Shortly after resigning as a Blue Shield of California executive in 2015, I found evidence in documents I obtained through a public records request of a company scheme to avoid paying Affordable Care Act taxes on nearly two billion dollars of revenue. These are taxes imposed on insurers by the health reform law to help fund subsidized coverage for low and middle-income people.
Structuring subsidiary to avoid taxes
I blogged about the plan at the time in an article (“Blue Shield structures acquisition to avoid taxes”) that described the apparent motive behind Blue Shield’s corporate structuring of a smaller insurance company it was acquiring, Care 1st Health Plan. Under federal law, it is illegal for a company to cut its taxes through a transaction or business arrangement that has no “substantial purpose (apart from Federal income tax effects).”
Blue Shield denied my allegation at the time. But in a lawsuit filed later, it claimed that I had “disclosed privileged details regarding the company’s strategy in the Care 1st acquisition,” including “the tax implications and strategy of how Blue Shield legally structured the Care 1st acquisition." Although I actually disclosed nothing I had learned internally about the acquisition or taxes, what Blue Shield revealed in its lawsuit against me sure seems to acknowledge the truth of what I alleged in my article.
Under the health reform law, the revenue amounts that insurers report to the IRS are public information. So when Blue Shield filed its return covering 2015, I could see that the company had indeed not reported the Care 1st revenue—$1.9 billion in total.
Redefining premium revenue as non-reportable
Something else in the tax filings also caught my eye: Three months after submitting the 2015 return, Blue Shield amended it by subtracting $3 billion from the revenue it had reported.
After digging through records I got from several federal and state agencies, I saw indications that Blue Shield was masquerading a major portion of its business as a type of coverage (self-funded insurance) that is not subject to the tax. The details are too involved to describe in this short article, but you can see how suspicious Blue Shield’s tax reporting is just by comparing it to that of other insurers.
The table below shows the portion of premium revenue that each of the ten largest insurers declared to the IRS relative to the total it reported to another federal agency, the Centers for Medicare and Medicaid Services, or CMS.
Only Blue Shield has sharply reduced the percentage of its total premiums that it reports to the IRS. And that percentage is far lower than for any other insurer except Unitedhealthcare, which is a major provider of Medicare Supplement insurance—coverage that is exempt from the tax and not required to be reported to the IRS.
my IRS Whistleblower Claim
As reported today by California Healthline, I recently filed a whistleblower claim with the IRS detailing these two schemes. In total, Blue Shield appears to have skipped out on $89 million in health reform taxes due in 2016, and is poised to do the same every year going forward unless it’s stopped.
Because of the way the tax is apportioned, if one insurer pays less than its fair share, all the others have to pay more to make up the difference—costs that they then tack onto the premiums they charge their customers.
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