Kaiser, Blues, and Health Net’s $10 Billion Back Tax Bill Coming Due?

Kaiser Permanente

The San Jose Mercury News recently reported on a landmark legal case against the state’s four biggest health insurance plans:

California's four largest health plans may be on the hook for $10 billion in state back taxes -- and at least $1 billion every year going forward -- if a closely watched legal case does not break their way.
Should that happen, insurance industry critics say, it would end one of the biggest tax code abuses in state history -- one that for decades has allowed Kaiser Permanente, Anthem Blue Cross, Blue Shield of California and Health Net to avoid paying a state tax on health insurance premiums. The health plans, however, say they aren't insurers and thus shouldn't be subject to the tax.
If they lose in court, it could mean a huge windfall for the state's coffers, potentially pouring much-needed funds into the state's overwhelmed Medi-Cal program -- and perhaps an El Niño-like deluge into Gov. Jerry Brown's Rainy Day Fund.

The reaction from Sacramento?  Some felt the rain drops on their face after a long drought.
"This is clearly a monumental case for California and Californians," said state Sen. Bill Monning, D-Monterey, a member of the Senate Health Committee. "The reason it would be a good decision -- from a public policy point of view -- is that it would level the playing field so that everyone participating in the insurance market is held to the same standard."
 Consumer Watchdog, Capitol Watchdog's publisher, is co-counsel in the case against Kaiser and Health Net. All told the four companies' tax bills are worth about $1 billion per year going forward for the state in addition to about $10 billion underpaid over the last 8 years. 
The cases are moving forward because the California Court of Appeal and state Supreme Court ruled against the companies and, ironically, the CA Department of Managed Health Care (DMHC), in quoting the California Constitution and case law. If a majority of a companies’ dollars are from insurance practices, indemnifying against risk or harm, then it pays the gross premiums tax like other insurance companies.   That’s about twice as much as the state’s income tax.
Now the trial court in Los Angeles is moving forward with the case to apply the analysis. The companies’ own records supplied to the state DMHC show indemnification is the majority of its payments to doctors and hospitals, not capitation, where the doctors take on the risk of patient care instead of the companies. This is the crux of the legal question.
The health plan lobbyist Charles Bacchi and I tangled on Southern California Public Radio last week over the issue  The companies don’t have much to say for themselves, other than rates will go up if they have to pay their real tax bill. 
The reality is that the $10 billion in back taxes cannot be passed onto consumers. Policyholders today cannot pay for the companies’ tax dodge of the past eight years under contract. And there's the Medical Loss Ratio (MLR) rule that says no more than 20% of premiums can pay for administration and profit, and every plan is up to that line.
What’s more the companies have much much more than $10 billion in the bank.  Take Kaiser. It’s estimated $5.9 billion back tax bill is dwarfed by the $23 billion EXTRA it's keeping in reserves than the DMHC requires.  These huge reserves have long been a thorn in policyholders’ sides, but now the tax collector has a place to go.  Blue Shield has $2 billion more than required in reserve and it’s back tax bill is about $1.4 billion. 
This won’t stop the health plans from claiming the sky is falling.   But it won’t, and it cannot, especially as 40 other health plans in the market do pay their fair share of taxes and make it all work.
Stay tuned as LA case moves forward this Spring. The Governor might even break a smile at the thought of El Nino for his rainy day fund.

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