When WellPoint Health Networks planned to buy up what was then known as Blue Cross two dozen years ago, California regulators required WellPoint to set aside billions of dollars to keep much of the nonprofit’s assets in the public trust.
The $3 billion carve-out from the Blue Cross acquisition seeded what became the California Endowment and the California Health Care Foundation, major charities that now promote an array of services across the state.
Now a lawsuit is accusing the same state regulatory agency of failing to safeguard the public trust in two more recent decisions.
The California Department of Managed Health Care ruled in 2015 that Blue Shield of California’s proposed acquisition of Care1st, a smaller for-profit provider, did not trigger a stricter regulatory review because the nonprofit had no assets subject to charitable trust obligations.
State regulators reached the same determination in 2018, when the nonprofit Delta Dental sought to acquire a 49.5 percent stake in the for-profit Oregon insurer Moda Health.
The lawsuit, filed last month by a former Blue Shield of California executive, claims that state regulators are failing to exercise their legal authority and are jeopardizing assets that should be in the public trust the next time a nonprofit health provider becomes a takeover target by a profit-driven rival.
“If a for-profit health plan later acquires Blue Shield, there may be no requirement that an amount equal to the value of Blue Shield be set aside for the benefit of the community,” said its former director, Michael Johnson, in his lawsuit.
“In other words, DMHC’s determination that Article 11 (of the Knox-Keene Health Care Service Plan Act of 1975) does not apply to Blue Shield could have multibillion-dollar consequences for the people of the state of California,” the legal complaint asserts.
The Department of Managed Health Care has yet to formally respond to the lawsuit. A spokeswoman said last week that the specific section of the Health and Safety Code mentioned in the lawsuit does not apply to the Blue Shield of California and Delta Dental cases.
“The DMHC reviewed health plan and public documents to look for evidence of assets subject to a charitable trust,” spokeswoman Ashley Robinson wrote by email. “This included reviewing articles of incorporation filed with the Secretary of State, filings with the Attorney General’s Office, plan financial documents and previous filings with the DMHC.”
Both Blue Shield of California and Delta Dental argued before regulators that they are not subject to the charitable-trust obligations— even though both are recognized by the IRS as nonprofit organizations.
The two companies, which reported 2018 revenue of $20.6 billion and $8.8 billion, respectively, declined to respond to questions about the lawsuit or the state regulators’ determination that they hold no charitable assets.
Johnson is not alone is his belief that state regulators are not meeting their obligation to protect nonprofit assets.
In both the Blue Shield of California and Delta Dental acquisitions, a coalition of consumer groups wrote letters urging the Department of Managed Health Care to take a closer look at the impacts of the transactions.
“The DMHC must ensure that charitable assets of health service corporations continue to be used to further their original purposes, and no other,” wrote the California Public Interest Research Group and other advocacy organizations in 2015, when Blue Shield of California proposed buying Care1st for $1.2 billion.
“At the beginning of 2014, Blue Shield of California held a surplus in excess of $4 billion, well above the amount required by the state and the BSBC (Blue Shield Blue Cross) Association,” they added. “It added to that surplus in 2014 and raised insurance premiums in 2015 with a clearly stated intent to grow additional surplus.”
In allowing the acquisition, state regulators stripped Blue Shield of California of its state tax-exempt status, in part due to the charity’s high surplus.
The health provider remains a federally recognized nonprofit organization, however, meaning it does not have to comply with many of the regulations and shareholder demands that its corporate rivals must meet.
Another group of consumer advocates urged the state to more closely examine Delta Dental’s ownership bid for a portion of Moda Inc.
“Delta Dental claims that Article 11 does not apply. We disagree,” said a January 2019 letter from Consumer Reports, Health Access, the California Pan-Ethnic Health Network and the Western Center on Law & Poverty.
The dental insurer’s own documents show it is a social-welfare organization and, as such, its assets fall under the charitable trust obligations spelled out in state law, the group said.
“Delta Dental’s articles of incorporation, tax exemption, and irrevocable dedication of assets are clear evidence of a public-benefit purpose, and thus establish that its assets are held subject to a charitable trust obligation,” the coalition told state regulators.
Among other things, the advocacy groups wanted regulators to require the dental provider to raise its charitable contributions, support more local consumer-assistance programs or donate money to help improve the dental-care delivery system.
They also suggested the Department of Managed Health Care use Article 11 of the Knox-Keene Act to force Delta Dental to expand coverage, improve the quality of its products and increase diversity among network providers.
“Prior to approving this merger, the department should insist that Delta Dental commit to a set of undertakings that will ensure that it rises to the standards it implicitly agreed to when forming as a tax-exempt social welfare organization,” they concluded.
The lawsuit Johnson filed follows a years-long quest to learn how the Department of Managed Health Care reached its determinations that Blue Shield of California and Delta Dental hold no assets in charitable trust — and are thus not subject to stricter requirements.
He filed numerous California Public Record Act requests for emails and other documents related to the two decisions but received no responsive records detailing the decision-making process.
Lawyers for the department withheld most of the requested communications under the “deliberative-process” and attorney-client exemptions in the open-records law.
Robinson said the Department of Managed Health Care follows the law in responding to all California Public Records Act requests.
Johnson, whose lawsuit seeks to compel the agency to release all the emails and other records he requested, said regulators are deliberately obscuring their reasoning from the public.
“If the DMHC had good reasons for ruling in favor of Blue Shield and Delta Dental, they wouldn’t now be trying to hide documents showing why they ruled as they did,” he said.
The complaint seeking a judge’s order to release the records was filed in San Francisco Superior Court on Jan. 23. The state has not yet filed its response, and no hearing date has been set.