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Jul 12, 2004
Open Letter to WellPoint and Anthem Shareholders Regarding Blue Cross of California's Failure to Pay Gross Premium TaxAs California regulators review the impact on the California health care system of the proposed merger of Blue Cross of California's parent company, WellPoint Health Networks, and Anthem Inc, executives continue to deny that Blue Cross of California has avoided paying up to $500 million of a constitutionally required gross premium tax.
In an open letter sent to WellPoint and Anthem shareholders today, FTCR wrote:
"We think you deserve an appraisal of the facts given WellPoint's statement that it "has paid all required state taxes" in response to California State Senator Deborah Ortiz's call for an investigation into Blue Cross' unpaid tax liability by the state Attorney General. ... You should be aware of this situation given the vociferous denials by WellPoint that suggest the company has something to hide."
Blue Cross of California claims to have an exemption from the gross premiums tax under a 1990 law pertaining to non-profit hospital service plans. Blue Cross converted to a for-profit health insurer in 1994. The 1990 law, SB 785, was authored by Senator Alan Robbins -- who was later arrested by the FBI on corruption charges.
For FTCR's most recent analysis of Blue Cross of California's unpaid gross premium tax, please visit: http://www.consumerwatchdog.org/healthcare/pr/pr004454.php3
FTCR letter to WellPoint and Anthem shareholders:
Monday, July 12, 2004
WellPoint Health Networks
RE: Blue Cross of California's Avoidance of Gross Premiums Tax
In recent weeks our consumer group has received dozens of phone calls from stock analysts regarding the pending merger between WellPoint and Anthem Inc. We cannot return every call, but wanted to make very clear something that WellPoint seems to be keeping from you regarding the tax status of its California company, Blue Cross of California.
We think you deserve an appraisal of the facts given WellPoint's statement that it "has paid all required state taxes" in response to California State Senator Deborah Ortiz's call for an investigation into Blue Cross' unpaid tax liability by the state Attorney General.
The matter at issue is whether WellPoint's California company, Blue Cross of California, should have paid a gross premium tax on its preferred provider (PPO) products. The unpaid tax debt may be as high as $500 million.
Article XIII Section 28 of the California Constitution is very clear on this requirement:
"(b) An annual tax is hereby imposed on each insurer doing business in this State on the base, at the rates, and subject to the deductions from the tax hereinafter specified.
(c) In the case of an insurer not transacting title insurance in this state, the "basis of the annual tax" is, in respect to each year, the amount of gross premiums…
(d) The rate of the tax to be applied to the basis of the annual tax in respect to each year is 2.35 percent.
(f) The tax imposed on insurers by this section is in lieu of all other taxes and licenses, state, county, and municipal, upon such insurers and their property, except:
(1) Taxes upon their real estate."
Every other for-profit company that sells PPO products in the state pays the gross premium tax. Though Blue Cross of California does pay a much lower tax on its overall net income, the company has avoided paying a gross premium tax on its PPO products.
In its defense for not paying the gross premium tax, the company relies on a 1990 law that granted it an exemption from the tax when the company was considered a "nonprofit hospital corporation." The following is the Health and Safety Code statute providing that exemption:
"§ 1396.5. Nonprofit hospital corporations operating in 1965; privileges under Knox-Keene Health Care Service Plan Act. A nonprofit hospital corporation which substantially indemnified subscribers and enrollees and was operating in 1965 under Chapter 11A (commencing with Section 11490) of Part 2 of Division 2 of the Insurance Code and which is regulated under the Knox-Keene Health Care Service Plan Act shall enjoy the privileges under the act which would have been available to it had it been registered under the Knox-Mills Health Plan Act and applied for a license under the Knox-Keene Health Care Service Plan Act in 1976."
As you know, Blue Cross of California is no longer a nonprofit hospital corporation. The company converted to for-profit in 1994 and went public in 1996. It is unclear how a constitutional duty to pay gross premiums tax can be obviated by a statute referring to a nonprofit hospital corporation that no longer exists.
It appears that Blue Cross of California should have been paying gross premium taxes on its PPO products since 1994. The differential between the net income tax Blue Cross of California has been paying and the gross premium tax the company should have been paying was at least $50-60 million in 2003, depending on the actual amount of the company's net income tax payments that are not publicly available.
You should be aware of this situation given the vociferous denials by WellPoint that suggest the company has something to hide. Though WellPoint executives continue to deny that they owe up $500 million in back taxes, WellPoint and Blue Cross have yet to explain why they have ignored the California constitution's gross premium tax requirement.
FTCR is a non-profit and non-partisan consumer advocacy organization.
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