DMHC Approves Blue Shield’s Acquisition of Care1st Health Plan

Blue Shield of California has won state approval to acquire Care1st Health Plan, but had to make several concessions, including permanently relinquishing its not-for-profit tax exemption, the Los Angeles Times reports.


Blue Shield proposed the $1.2 billion acquisition of the multi-state Medicaid insurer in December (Terhune, Los Angeles Times, 10/8). Care1st has more than 524,000 enrollees (California Healthline, 5/8).

According to the Times, the state’s scrutiny of the deal increased after reports in March that the Franchise Tax Board had stripped Blue Shield’s tax-exempt status in August 2014. The insurer is appealing the decision (Los Angeles Times, 10/8).

Blue Shield also faced criticism over its:

  • Executive pay;
  • Rate hikes; and
  • $4.2 billion surplus.

In addition, advocates had criticized Blue Shield for failing to serve beneficiaries of Medi-Cal, California’s Medicaid program (California Healthline, 3/18).

Details of Agreement

On Monday, the California Department of Managed Health Care and Blue Shield signed an agreement authorizing the acquisition (Robertson, Sacramento Business Journal, 10/8).

Under the agreement, Blue Shield will permanently forfeit its not-for-profit tax exemption, regardless of the outcome of its ongoing appeal (Los Angeles Times, 10/8).

If Blue Shield wins its appeal, it will add the money to its earnings and refund policyholders any income above a 2% company margin (Sacramento Business Journal, 10/8).

Under the deal, DMHC also required Blue Shield to:

  • Invest $200 million to strengthen care delivery;
  • Improve access to care under Medi-Cal; and
  • Provide consumers with assistance.

Specifically, of the $200 million in investments:

  • $140 million will go to the Blue Shield Foundation or other DMHC-approved organizations;
  • $50 million will go toward care delivery reform programs, such as a provider directory database and a Medi-Cal encounter data standardization project; and
  • $10 million will go to local consumer assistance programs.

Meanwhile, both Care1st and Blue Shield have agreed to develop a plan for promoting health literacy education (Sacramento Business Journal, 10/8).

DMHC as part of the agreement determined that Blue Shield does not operate as a public charity and its assets are not subject to charitable trust obligations (Los Angeles Times, 10/8).

When the deal closes, Care1st will convert to a not-for-profit organization (Sacramento Business Journal, 10/8).

Comments From Blue Shield, DMHC

DMHC Director Shelley Rouillard said the agency had conducted an extensive review and several legal analyses to determine Blue Shield’s obligations as a not-for-profit insurer.

She said, “I think we got some strong commitments from Blue Shield to do better, and we will be monitoring them and holding them accountable.”

Meanwhile, Blue Shield spokesperson Steve Shivinsky said, “We are very pleased that after a long and in-depth review by the state, we have received their approval,” adding, “Blue Shield is excited to finally be in position to enter the Medi-Cal market through Care1st.”

Reaction From Consumer Advocates

Consumer advocates have widely criticized the agreement.

Anthony Wright, executive director of Health Access, said, “We are disappointed in the state’s ruling on the charitable trust issue and for not putting other conditions in place,” adding, “The specifics in the agreement are underwhelming.”

In addition, Jamie Court, president of Consumer Watchdog, said, “Blue Shield shouldn’t be drawing on a bank account entrusted to the public and policyholders for an acquisition spree when there are still significant questions on how that money should be spent” (Los Angeles Times, 10/8).

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