January 1, 2016; San Antonio Express-News

As NPQ readers know, in a recent court ruling, a New Jersey judge dubbed the modern nonprofit hospital a “legal fiction,” which brought its property tax status into immediate question. This ruling highlights the question, “When is a nonprofit not a nonprofit?”

Another category of nonprofit increasingly in the spotlight for its corporate behavior comprises nonprofit insurers like Blue Cross and Blue Shield, which have been under scrutiny for years but are now showing their true colors under fire. We have covered the case against the tax status of Blue Shield of California extensively.

The Chicago-based Health Care Service Corp. is the parent corporation of the Blue Cross and Blue Shield plans in Texas, Illinois, Oklahoma, New Mexico, and Montana, and it says that its reserves are not for such uses as smoothing out the transition to care under the ACA. Instead, in Texas, the company is cutting off its PPO customers and raising its rates by 20 percent.

HCSC in 2015 bested its previous year’s revenue by 22 percent and is now sitting on $9.9 billion in surplus funds, so why not reward the CEO with a $10 million bonus? Maybe because it is a mutual benefit corporation. It operates through nonprofit insurers, but as Rick Cohen described here in 2013, it in no way shows as a nonprofit.

“Our reserves serve a different purpose, and that is to remain in place to protect our nearly 15 million HCSC members and ensure anticipated and unanticipated claims by our members,” said Carl McDonald, the company’s divisional senior vice president of treasury and business development.

“That’s why companies have reserves, for a rainy day. Well, guess what? It’s raining,” said John Rowe, a health policy professor at Columbia University Mailman School of Public Health and former CEO of Aetna, Inc.

Founded in 1936, HCSC holds an independent license from Blue Cross and Blue Shield Association and operates as a “mutual legal reserve company.” However, a suit filed against HCSC in 2014 claims the company has broken its promise to “operate on a nonprofit basis for the mutual benefit of its members.”

Part of what is at question in that suit is the fact that when the company does well, it does not reward its member/stakeholders, instead providing top executives with compensation rates that suggest that common cause is the last thing on anyone’s mind. Patricia Hemingway Hall, the now-retired CEO of HCSC, earned around $11.7 million in 2014 all by herself, including $10 million in bonuses. That pay was around four times what any other CEO in a multistate nonprofit or mutual Blue Cross and Blue Shield insurer made, and she was the sixth-highest-compensated insurance CEO in the nation. All of those earning more headed for-profit corporations.

The lawsuit notes, “The more money HCSC accumulates, the more money its executives got paid. This has resulted in a perverse incentive system that favors the continued accumulations of excess profits and expansion of HCSC’s business operations at the expense of its policy-holder members.”

This, alleges the suit, violates HCSC’s own bylaws, which provide that “no person or entity shall receive, directly or indirectly, any profits from the corporation.”

In a statement, HCSC says it “remains strongly committed to a not-for-profit structure.”

“We do not measure success by how much money we make. Instead, we set our sights on meeting the health care needs of our members and facilitating their use of the health care system,” the statement said.

The HCSC divisions in New Mexico and Illinois also eliminated coverage rather than dip into reserves. This, says Michael Johnson, the whistleblower in the California Blue Shield case, should be where the rubber hits the road on nonprofitness.

“A [health insurance] nonprofit exists, not to make money, but to make health care affordable,” he said. “It should use its reserves to smooth out the ups and downs.”—Ruth McCambridge