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Blue Shield Lost Its Tax Exemption Last Year. Who’s Next?

One of California’s biggest not-for-profits looks pretty profitable.

Blue Shield’s healthy balance sheet — $13.6 billion in annual revenue, with $4.2 billion in reserves — is more typical of a Fortune 500 company than an organization helping the unfortunate.

And partly because of its financial strength, Blue Shield has lost its tax exemption, in a decision rendered by a California tax board last summer.

Blue Shield announced it will appeal; a spokesperson said the company “firmly believes it is fulfilling its not-for-profit mission and commitment to the community.”

But the decision has reignited a simmering debate.

Should health care organizations — which are increasingly multibillion dollar businesses — also enjoy tax breaks that run to tens of millions of dollars each year?

And who’s next?

Tax-Exemption Fight Nothing New For Hospitals

Blue Shield’s lost tax exemption has gotten considerable attention since it was revealed last month by the Los Angeles Times. But the quiet fight over tax-exempt status in health care has been dragging on for years.

Traditionally, those battles centered on a different player: hospitals. An Illinois board stripped Provena Covenant Medical Center of its property-tax exemption in 2004. The Senate Finance Committee grilled the executives of 10 leading hospital systems in 2005.

“Do Tax-Exempt Hospitals Have a Future?” Lisa Petkun and Michelle Parten asked in a Pepper Hamilton law brief.

That was 2009.

Despite threat after threat, not-for-profit hospitals persisted to keep their tax exemptions. Their strongest argument, experts say, has been to demonstrate that they collectively provide billions of dollars in community benefit, especially to uninsured or impoverished patients.

But there’s new momentum to change how hospitals earn tax-exempt status — especially in California, where two bills are in front of the legislature.

  • SB 346, introduced by state Sen. Bob Wieckowski (D-Fremont), requires hospitals to allocate 90% of their community benefit funding to charity care and projects to help particularly vulnerable populations.
  • AB 1046, backed by the California Hospital Association, introduces more subtle changes: it aims to streamline reporting and make the process more transparent by aligning state and federal community benefit laws.

Hospitals aren’t enthusiastic about SB 346’s mandatory requirements. The bill “imposes vague, unrealistic and costly mandates on not-for-profit hospitals and clinics,” Anne McLeod, senior vice president for the California Hospital Association, wrote in California Healthline‘s Think Tank. “AB 1046 improves the system, SB 346 harms it.”

How Tax-Exempt Status Is Under Pressure Around the Nation

Beyond California, lawsuits and legislation in Connecticut, New Jersey and elsewhere focus on whether not-for-profit hospitals deserve to keep their tax-exemptions.

And most importantly, the Affordable Care Act presents new challenges, both direct and oblique, to hospital tax exemptions.

First, the law instituted new requirements on hospitals, intended to improve reporting and transparency. (Under the ACA, hospitals must perform community needs assessments, while the IRS must report on the amount of their community benefit — about 9.7% of hospitals’ expenses in 2011, according to the latest report.)

But the ACA also could knock out one pillar of why health care organizations need to be tax-exempt: The health law is lowering the uninsured rate. And if the need for hospitals to provide charity care goes down, the hurdles to earning tax-exempt status will likely go up.

Meanwhile, the Blue Shield decision could kick up scrutiny of other insurers, too. For example, a number of Blues already are facing anti-trust lawsuits centered on their market power, Bruce Japsen writes for Forbes.

“There is an important relationship between what is happening in California and what is happening in our case,” according to Joe Whatley, an attorney for plaintiffs suing the Blues plans. “While they claim to be non-profit, they charge their insured more than they should and they pay their providers less than they should. They build up these huge reserves, more than are needed under any circumstances.”

And the questions will likely mount as health organizations get larger — and the value of their exemptions do, too.

“I have never seen an investigation like that on Blue Shield,” USC professor Glenn Melnick told the Los Angeles Times Chad Terhune.

“Is this the beginning of a harder look at nonprofits in healthcare?” Melnick added. “In a lot of cases, nonprofit status is exploited.”

Around the nation

Here’s a look at other stories making news on the road to reform.

Covered California’s disappointing second year. A new Avalere report suggests that California ranked among the five worst states in terms of enrollment growth on its ACA-created insurance exchange, Chris Rauber reports for the San Francisco Business Times.

SGR deal would end ‘Washington’s most frenzied lobbying extravaganza.’ The proposed permanent “doc fix” has implications for back-room politics too, Dylan Scott writes for National Journal. “There are people who have made careers out of navigating the [doc-fix] patch,” one official told Scott. “This is going to put lobbyists out of business.”

Private exchange enrollment doubles in 2015. More companies are shifting their employees to private insurance exchanges, and total enrollment reached 6 million in 2015, Bob Herman reports for Modern Healthcare.

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