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Read Making a Killing

home / healthcare / press releases

NEWS RELEASE
Jul 08, 2004


CONTACT: Jerry Flanagan, (310) 392-0522 ext. 319

Investigation of Blue Cross' Tax Status Called for By Consumer Group;

HMO May have Underpaid State Up To $106 Million in 2003
Blue Cross of California, whose parent company WellPoint has yet to receive approval for its pending merger with Anthem Inc., has avoided paying hundreds of millions of dollars in annual gross premium taxes. Every other for-profit insurer pays the tax on their preferred provider organization (PPO) products, according to the Foundation for Taxpayer and Consumer Rights (FTCR). FTCR called on legislators and regulators to investigate Blue Cross' refusal to pay the gross premium tax required by Article XIII, Section 28 of the California Constitution.

The Department of Managed Health Care (DMHC), which will hold a hearing on the merger tomorrow in Sacramento, has been asked by FTCR to address the issue of Blue Cross of California's failure to pay the tax.

In a letter sent yesterday (see below) to California Department of Insurance (DOI) Commissioner John Garamendi and DMHC Director Cindy Ehnes, FTCR wrote:

"In this time of serious tax cuts for programs benefiting the state's most vulnerable patients, Blue Cross' should not have a special tax exemption while other similarly situated for-profit insurers must pay hundreds of millions of dollars each year in gross premium taxes."

Commissioner Garamendi and DMHC have approval authority over the transfer of ownership of Blue Cross of California to the new parent company. Garamendi stated in a conference call with reporters on Tuesday that he would not approve the deal if Blue Cross enrollees were required to pay for a $4 billion cash buy-out payment or up to $600 million in executive payouts.

In the letter to state regulators, FTCR wrote:

"Blue Cross of California must be required to pay-off its past tax debt before the company is sold and ensure that the pending merger does not result in any further costs to taxpayers and patients... The company must not be allowed to continue to cheat the state."

FTCR letter:

John Garamendi
Commissioner
Department of Insurance

Cindy Ehnes
Director
Department of Managed Health Care

Dear Commissioner Garamendi & Director Ehnes:

RE: State Must Require Blue Cross to Pay Its Tax Debt

Much has been said about how much the buy-out of Blue Cross of California's parent company, WellPoint Health Networks, by Anthem Inc. will cost patients including a $4 billion cash payment and $600 million in executive payouts.

What has not been talked about is that Blue Cross has not been paying the required gross premium tax paid by every other for-profit health insurer on their Preferred Provider Organization (PPO) products -- a tax holiday that appears to have cost California $106 million last year and up to $1 billion over the last ten years.

While legislators and patients grapple with the challenge to pay for public health care programs and skyrocketing insurance premiums, it is absurd that the state's most profitable insurer is allowed to flout state tax laws. California patients and taxpayers deserve an explanation at this Friday's hearing of why Blue Cross gets special privileges while they foot the bill.

As we understand it, the following explanation is how Blue Cross came to avoid its tax obligation articulated in the California Constitution. In this time of serious tax cuts for programs benefiting the state's most vulnerable patients, Blue Cross' should not have a special tax exemption while other similarly situated for-profit insurers must pay hundreds of millions of dollars each year in gross premium taxes.

When Blue Cross was founded in 1937, the state granted it a special exemption from paying a tax on premiums it collected, citing the then non-profit company's mission to serve the poor and disenfranchised.

Fifty-seven years later, CEO Leonard Schaeffer traded in that mission and turned the company into a for-profit firm. But unlike every other for-profit health insurer in the state, Blue Cross' preferred provider organization (PPO) seems to have grandfathered itself an exemption from the gross premium tax. Blue Cross does pay a corporate income tax but it is a far smaller tax obligation particularly because the company is allowed to deduct expenses and cash transfers.

Though the Department of Managed Health Care (DMHC) analysts say they don't know exactly how much Blue Cross has been allowed to pocket, what we do know suggests a lucrative tax advantage for the company. For instance, in 2003, according to filings with the DMHC, Blue Cross of California collected $8.6 billion in premiums from 4.4 million enrollees.

Blue Cross states that roughly 75% of those 4.4 million enrollees are PPO members. Estimating conservatively, that means $6.45 billion of Blue Cross' 2003 premium earnings came from PPO enrollees.

If Blue Cross played by the same rules as other health insurers are required, then it would have paid a gross premium tax last year equal to 2.35% of that $6.45 billion, or $151.6 million.

However, Blue Cross paid less than 1/3 of that amount if in fact it paid the maximum required under tax law (its actual tax payments do not appear to be public record). In 2003, the company's total net income was $459.3 million. Even if Blue Cross paid every penny of its income tax -- something that corporations rarely do -- that total would have been a mere 8.83% of $459.3 million, or $40.6 million.

Even after adding in the company's $.99 per member fee to the DMHC, the total payment to the state in 2003 was approximately $45 million -- a far cry from the $151.6 million that the company should have paid.

Less money in the tax rolls hurts all Californians and an unfair advantage for Blue Cross makes it less likely that other insurers will play in the state's already uncompetitive market. Blue Cross' special tax loophole must be explained and closed. The company must not be allowed to continue to cheat the state.

Blue Cross of California must be required to pay-off its past tax debt before the company is sold and ensure that the pending merger does not result in any further costs to taxpayers and patients.

Sincerely,

Jamie Court
Jerry Flanagan

-end-

The Foundation for Taxpayer and Consumer Rights is a non-profit and non-partisan consumer advocacy organization. For more information, visit us on the web at http://www.consumerwatchdog.org



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