WellPoint Health Networks Faces Suit Over Alleged Improper Use of State Tax Exemption
The Foundation for Taxpayer and Consumer Rights on Monday filed a lawsuit in Los Angeles County Superior Court that asks Controller Steve Westly (D) to collect as much as $500 million in alleged owed taxes from California-based WellPoint Health Networks, the parent company of Blue Cross of California, the Los Angeles Times reports. The lawsuit, filed as Indiana-based Anthem is expected to complete a proposed $18.4 billion merger with WellPoint, alleges that WellPoint over the past 10 years has improperly claimed an exemption from the state gross premiums tax for health insurers (Girion, Los Angeles Times, 11/23).
The proposed merger, announced in October 2003, would combine the companies under the name WellPoint and establish headquarters in Indiana. The merger would create the largest U.S. health insurer, with 28 million members in 10 states and Puerto Rico. Anthem CEO Larry Glasscock would serve as CEO of the new company, and WellPoint CEO Leonard Schaefer would serve as chair. Anthem and WellPoint shareholders, as well as a number of entities with direct regulatory authority -- such as the Department of Justice, 10 states and Puerto Rico -- have approved the merger.
Representatives from FTCR in July said that WellPoint improperly claimed the state tax exemption after Blue Cross of California became a for-profit company in the mid-1990s. Sen. Deborah Ortiz (D-Sacramento) in July called on Attorney General Bill Lockyer (D) to investigate allegations that WellPoint saved millions of dollars through the exemption (California Healthline, 7/12).
According to the lawsuit, WellPoint over the past eight years would have paid an additional $300 million to $500 million in state taxes without the exemption.
According to the lawsuit, WellPoint has not paid the state gross premium tax on preferred provider organization coverage sold by Blue Cross, which accounts for a "substantial portion of Blue Cross' health insurance business," the Times reports. The lawsuit alleges that WellPoint has claimed the Blue Cross PPO coverage as an HMO and has paid only an 8.83% state franchise tax on Blue Cross PPO revenue.
Under state law, HMOs are not considered health insurers and are exempt from the gross premium tax. According to the lawsuit, the gross premium tax rate is only 2.35%, but "because it's assessed on gross premiums, instead of net income, it results in insurers paying a greater share of premium revenue," the Times reports.
Blue Cross is the only for-profit health insurer in California that does not pay the gross premium tax, according to the lawsuit. WellPoint is not named as a defendant in the lawsuit, which seeks an injunction to order Westly to collect the alleged owed taxes.
A Westly spokesperson said the controller has not reviewed the lawsuit and declined to comment.
Blue Cross spokesperson Michael Chee also declined to comment on the lawsuit.
A WellPoint spokesperson in July said that the company is not legally required to pay the state gross premium tax.
FTCR President Jamie Court on Monday said, "This is really a case of one for-profit insurer claiming an exemption that no other for-profit insurer in the state would dare claim. It's giving the company a competitive advantage over other companies, and it's making taxpayers foot the bill. This company clearly has the money to pay its tax obligations. And the company that buys it should be prepared to as well."
Analysts on Monday said that the effect of the lawsuit on the merger between WellPoint and Anthem remains "unclear," the Times reports (Los Angeles Times, 11/23).