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Court Rules Blue Cross, Blue Shield May Need To Pay State Health Premiums Tax

A state court ruled last week that two health care service plans may need to pay the state’s gross premiums tax because they may qualify as health insurers.

The health care service plans -– Blue Shield of California and Anthem Blue Cross — argued that they were regulated by the Department of Managed Health Care, not the California Department of Insurance, and were not insurers subject to the gross premiums tax.

But California’s Second District Court of Appeals ruled on Sept. 25 in Myers v. State Board of Equalization that those service plans’ business seems to be built on selling and administering indemnity-based insurance policies, so the gross premium tax may apply to them.

That made sense to Janice Rocco, deputy commissioner at the California Department of Insurance.

“The Department of Insurance filed an amicus brief in [this] case in support of the position … that the law requires Blue Shield and Anthem Blue Cross to pay the premium tax paid by all other insurers,” Rocco said.

“[When] a significant financial proportion of their business is to provide indemnification for future medical claims, [that] is an insurer,” Rocco said, “and as such [they] cannot evade paying the premium tax paid by other health insurers by calling themselves a health plan.”

The court said that, in 2012, those two health service plans paid out $12.4 billion in indemnity-based expenses and just $3.5 billion in non-indemnity-based expenses. The determination of whether or not service plans should be called “insurers” under the California Constitution should be based on those business practices, not the regulatory structure they follow, the court said.

The Court of Appeals decision reverses a judgment last year in Superior Court in Los Angeles County. The California Constitution imposes a tax of 2.35% on the amount of gross premiums received each year by every insurer in California. That differs from the net-income corporate franchise tax imposed on all other businesses.

The Court of Appeals has sent the case back to the lower court, in part to clarify whether or not the two companies qualify as insurers that need to pay the gross premium tax. 

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