Blog | Wednesday, April 22, 2015

BCBS gets stripped, and why you should care


GlassHospital & Co. were in California last week, where a huge story was reported by Chad Terhune in the Los Angeles Times.

The story was picked up nationally, but given the fact that it's about a large non-profit health insurer and a state bureaucracy, you could easily have let your eyes scan elsewhere. Or glaze over.

But I'm here to tell you why this is both fascinating and really important:

Blue Shield, the third largest health insurer in California was stripped of its tax-exempt status. For a non-profit, that smarts. And it's nearly unprecedented.

Non-profit institutions like hospitals, schools, charities, and religious organizations do not pay taxes, because their “business models” are about public service and/or community benefit; not about pure profit. Nevertheless, non-profits do need their revenues to exceed their expenses, typically to get re-invested in their missions, rather than, say, as dividends to shareholders, else they risk not being able to continue in business.

With more and more non-profits being urged by the public and their executives to be run “like businesses,” efficient, cost-effective, and strategic, it's no wonder that many non-profits now operate essentially like their for-profit counterparts.

Here's the rub: When that happens, attention can drift from the mission. For a hospital, it can mean focusing more on competition and market share than on serving the public. Same for a health insurer. Blue Shield has amassed a financial reserve of $4 billion, more than 4 times what its parent organization requires.

What's a non-profit doing hoarding that kind of cash?

An obscure entity called the California Franchise Tax Board issued the ruling stripping Blue Shield of its tax exempt status last August (why it took so long to become public is another story). The Tax Board determined that the business practices of Blue Shield are not consistent with the public purposes of a true not-for-profit entity [my phrasing].

Blue Shield is appealing the decision. Apparently, this all occurred due to a whistleblower, who went to Blue Shield's management to make his case that the company needed to act more in the public interest. Sadly, his ideas were dismissed.

Taking away a non-profit's tax-exempt status is a harsh punishment, and very rarely implemented. Exactly 5 years ago, I blogged about an Illinois hospital that had its tax-exempt status stripped. That gives you some sense of the rarity of such an action. What could this decision portend for other revenue-starved states?

This post by John H. Schumann, MD, FACP, originally appeared at GlassHospital. Dr. Schumann is Interim President of the University of Oklahoma, Tulsa. His blog, GlassHospital, seeks to bring transparency to medical practice and to improve the patient experience.