CEO laughs off questions about Blue Shield's conduct as a nonprofit

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In a message to employees, Blue Shield of California CEO Paul Markovich laughed off a front-page LA Times article detailing blistering criticism of the nonprofit by California authorities who revoked its tax exemption. Markovich likened the reporting to an old Saturday Night Live skit parodying the news.

Major doubts have been raised that Blue Shield is serving its nonprofit mission, and to the CEO, it's all a joke. This is a man who, with a board of ten, controls some $10 billion in community benefit assets.

I know from my experience at Blue Shield that a great many of its employees really do care that the health plan is nonprofit and want it to do public good. Markovich's attitude doesn't reflect that, and I hope they’ll push back however they can. I reached out yesterday to over a hundred of them with this message: 

Dear former Blue Shield colleagues:

Someone sent me a copy of Paul's blog post to employees about the LA Times story on the audit by the Franchise Tax Board. You probably saw it. Paul dismisses the article as much ado about nothing. The whole thing reminds him, he says, of a Saturday Night Live skit. 

My wife is a stand-up comic, so I appreciate people who find the humor in things. But Paul’s post is pure arrogance. The questions raised by the FTB and others about whether Blue Shield is giving the public its due are serious; they cast doubt that Blue Shield is serving its core mission. That's why the LA Times, as well as other media outlets, are giving this so much attention. 

Paul brushes it all off as a piddling “$24 million health story" about nothing more than how much in state income taxes Blue Shield would have to pay if the revocation of its exemption is upheld. In fact, the story is about much more than that, such as:

What duty does Blue Shield have to work for the benefit of the public? 

Despite all the talk we’ve heard from Paul about Blue Shield’s commitment to the community, his answer to the question is “none.” That’s the meaning of his claim that Blue Shield is a “nonprofit, mutual benefit corporation, and not a charity.”

The state’s other big nonprofit health plan, Kaiser Permanente, and every nonprofit hospital in California all acknowledge their "charitable trust obligation" to operate for public benefit. But not Blue Shield. Not surprisingly, that has raised eyebrows. Over a dozen consumer and community groups have publicly challenged Blue Shield’s stance. And the Department of Managed Health Care (DMHC) has said it will examine the issue.

Is Blue Shield being straight with state officials?

One seemingly arcane issue Paul addresses in his post is whether Blue Shield’s assets would be distributed to members in the event of its dissolution. This is an important question because Blue Shield has argued to the DMHC that the provision in its bylaws providing for such distribution proves that Blue Shield has no charitable trust obligation and is obligated to operate instead for the benefit of its enrollees.

However, the recent LA Times article reveals that Blue Shield told tax authorities the exact opposite. The auditors had pointed to that provision in Blue Shield’s bylaws as evidence that the plan is organized for the benefit of private individuals, and therefore, not eligible for exemption as a “social welfare” organization. Lawyers for Blue Shield responded to the FTB that the provision was inoperative, writing that federal law “makes it abundantly clear that Blue Shield would be prohibited from making distributions upon dissolution to anyone or any entity other than another [nonprofit] and most certainly not to its contracted physicians or members.” 

Paul says in his post that Blue Shield has been responding to the issues raised by the revocation of its tax exemption by “patiently, publicly, and honestly sharing the facts.” Yet Paul refuses to share the FTB’s audit findings or Blue Shield’s letters to the agency. Those documents, which I saw while working at Blue Shield, contain no business sensitive information. If Paul had nothing he wanted to hide, he’d release them. 

What should Blue Shield be doing to benefit the community?

If you accept that Blue Shield is "for community," as the organization regularly tells its customers, employees, and the public, then the question is, how much should it do for the community?

Although Paul denies Blue Shield has any legal duty to do public good, he claims it does a lot. The deeds he cites most often, which you’ve heard repeated many times, are the pledge to limit annual profits to 2% of revenue and the charitable contributions made through the Blue Shield of California Foundation. But the “2% pledge” is just an aspect of pricing, and Blue Shield’s rates aren’t below market. And while the Foundation provides real public benefit, its $35 million in annual grants are a minuscule return to the community for a nonprofit with total assets of probably at least $10 billion (the market value of Blue Shield).

A reasonable return would be 5% or about $500 million a year. That’s the return the community has gotten from the assets of formerly nonprofit Blue Cross of California. When Blue Cross converted to for-profit status in the mid-90s, its $3 billion in assets went to establish the California Endowment and California Healthcare Foundation. Like all foundations, they devote at least 5% of their assets every year to community benefit activities.

I left Blue Shield because when I raised these issues with Paul he was just as dismissive as he is in his blog post. That's why I’m now on the outside pressing for Blue Shield to take its nonprofit duties seriously. I hope that those of you who believe the nonprofit mission is important—and I know that’s most of you—will put the heat on from within.

If you’re interested in more detail on these issues, including links to Blue Shield’s statements to regulators and other documents, take a look at my blog at makeitrightblueshield.org. And if you'd like to talk, regardless of whether or not you agree with me, please call. 

Best, Michael