By Chad TerhuneApril
17, 2018
A
federal whistleblower complaint alleges that a major California insurer failed
to pay an estimated $89 million in taxes on premium revenue as required under
the Affordable Care Act.
The complaint against
Blue Shield of California focuses on the taxation of certain health plans that
are funded by both an employer and insurer. It could spark more scrutiny by
federal officials into whether all insurers are paying their fair share of
taxes on premiums.
The
ACA’s health insurance tax is
one of several fees designed to help fund the health law. Employers’
self-funded plans are exempt from this ACA tax. But traditional plans, in which
health insurers are fully responsible for paying medical claims in exchange for
premiums, are subject to the tax.
At
issue in this case is whether Blue Shield should have paid ACA taxes on hybrid,
or “flex-funded,” plans, in which employers pay claims out of their own pocket
up to a point and the insurance company covers the rest. Such plans account for
a modest share of the insurance market.
The
whistleblower in the Blue Shield complaint is Michael Johnson, a public policy
director at the company until 2015, when he left and became an outspoken critic
of the company.
“Blue
Shield appears to have skipped out on $89 million in health reform taxes in
2016, and it’s poised to do the same every year going forward,” Johnson said.
In July
2016, the San Francisco-based insurer made a significant change to its annual
tax filing required by the ACA, federal records show.
Blue Shield amended its initial filing from three months earlier and made a 25
percent reduction in its reported premiums, or $3.1 billion less.
Johnson
cited those public Internal Revenue Service filings and other information he
learned as a Blue Shield employee in his Jan. 30 whistleblower complaint. He
shared parts of his complaint with California Healthline.
Johnson
worked at Blue Shield for 12 years before leaving in March 2015. Soon after, he
launched a public campaign against Blue Shield, accusing the nonprofit of
shortchanging the public by operating too much like its for-profit competitors.
Blue Shield sued Johnson in 2015 for breach of contract, accusing him of
disclosing confidential company information. Johnson is seeking to have the
case dismissed in state court.
In a
statement, Blue Shield said it has complied with ACA rules. The company said it
amended its IRS filing because some revenue from flex-funded plans, also known
as minimum-premium plans, represents service fees, rather than insurance
premiums. Overall, the company said, its customers benefit because its tax
savings result in lower insurance costs.
Some
health-policy experts said they couldn’t comment directly on Blue Shield’s
situation but were skeptical that flex-funded plans could avoid ACA taxes
altogether.
“If the
full payment for minimum-premium plans are booked as premium revenue [by the
insurer], I would think that they would have to pay the tax. There is no
exclusion in the law that I am aware of,” said Glenn Giese, an actuary at the
Oliver Wyman consulting firm in Milwaukee.
But
views differ within the insurance industry. A spokesman for industry
giant Cigna Corp. said that
flex-funded or minimum-premium plans are subject to ACA taxes.
Anthem
Blue Cross, the nation’s second-largest health insurer, disagrees. In a
company fact sheet on ACA taxes, it said “minimum
premium products should be considered self-funded [by employers and] will not
be subject to the ACA insurer fee.”
In
2014, the first year of the ACA rollout, the federal government collected $8
billion in taxes from insurers, and the amount increases annually. Health
insurers collectively will pay $14.3 billion in taxes this year.
Congress
has suspended the ACA tax twice, for 2017 and 2019, in response to persistent
lobbying from businesses and insurers who want it permanently
repealed. Critics say it drives up premiums for employers and
consumers at a time when health costs are already too high.
The IRS
Whistleblower Office acknowledged receipt of Johnson’s complaint in a Feb. 22
letter and said “we will evaluate the information you provided to determine if
an investigation is warranted and an award is appropriate.”
If the
IRS uses the information provided by a whistleblower, it can award the person
up to 30 percent of the additional taxes and penalties collected. A spokesman
for the IRS declined to comment further, saying the agency can’t discuss
specific cases.
In
2016, Blue Shield paid $196 million in ACA premium taxes. However, in his
complaint, Johnson said Blue Shield should have paid an additional $55.4
million related to flex-funded plans.
Johnson
also contended that his former employer underpaid its ACA taxes by $33.7
million in connection to its acquisition of Care1st,
a for-profit Medicaid insurer, in 2015.
Under
the ACA, nonprofit insurers that derive at least 80 percent of their gross
revenue from government programs are exempt from the health insurance tax. But
Johnson said a company can’t cut its taxes through a transaction that has no
other “substantial purpose” besides the tax implications.
Blue
Shield said the conversion of Care1st to nonprofit status wasn’t driven by tax
considerations.
Chad Terhune: cterhune@kff.org, @chadterhune
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