Last year, regulators approved a request by Blue Shield of California, the state’s third-largest health insurer, to restructure and establish a new parent corporation in Delaware.
The Oakland-based nonprofit got the go-ahead from the Department of Managed Health Care, or DMHC, to create an entity called Ascendiun Inc., which is now the out-of-state corporate parent of Blue Shield. The insurer said that the restructuring would allow it to better serve its members “with less bureaucracy and faster results, while making health care more affordable.”
But the transaction has raised alarm among a former high-level Blue Shield executive and consumer advocates, who complain that it was carried out with no public oversight and could allow the insurer to transfer money to a Delaware parent company with few strings attached. The activists claim that some of that money could be used to boost its spending on charitable endeavors.
The company has accrued a surplus of more than $4 billion over the decades as it benefited from its former tax-exempt status, according to a regulatory filing.
“The move guts the ability of the DHMC to enforce Blue Shield’s nonprofit obligations to the California public and gives Blue Shield’s directors … a virtually free hand to make use of Blue Shield’s billions of dollars in charitable assets as they please,” wrote Michael Johnson, the insurer’s former vice president of public policy, in a recent letter to Mary Watanabe, director of the department, which was reviewed by The Times.
Johnson is calling for the department to rescind its approval and unwind the restructuring.
The department maintains that the insurer is not subject to charitable trust rules as a nonprofit mutual benefit corporation.
In a statement, the department said it “maintains full regulatory authority and enforcement of all Blue Shield of California health plan operations,” and reviewed the transaction to ensure that it will not harm the plan’s financial viability.
Blue Shield’s restructuring is reviving a longstanding debate about whether one of the state’s largest insurers is reinvesting enough of its profit to lower its rates, better serve low-income residents and provide coverage for underserved areas of the state.
Controversy over the company’s role as a nonprofit previously aired in 2015 as it sought approval from the department for its $1.2-billion purchase of Care1st, a Medicaid health plan.
Blue Shield has disputed Johnson’s claims, noting that the state has determined it is not subject to the rules governing charitable nonprofits.
In the Jan. 8 announcement of its restructuring, Blue Shield also disclosed that it was forming a for-profit subsidiary called Stellarus that would provide services to other health plans, such as delivering drugs to patients more inexpensively than pharmacy benefit managers.
Ascendiun is structured as a nonprofit and Blue Shield and the company’s Medi-Cal insurer, Blue Shield of California Promise Health Plan — the former Care1st — also would continue as nonprofits, the insurer said at the time.
“This structure is not uncommon among health plans, as many across the country — including other nonprofit Blue Cross and Blue Shield companies — have made similar corporate reorganizations to better serve their membership,” the insurer said in its statement to The Times.
A scathing audit
Blue Shield was established in 1939 by the California Medical Assn. as the nation’s first prepaid health plan to cover physician bills. It followed the creation of the first Blue Cross plan, in Texas, to pay for hospital bills.
The California insurer did not pay federal taxes until a change in the law in 1986. And it was exempt from state taxes until the Franchise Tax Board revoked that status in August 2014 after a scathing audit that The Times first reported.
The audit found that Blue Shield was operating similarly to a for-profit company, with executives instructed to “maximize profitability.” The tax board also found that the insurer had stockpiled “extraordinarily high surpluses” even as it failed to offer enough public benefits, such as more affordable coverage.
Blue Shield denied the accusations but ultimately relinquished its tax-exempt status, even as it has continued to pursue an appeal of an order requiring it to pay more than $100 million in back taxes.
Johnson contends that the new corporate structure will allow Blue Shield to move its assets around in pursuit of its business goals with little oversight beyond maintaining required reserves — especially given its parent company’s incorporation in Delaware, a business-friendly state where most Fortune 500 companies are registered.
The DMHC strengthened reserve requirements in approving the deal and it now totals about $2.1 billion, according to a regulatory filing, which Johnson says would allow Blue Shield to transfer about $2.4 billion to Ascendiun.
Charles Bell, a healthcare advocate who was involved in last decade’s debate over Blue Shield’s charitable obligations, is troubled by the decision to establish an out-of-state parent.
“I think that the changes in corporate structure that were made are highly concerning, and it should have received a much higher level of public scrutiny and a lot more skepticism by the Department of Managed Health Care,” said Bell, advocacy programs director for Consumers Union, the publisher of Consumer Reports.
The department said in its response to The Times that it “may hold public meetings if a transaction meets certain requirements to qualify as a major transaction. Upon due consideration, the Department determined that the specific facts of this restructuring did not meet the criteria set out in law to hold a public meeting.”
A long history of restructuring
Blue Cross and Blue Shield plans have a long history of restructuring, including Blue Cross of California.
That insurer broke ground when in 1993 it spun off a recently established for-profit subsidiary, Wellpoint Health Networks. Blue Cross was later required to distribute $3.2 billion to a pair of new nonprofits, the California Endowment and the California Health Care Foundation, which are still operating.
Less than a decade later, Blue Cross and Blue Shield plans in more than dozen other states had converted to for-profits, typically highly controversial proposals, given questions about what was to become of their billions of dollars of assets.
More recently, the nonprofits have converted into mutual insurance holding companies. That allows them to maintain their nonprofit status while funding for-profit ventures, such as in technology, said Brendan Bridgeland, an attorney with the Center for Insurance Research in Cambridge, Mass.
What is unusual about Blue Shield of California’s restructuring, he said, is that the DMHC allowed it to establish an out-of-state parent company.
“Once you reach the point where the subsidiary starts transferring money up to the parent and it gets reallocated, then it’s going to be out of their control,” Bridgeland said.
Johnson’s concerns are rooted in efforts last decade by healthcare advocates to have Blue Shield declared a charitable organization and to dig into its assets to improve patient care as a condition of its approval to acquire Care1st. Johnson worked at Blue Shield from 2003 until 2015, when he resigned to mount a public campaign to pressure the insurer over its nonprofit mission.
Johnson has been involved in litigation with his former employer, which sued him in 2015 alleging he disclosed confidential information, including Blue Shield’s communications with the Franchise Tax Board. In a settlement, he agreed to no longer retain or disseminate such documents.
In seeking to retain its state tax-exemption during its audit by the board, which began in 2013, Blue Shield argued that should it dissolve, its assets could be distributed only to another nonprofit. Yet, the insurer told the DMHC, when the agency reviewed the proposed acquisition in 2015, that as a nonprofit mutual-benefit corporation it served only its enrollees and had no such obligations.
Ultimately, the department decided that Blue Shield did not have the charitable obligations though it required the insurer, in approving the acquisition that year, to refrain from making “misleading or inconsistent” statements regarding the distribution of its assets if it ever were dissolved.
“Through this process there have been inconsistencies in what Blue Shield has said. It was frustrating because we had to spend a lot of time and energy to make sure what was true,” the department’s then director, Shelley Rouillard, said at the time.
A pledge to spend more on patient care
The insurer pledged as part of the Care1st acquisition to spend $200 million over the next decade on several initiatives aimed at providing better patient care.
Nevertheless, patient advocates criticized the DMHC’s finding that Blue Shield did not have charitable obligations, saying the state lost the opportunity to regulate how the insurer spent its billions in assets — and then failed to impose tougher conditions on the insurer, such as limiting its ability to impose rate increases deemed unreasonable.
In his March letter, Johnson called on the DMHC to require Blue Shield to spend annually at least 5% of its total assets on community benefits, which might go, for example, to grants to community clinics in underserved areas of the state.
Blue Shield defended its charitable spending, noting that it caps its annual profit at 2% and allocates additional revenue to such services as delivering COVID vaccines at no cost to the state, and funding nonprofits that advance mental health.
“Blue Shield … has consistently supported its members and California communities throughout the state,” the company said.
Johnson also contends newly public documents show Blue Shield has continued to argue before state tax authorities that it is a charitable trust. In the opening brief of its back taxes case in 2020, the insurer cites a state Supreme Court case that it said confirms “Blue Shield operates exclusively for the promotion of social welfare,” his letter notes.
Blue Shield told The Times that it has provided “consistent information to DMHC about its corporate restructuring” and that Johnson’s letter provided “no new evidence” regarding Blue Shield’s status as a “tax-paying not-for-profit mutual benefit corporation.”
Johnson and the DMHC traded additional letters last week, with Johnson questioning why the department had not reviewed the new tax appeal documents or why they had not reviewed Ascendiun’s articles of incorporation or bylaws prior to approving the restructuring.
Janet Rickershauser, a nonprofits lawyer at Hurwit & Associates, said that the bylaws are important to understanding the parent company’s operations, including the relationship of the subsidiaries to each other and the holding parent company.
In a letter sent June 23 to Johnson, Jonathon Williams, an assistant chief counsel at the DMHC, said the department concluded it was “not necessary or appropriate” to review the tax-appeal documents in its review of Blue Shield’s application to restructure nor conduct a “full evaluation of Delaware’s corporation statutory scheme.”
The department told The Times that it conducted a “comprehensive review” of the articles of incorporation of Blue Shield and its Medicaid Promise Health Plan as required by state law.
Although it did not review Ascendiun’s bylaws or articles of incorporation, the department said it retained its regulatory authority over Blue Shield.
Blue Shield said it would not release it bylaws because they are “confidential company documents.”
However, Rickershauser said that “hiding the ball on the bylaws is preventing transparency into important aspects of how they’re operating.”
The post Insurer Blue Shield of California’s new parent company alarms consumer advocates appeared first on Los Angeles Times.
