Health

Blue Shield audit FAQ: What does it mean for consumers?

The entrance to an office of health insurer Blue Shield of California. The company's tax-exempt status was revoked last August by the state Franchise Tax Board.
The entrance to an office of health insurer Blue Shield of California. The company's tax-exempt status was revoked last August by the state Franchise Tax Board.
Steve Rhodes/Flickr Creative Commons

In August of last year, one of California's largest health care providers was stripped of its tax-exempt status after the state Franchise Tax Board found what it said were troubling business practices at the nonprofit.

Over the weekend, the L.A. Times reported that it had reviewed documents related to the state's audit of the company, which concluded that Blue Shield's business practices, "which stress profitability, are inconsistent with an organization organized as a nonprofit which desires tax-exempt status." 

So what does the audit and the loss of tax-exempt status mean for Blue Shield's 3.4 million customers in California? We offer a few answers below: 

Does losing tax-exempt status mean Blue Shield would also lose its nonprofit status?

No. A company can still operate as a nonprofit while paying taxes. Blue Shield already pays federal income taxes. Meanwhile, it is appealing the decision to revoke its tax-exempt status.

What did the audit find? Why was it done? 

The Franchise Tax Board has not said why it conducted the audit and has refused to release it, citing the confidentiality of taxpayer information under state law. The L.A. Times reviewed documents "related to the audit" that criticized Blue Shield for setting aside "extraordinarily high surpluses" – $4.15 billion in 2012, the last year examined. Blue Shield says it needed that large of a reserve to navigate the unpredictable health insurance market. The audit disagreed, asserting that that amount "far exceeded the reserves required either by law or the best practices and standards of the healthcare industry," according to the Times.

Did the Tax Board cite other reasons for revoking Blue Shield’s tax-exempt status?

Yes. The auditors said the company "is not operating exclusively for the promotion of civic betterment or social welfare," according to the Times. That is a key requirement for tax-exempt status. The auditors also said they were troubled by job descriptions for top executives that directed them to "maximize profitability." Blue Shield argues that it gives about $30 million annually to charity, and caps its profits at 2 percent.

Can I expect my Blue Shield coverage to change? Will my premium increase? 

If Blue Shield loses its appeal and has to pay state income taxes, experts don't believe that should lead to a change in Blue Shield policies, or higher premiums.

Are there other health care nonprofits that might also face an audit now? 

Kaiser Permanente is the only other health care nonprofit in California; there has been no indication that the Franchise Tax Board is interested in a similar investigation.

Have a question about Blue Shield's loss of tax exempt status? Post it in the comments below.