Why won’t CA regulator explain Blue Shield charitable trust ruling?

When California Department of Managed Health Care Director Shelley Rouillard approved Blue Shield’s acquisition of Care1st Health Plan last October she also made a determination that Blue Shield has no charitable trust obligation. That ruling effectively privatizes Blue Shield, relieving it of any obligation to operate for community benefit and giving its directors license to sell the health plan to a for-profit company without having to set aside for community benefit any of the billions of dollars a sale would net.

The DMHC has refused repeated requests I’ve made over the last three months for an explanation of the decision and how it was reached. Today, I sent the letter below detailing the stakes for the public and appealing once again for the DHMC to provide the public with basic information about the determination. 

Letter to DMHC Director Shelley Rouillard

Dear Ms. Rouillard:

I’m writing regarding your recent determination that Blue Shield of California holds no assets subject to a charitable trust obligation. Your ruling appears to mean: (1) Blue Shield, despite being a nonprofit, will not be required by the DMHC to operate for the benefit of the community; and (2) if Blue Shield’s directors decide to sell the insurer, they would not have to set aside into a community benefit foundation any of the billions of dollars the sale would net.

It’s impossible to know with certainty what your decision means because the DMHC has communicated almost nothing about it. The public knows only, as reported by the Los Angeles Times, that in approving Blue Shield’s acquisition of Care1st Health Plan you “sided with the company’s argument that its assets, including about $4.2 billion in financial reserves, aren’t subject to charitable trust obligations and it doesn’t operate as a public charity.”

I’m writing to ask that you make clear how your decision affects Blue Shield’s obligations to the public. Specifically,

1)    Does your determination mean that Blue Shield is considered by the DMHC to have no legal obligation, as a nonprofit, to operate for community benefit?

2)    Does your determination mean that Blue Shield’s directors, if they sell Blue Shield, have no legal obligation to set aside assets for community benefit?

Background

The question of Blue Shield’s charitable trust status arose last year in connection with its acquisition of Care1st Health Plan. Under Article 11 of the Knox-Keene Act, the DMHC must impose certain requirements on a nonprofit health plan that seeks to restructure, unless the plan is determined to have no charitable trust obligation.

A coalition of consumer groups and I argued that Blue Shield had a clear charitable trust obligation and that the transaction should be subject to Article 11. Blue Shield argued the opposite. You reviewed the transaction without applying Article 11, and in approving it, announced your agreement with Blue Shield on the charitable trust question.

While the acquisition is now complete, your determination of Blue Shield’s charitable trust status has implications extending well into the future. As described below, the decision appears to relieve Blue Shield of any obligation to operate for community benefit or to set aside assets for community benefit in the event that it is sold and absorbed into a for-profit company.

Obligation to operate for community benefit

A nonprofit organization’s fundamental duty to operate for the benefit of the community emanates from its charitable trust obligation, which is the common law duty of a nonprofit organization that has publicly presented itself as working for community benefit to devote its financial and other assets to that purpose.

Under California law, the DMHC is the sole governmental agency with authority to enforce the charitable trust obligations of nonprofit health plans. Given your determination about Blue Shield’s charitable trust status, it would appear that Blue Shield will not be required by the DMHC to apply its resources (i.e., operate) for community benefit. Is this the case? Is it the DMHC’s position that Blue Shield has no legal obligation to benefit the community beyond making the specific charitable contributions negotiated as a condition of your approval of the acquisition?

Requirement to set aside assets for community benefit

Under Article 11 of the Knox-Keene Act, a nonprofit health plan that converts to for-profit status, which would most commonly happen in connection with the sale of the plan, must preserve its assets for community benefit by relinquishing to a community benefit foundation an amount equal to the market value of the plan.

Article 11 codified the approach that was taken in 1994 when Blue Cross of California, then a nonprofit, was acquired by a for-profit company. In approving the acquisition, regulators required $3 billion, the estimated market value of Blue Cross, to be set aside into two community benefit foundations—The California Endowment and California Healthcare Foundation.

Since Article 11 exempts nonprofit health plans that do not have a charitable trust obligation and sole authority to enforce its provisions rests with you, your determination seems to give Blue Shield’s directors license to sell the nonprofit to a for-profit company without having to set aside any of its assets into a community benefit foundation.

The stakes for the public are huge. Based on the $1.2 billion that Blue Shield paid for Care1st, a reasonable estimate of its own value is at least $10 billion. What is the DMHC’s position regarding the applicability of Article 11’s community benefit set-aside requirement to Blue Shield were it to convert to for-profit status?

Rationale for your determination

Given the major implications of your determination, the public deserves a clear explanation of not only what it means, but also how you reached it. On its face, it’s hard to see how Blue Shield’s public obligations as a nonprofit could be so fundamentally different from those of Blue Cross when it was a nonprofit. Moreover, as Consumers Union, other consumer groups, and I documented to you, Blue Shield has repeatedly told the public, tax officials and consumers that its mission is to promote social welfare. How, despite these facts, did you conclude that Blue Shield has no charitable trust obligation?

I hope you will agree that the public ought to be provided basic information about the meaning of and basis for your determination. I look forward to your response.

Respectfully,

Michael Johnson

 

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