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The revocation of Blue Shield of California's tax-exempt status raises the question of whether for-profits have a competitive advantage.
In a move that is sending waves throughout the country, late last year California tax authorities revoked Blue Shield of California’s tax-exempt status. The Franchise Tax Board hasn’t commented on the exact reasons for this revocation although some observers have speculated it may be related to high reserves, executive salaries similar to that of for-profit insurers, or the perception that it is not fulfilling its mission as a non-profit. Blue Shield believes it meets the requirements for a state income tax exemption and has challenged the Franchise Tax Board’s decision.
FordIronically, the question arises, are non-profit plans at a competitive disadvantage or a competitive advantage? David Ford, principal of The Health Commons Group and former chief executive officer of non-profit insurer, CareOregon, Woodland, Washington, says there are advantages and disadvantages to having such status. “An advantage is that they don’t have to pay the same taxes as a for-profit, so they can take the income and use it to grow, become innovative, and restructure the fundamental business,” he says.
In addition, non-profits have a distinct marketing advantage as consumers like the idea of their health plans not being in business to “make money” per se, but rather to provide access to care. Ford was quick to point out, however, that, “These are people’s perceptions, which may not necessarily be true.” Health plan providers may prefer doing business with non-profits because non-profits reinvest income in the community instead of distributing it to shareholders, some believe.
CopelandBut non-profits have a disadvantage when it comes to having capital and access to capital. “For-profits have virtually unlimited access to capital when stock prices rise,” Ford says. “When they deliver good returns, they get more investors. For-profits don’t have as many regulatory issues to deal with, either, and are freer in their marketing practices. They can be more innovative in investing money to make money.”
By having more sources of capital, for-profit plans have better buying capabilities to acquire companies. “If a purchase is a fair price and the organization has earnings, it is an economical way to buy value, whereas non-profit plans have to use cash because they don’t have any other currency available,” explains Bill Copeland, U.S. Life Sciences and Health Care Leader, Deloitte, Philadelphia, Pennsylvania. “In a competitive environment where there is a race to build capabilities around analytics, consumerism, and value-based care, non-profits are at a slight disadvantage, especially if they’re not at scale. Ultimately, the for-profit plans have a greater degree of flexibility in accomplishing goals compared to the non-profits.”
NEXT: Affordable Care Act is a game changer
Before the Affordable Care Act (ACA) of 2012, non-profit versus for-profit status didn’t seem as significant because the business of providing health insurance hadn’t changed much in decades. But now, under the ACA, millions of uninsured Americans are now insured. “ACA created a market for individuals, it expanded government programs, it put a premium on making products more affordable, and it placed a mandate around paying providers based on outcomes, not just fee for service,” Copeland says. “All of these things introduced many new concepts to health plans such as consumerism, innovative payment methodologies, analytics, and more choices in convenience to make them more affordable. As a result, technology and business processes-and other things health plans have perfected over the years-have had to change.”
Consequently, Copeland predicts increased pressure on smaller, underperforming non-profit plans to either consolidate with other plans to create a bigger plan or discover a different way to secure capabilities, or they risk becoming non-competitive and becoming impaired. For-profit plans see this as opportunity to grow by acquiring non-profits.
According to a Deloitte report, the ACA has leveled the playing field by requiring all health plans to accept individuals with pre-existing conditions and provide coverage at community-rated prices. It will be harder for the single-state Blues to differentiate themselves and compete purely on their not-for-profit status and charitable investments in the community through health and wellness. This is not to suggest that the single-state Blues should give up their mission, the report states. Their non-profit status and investment in their communities continue to be valued by many consumers, employers, and regulators. The ACA provisions, though, have narrowed the differences among health plans and the single-state Blues may now need additional ways to distinguish themselves in the market.
Although a state cannot force a plan to convert to a for-profit, it can encourage it to do so and states do levy some control over plans. “If you look at conversions of the past, they benefited from what the plan was trying to do and what the state thought was a good solution for its financial woes,” Copeland says.
When Empire Blue Cross and Blue Shield converted to a for-profit plan, the sale’s proceeds benefitted both the foundation as well as some state initiatives that needed funding-which is typical, Copeland says.
Horizon Blue Cross and Blue Shield of New Jersey have explored converting to for-profit plans, including a potential sale to Wellpoint, but the state plan couldn’t agree on fair market value and some other special provisions, so the plan didn’t convert. “So there are cases of this working and instances where it didn’t work,” Copeland says.
John Santilli, MBA, partner, Access Market Intelligence, Trumbull, Connecticut, predicts that market forces-including implementation of the ACA, continued consolidation of health insurers, and an increase of reserves by Blues Plans-may drive some non-profit Blues plans to convert to for-profit status or consider merging with other Blues plans to strengthen their market share. Also, a number of Blues plans have created non-Blues licensed subsidiaries or are creating affiliations and joint ventures with other Blues Plans or other health organizations to extend their market reach.
NEXT: The future of non-profits
So what is the future of non-profits like Blue Shield that have large cash reserves but are hampered by regulations that dictate how they can spend them?
As a mission-based non-profit, Steve Shivinsky, vice president of corporate communications, Blue Shield of California, San Francisco, California, says the company will keep its focus on providing all Californians access to high-quality, affordable care, being a good corporate citizen, and being a good steward of its resources and the company. “We will continue to limit our net income to 2% of revenue, and to give excess funds back to our customers and the community,” he says. “We will continue to provide robust support to the Blue Shield of California Foundation’s efforts to improve the health safety net and address domestic violence. And we will continue to advocate for public policy that benefits the public, as we have done for many years.”
Shivinsky says Blue Shield believes it meets the requirements for a state income tax exemption and has challenged the Franchise Tax Board’s decision. “If the decision is upheld, we will pay the taxes we owe, as we always have,” he says.
Regardless of the decision, Blue Shield will remain a non-profit, Shivinsky says. “This best allows us to pursue our mission,” he says. “If we converted to a for-profit, our first responsibility would be to return profits to shareholders or other owners. We have no interest in that path.”
In fact, Shivinsky points out that in 2011, Blue Shield of California voluntarily capped its net income at 2% of revenue, and returned amounts over that to its customers and the community. “We are the only major health plan in America to maintain such a voluntary cap, giving back $560 million since the program’s adoption,” he says.
In addition, Blue Shield’s pending $1.2 billion acquisition of CareFirst-which has more than 500,000 members primarily in Medicaid managed-care plans, as well as some under Medicare-would expand its offerings into the Medicaid program for the first time, an important step in advancing its mission. The acquisition should be complete in the third quarter of this year.
According to Ford, “Virtually every large non-profit insurer is under the same pressures which Blue Shield of California faces to adapt to new market conditions-California is just a very visible example.” The question is, how are non-profits going to deal with this adaptation despite having big reserves yet having limitations on how those reserves can be spent because of their historic tax-exempt status?
Ford believes it would be wise for non-profits to channel excess reserves into premium reductions, which is what ACA was designed to do. “One reason for non-profit status is to provide access to healthcare at affordable rates,” he says. “Another reason for tax-exemption is to use reserves and future profitability to ‘invest forward’ into the community delivery system, as well, and to improve care and the cost of care in the future. This is called the ‘triple aim.’ If plans can actually and visibly accomplish this, regulators will be happy.”
In states with a significant amount of rural areas, non-profits could invest in establishing providers in those areas, pay to set up telemedicine networks, subsidize high-priced pharmaceutical drugs, and/or pay for the treatment of rare and costly diseases, Ford suggests.
We know now that many causes for severe disease are socially caused, which result in expensive late stage medical costs, such as Adverse Childhood Experiences (ACEs). “These social causes for disease are not addressed within the structure of our current medical system,” Ford says. “If non-profit insurers could redeploy their reserves and profits toward improving the community population’s health by addressing these social determinates of health, the non-profit insurers could preserve their tax-exemption by demonstrating a genuine social and public benefit to justify continuing this tax advantage.”
NEXT: Challenges ahead
With the passage of the ACA, Ford believes non-profit health plans need to reinvent themselves. “The pressure is on to demonstrate to state regulators-who are always looking for tax revenue-what is different (good and socially beneficial) about them and how they will benefit their respective states,” he says.
In addition, as a result of ACA, non-profits need to figure out how to provide guaranteed access for everyone. And as they add members, non-profits will need to set aside reserves to cover claims. “Non-profit plans have to approach additional investors-hospitals, providers, and so forth, to get that money, but may not succeed,” Ford predicts. “Difficult, yes, but even though they have an opportunity to grow 30 percent (a provision of ACA), they may not be able to do so as a result of insufficient capital access unless they reinvent themselves fundamentally and quickly.”
Santilli expects that Blues plans will find the health insurance market more competitive going forward. “They may experience some erosion of their market share, although they are well positioned historically and generate ample revenue to fund initiatives to compete effectively,” he says.
The bottom line is that emerging growth opportunities and business challenges are driving fundamental shifts to the health plan market. Now, more than ever, gaining a competitive edge requires achieving new levels of operating efficiency, demonstrating value, and offering improved affordability, product flexibility, and service responsiveness. Traditional business models are no longer sufficient, and many health plans are taking steps to diversify their product and service offerings, modify care and payment arrangements with providers, and improve their interfaces with consumers in ways they hope will differentiate them from competitors.
Karen Appold is a medical writer in Pennsylvania.