Source: https://www.crowell.com/NewsEvents/AlertsNewsletters/all/New-California-Court-of-Appeal-Decision-May-Impose-Premium-Taxes-on-California-Health-Plans
Timestamp: 2019-04-22 19:06:17+00:00

Document:
Since their inception, California health care service plans have been considered not to be insurers for purposes of the State's 2.35 percent gross premium tax. Under a controversial ruling issued by the Court of Appeal, this could change.
On September 25, the Court of Appeal held that a suit alleging that California's Blue Shield and Blue Cross plans—which are otherwise regulated as health care service plans—are insurers for purposes of the State's 2.35 percent gross premium tax, stated a claim for trial.1 The Court held that the test for whether a health care service plan is an insurer for purposes of the tax is whether "indemnifying" against future contingent medical expenses is a "significant financial proportion" of its business. The Court said that allegations that California Physicians' Service, dba Blue Shield of California (Blue Shield) and Blue Cross of California, dba Anthem Blue Cross (Blue Cross) paid between 75-80 percent of member expenses under their PPO and HMO plans on a fee-for-service basis, rather than on a capitated basis, would be sufficient to find that they were predominantly providing "indemnity."
The central dispute: are fee-for-service products subject to the insurance premium tax?
The complaint in Myers seeks a writ of mandamus that the State collect premium tax from the defendant Blue plans. The premium tax is imposed by Article 13 § 28 of the California Constitution on "each insurer doing business in this state."3 Both Blue Shield and Blue Cross are licensed as health care service plans, rather than insurers, and are regulated by the DMHC, rather than the Department of Insurance (CDI).4 Because they are not considered insurers under state law and do not operate under insurance licenses, they do not pay premium taxes.
For its decision, the Court relied on Insurance Code § 22, which defines insurance as an indemnity contract.15 The Court also relied heavily on Roddis. Roddis did not involve a premium tax issue. It concerned whether an unlicensed entity should have been licensed as an insurer or as a health plan under the former Knox-Mills Act. At the time of the Roddis decision, the Knox-Keene Act, which has regulated health plans since 1975, had not been enacted.
The Court noted that the complaint alleged that in 2012 Blue Shield paid $1.7 billion in claims on a capitated basis and $5.2 billion on a non-capitated basis; and that Blue Cross made $7.2 billion in fee-for-service and $1.8 billion in fixed fee payments on claims. Notably, these figures appear to include the Blues' HMO and PPO business.20 The Court concluded that the alleged predominance of fee-for service business was sufficient to state a claim that the Blues should be treated as "insurers" for the purpose of assessing the gross premium tax, and it remanded the case for further proceedings in the trial court.
The Myers decision is based on debatable assumptions. California law exempts health care service plans from Insurance Code requirements, calling into question the relevance of Insurance Code definitions of insurance. The Court assumes that PPO plans are "customarily characterized as health insurance plans and, as such, are subject to the oversight of the Department of Insurance." But the Knox-Keene Act permits health care service plans to offer PPO-style products when approved by the DMHC and the Insurance Code expressly exempts products offered by DMHC-licensed health care service plans from regulation as insurance.21 The test for "insurer" in Roddis is dated, because it was based on that court's concern about the lack of reserve requirements for health care service plans in 1968. In 1975, California replaced the Knox-Mills Act with the Knox-Keene Act, which imposed reserve requirements on health plans as well as a host of other requirements.22 The notion that fee-for-service provider contracts make it "very difficult" for plans to determine taxable income is also questionable. Health care service plans cover services provided during a plan year, not events where costs may not be determined for many years as in a general liability policy. Bills for fee-for-service claims should arrive shortly after services are provided—like other industries subject to income taxes.
The Myers decision only considers two structures for payer-provider contracts: capitation versus fee-for service. But the modern world of payer-provider contracting is far more complex. Contracts frequently feature other models of risk sharing. For example, many plans and providers are part of accountable care organizations in which risks are shared via pooling arrangements. It is unclear how the Myers holding would be applied to these or other forms of shared risk contracts.
There is still a ways to go before the impact of the Myers decision becomes clear. But it bears watching because of the effect it could have on health care service plan tax obligations.
1Myers v. State Board of Equalization, Court of Appeal, State of California, Second Appellate Dist., Div. 2, No. B255455 (Cal. Ct. App., Sept. 25, 2015) (hereafter, "Opinion").
2 Katherine Wilson, Enrollment in Individual Health Plans Up 47 percent in 2014, California Healthcare Foundation (May 20, 2015 (available at http://www.chcf.org/articles/2015/05/enrollment-individual-up) (visited Oct. 6, 2015) ("as of 2014, DMHC now regulates the largest portion of enrollment in all three commercial markets, with 82 percent of the individual market, 77 percent of the small-group market, and 91 percent of the large-group market").
"(a) "Insurer," as used in this section, includes insurance companies or associations and reciprocal or interinsurance exchanges together with their corporate or other attorneys in fact considered as a single unit, and the State Compensation Insurance Fund. As used in this paragraph, "companies" includes persons, partnerships, joint stock associations, companies and corporations.
(d) The rate of the tax to be applied to the basis of the annual tax in respect to each year is 2.35 percent.
(f) The tax imposed on insurers by this section is in lieu of all other taxes and licenses, state, county, and municipal, upon such insurers and their property, except: ... [listing exceptions]."
These provisions are largely repeated at Cal. Rev & Tax Code §§ 12201, 12202, 12204.
4 Both Blue Cross and Blue Shield have separately licensed insurance company affiliates that are subject to the insurance premium tax.
5 Appellant's Opening Brief at 3.
6 Opinion at 3. The trial court also based its dismissal on the grounds that the suit was barred by res judicata and that the plaintiff lacked standing. Id. While not examined in this article, these grounds could be critical for a future appeal.
7 Roddis v. California Mutual Assn, 68 Cal.2d 677 (1968). See Appellant's Opening Brief at 34-35.
8 Brief of Respondent California Physician Service dba Blue Shield of California ("Blue Shield Respondent's Brief") at 28 (citing Cal Const., art XIII, § 28a; Blue Cross of California doing business as Anthem Blue Cross Respondent's Brief ("Blue Cross Respondent's Brief") at 19 (citing same and Silvers v. State Board of Equalization (2010) 188 Cal.App.4th 1215).
9 Blue Shield Respondent's Brief at 28-20 (citing Health & Safety Code § 1345(f)).
10 Blue Cross Respondent's Brief at 19 (citing Ins. Code §§ 740(g) and 742(g) and Health & Safety Code § 1346.5).
11 Id. at 22; see California Health & Saf. Code § 1340 et seq.
12 Amicus Curiae Brief of DMHC.
13 Brief of Respondent/Defendant Dave Jones, Insurance Commissioner of the State of California (citing Ins. Code §§ 23, 23).
14 Amicus Curiae Brief, California Department of Insurance.
16 The current statute retains much of this language. See Health & Safety Code §§ 1345(f); 1349.
18 Id. at 18-20. See Roddis, 68 Cal.2d at 680 (noting that under the Knox-Mills Act, "[n]o provisions exist to assure financial responsibility").
19 Opinion at 14, 21.
20 See id. at 6, 8. This holding shows how out-of-step the Myers decision is with long-standing regulation of health plans in California.
21 See, e.g., Health & Safe. Code § 1374.72(g); 1375.7(b)(1)(B); Ins. Code 742(b).
22 Health & Safety Code §§ 1374.64; 1377; 28 CCR § 1300.76. Health care service plans must maintain loss reserves as well as "tangible net equity" (TNE), and are subject to financial oversight by the DMHC.
23 Opinion at 17, 19.
24 Health & Safety Code § 1379.
25 Prospect Medical Group, Inc., v. Northridge Emergency Medical Group, 45 Cal.4th 497 (2009).

References: § 28
 § 22
 v. 
 v. 
 § 28
 v. 
 § 1345
 § 1346
 § 1340
 § 1374
 § 1300
 § 1379
 v.