Hand Out

By Tracy Seipel
Posted:    01/21/2016 – 12:01:48 PM PST
Updated: 01/21/2016 – 07:01:54 PM PST

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.

Yet some worry that such a defeat for the four plans — which control almost 70 percent of California’s health insurance market — means consumers will end up footing their behemoth tax bills through higher premiums.

“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.”

Blue Shield and Blue Cross already lost a key round in a state appellate court. The case against Kaiser and Health Net heads to a Los Angeles court Friday.

At the heart of the debate is a century-old section in the state constitution that requires almost all insurers to pay a 2.35 percent tax on the premiums they collect each year. The tax is paid in lieu of almost all other state taxes.

Yet for decades, industry critics say, Kaiser, Blue Cross, Blue Shield and Health Net have managed to avoid paying the premium tax on the majority of their business.

The four say they are “health care service plans” that are in the business of providing medical services for a fixed monthly fee through a restricted network of hospitals and doctors. These plans, they say, require the doctors and hospitals to assume the financial risk of providing medical services to consumers. They contend they are different from “insurance plans,” like Aetna and Cigna, which reimburse consumers for their medical expenses.

But according to the lawsuits, the difference between the plans has become blurred over time as the “health care service plans” have come to resemble “insurance plans” in the way they pay doctors and hospitals Health care advocates and consumer advocates say Kaiser, Blue Cross, Blue Shield and Health Net are all essentially insurers — whether they call themselves that or not.

“If it walks like a duck and talks like a duck, then it’s a duck,” said Jerry Flanagan, an attorney with Consumer Watchdog, a nonprofit Santa Monica-based advocacy group that joined the case in September after the original 2013 lawsuit was expanded to include the nonprofit Kaiser and for-profit Health Net as parties in the case.

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