Is Blue Shield Shopping For Regulators?

California Insurance Commissioner Dave Jones accused Blue Shield of California of using regulatory “loopholes” to move virtually its entire book of business for individual policyholders to the Department of Managed Health Care in order to save millions of dollars in premium taxes.

Jones made the charges during a press conference Tuesday, where he announced the San Francisco-based insurer had agreed to delay by 90 days the cancellations of 115,000 individual policies as part of its reorganization under the Affordable Care Act. 

The Department of Insurance claimed Blue Shield used a loophole to not only cancel the policies, but move individual policies it offers that adheres to ACA guidelines to the DMHC for regulation. Jones said his office had been notified of the shift by Blue Shield in mid-October.

“They've picked up all their marbles and moved to another marble game,” he said.

Blue Shield spokesperson Steve Shivinsky contended in an email that that characterization was inaccurate. Instead, he said it applied to policies that were not yet being offered in the market but “mirrored” those being offered on the Covered California health insurance exchange. 

However, Shivinsky did not deny the insurer expects to have most of its book of business in the coming months regulated by the DMHC (the plans offered by an affiliate, Blue Shield Life & Health Insurance Co., are regulated by the DOI). He noted that the DMHC, which focuses on plans that operate under the state's Knox-Keene act and are health maintenance organizations, currently regulates about 80% of its products, and it will grow to 90% by January 2015.

“Consolidating under one company will simplify our operations and significantly lower administrative costs,” Shivinsky noted. He added that the company's expanding number of accountable care organizations are also offered under the Blue Shield of California label.

A DMHC spokesperson confimed Blue Shield already has a large majority of its policyholders under its regulation, about 2.3 million in total.

However, shifting large chunks of its business over to the DMHC will permit Blue Shield to avoid the gross premium tax levied by insurance companies that are regulated by the DOI, according to Jones. He estimated that the tax for Blue Shield is approximately $107 million a year, and that it was exercising what he referred to as a loophole to avoid paying it. As a result, Jones suggested that the recent decision by insurers Aetna and Cigna to exit the individual market in California may have been influenced by this tax advantage Blue Shield enjoyed.

Shivinsky denied Blue Shield was moving their plans over to the DMHC for tax purposes. “There is no 'loophole' – state law allows Blue Cross and Blue Shield plans to offer PPOs under DMHC,” he said.

Blue Shield's move to get more of its insurance products under the DMHC's purview is the opposite tack of what consumer advocates said had been a longstanding practice of trying to get policies under the DOI's jurisdiction because the Insurance Commissioner does not have the power to reject premium increases as unreasonable.

“The ACA has leveled the playing field,” because of the uniformity of benefits that must be offered by insurers, said Jamie Court, president of Consumer Watchdog, a Santa Monica-based group that has sponsored a 2014 ballot proposition that would give both the DOI and DMHC the power to regulate rates if approved by voters. As a result, he added, many insurers have gradually been moving their policies over to the DMHC in order to avoid the gross premium tax.

“There's something rotten in California when the health plan can choose their regulator,” Court said.