Blue Shield of California’s Involuntary Conversion to For Profit Status by the Franchise Tax Board

The Blues are funny entities. Every Blue Cross and Blue Shield Association plan pays federal taxes but reaps the benefits of special exemptions as 501(m) entities.  Blue Shield of California is — or, was– also exempt from state income taxes.The California Franchise Tax Board has changed that.

California's Franchise Tax Board does not usually conjure up the image of an "irate taxing body" but they were, apparently, irate enough this summer to revoke Blue Shield of California's state tax exemption. News of the revocation is just seeping out. 

Sadly, the Franchise Tax Board has offered no public rationale for its decision. So, let the speculation begin. NPR wonders if it is related to the behemoth's $4.2 billion in financial reserves or maybe to its modest funding of  its charitable foundation; The Los Angeles Times wonders if it is the power of having Blue Shield of California's Foundation long-time director resign to lead the charge to involuntary conversion to for-profit status; and Nonprofit Quarterly notes that the Franchise Tax Board decision was made on the heels of an in-depth audit.

I follow voluntary nfp to fp conversions in the health care world. They, themselves, are the subject of a lively public policy debate. But an involuntary conversion — now on appeal by Blue Shield of California — is such a fascinating inversion of the same issue, it is important to appreciate the resonance of what is going on here.