Blue Shield structures acquisition to avoid taxes

Photo by Phillip Ingham

There are lots of reasons to be skeptical about Blue Shield’s proposed $1.25 billion acquisition of Care1st Health Plan, including those I’ve written about previously. Buried in the regulatory filings is another that deserves mention. Blue Shield has structured the deal so that despite the recent revocation of its tax exemption it would escape state and federal taxes on its new business. The tax avoidance would even extend to a special assessment used to fund coverage expansion under the Affordable Care Act, which Blue Shield claims to strongly support.  

As described in this filing with the Department of Managed Health Care, Blue Shield has established an affiliate corporation, Cumulus Holding Company, Inc., which would acquire Care1st. Why take this extra step and not just absorb Care1st directly into Blue Shield? Article 2.2 of the bylaws that would be established for Care1st upon completion of the deal has the answer:

Notwithstanding any other provision of the Articles of Incorporation or these Bylaws, the corporation shall not directly or indirectly carry on any activity that would prevent it from obtaining or maintaining exemption from Federal income tax exemption as an organization described in section 501(c)(4) of the Internal Revenue Code of 1986, as amended, or section 23701f of the California Revenue & Taxation Code.

In short, the plan is to obtain federal and state tax exemption for the business conducted by Care1st by segregating it from Blue Shield’s tainted operations. As a for-profit company, Care1st currently pays state and federal taxes. But since its business consists exclusively of providing Medicaid and Medicare coverage, it would be eligible for tax exemption if conducted by a nonprofit organization—but not if folded into the operations of a nonprofit whose activities have disqualified it for exemption.

It’s hard to estimate how much in lost corporate tax revenue Blue Shield’s gambit would cost the state and federal governments since it’s difficult to predict the insurer’s future income on the new business. But on the health reform taxes alone, which are assessed on easier-to-predict premium revenue, Blue Shield would avoid paying upwards of $50 million a year.

So here we have a taste of Blue Shield's plans for dealing with the revocation of its tax exemption: instead of cleaning up its act, it's going to play shell games.

More info on the Care1st deal is here.