Judge Tosses Blue Cross Tax Lawsuit

A lawsuit aiming to force the state to collect more taxes from Blue Cross of California has been thrown out of court at the request of lawyers for tax collectors.

The suit claimed that the company should pay taxes for its preferred provider business based on premiums collected. Historically Blue Cross has paid a franchise tax on net income, which is applicable to HMOs, for its PPO business as well.

State lawyers had sought dismissal of the suit, saying it had no legal standing and raised a tax policy issue that belonged to regulators, not the courts.

Los Angeles County Superior Court Judge Jane Johnson agreed in an order dated May 31.

Blue Cross said it was pleased by the outcome.

“Blue Cross of California has always maintained that it has historically and consistently complied with all regulatory and tax requirements to which it is subject,” the company said in a statement.

The Santa Monica-based Foundation for Taxpayer and Consumer Rights, which filed the suit, is considering whether to appeal the ruling or to take the controversy to state regulators.

“They owe this money, and we are going to try to make them pay,” said Harvey Rosenfield, the foundation’s founder.

The suit had sought to force Controller Steve Westly to collect back premium taxes from Blue Cross. He declined to comment.

The suit was filed last year, shortly before Indianapolis-based Anthem Inc. purchased Blue Cross parent WellPoint Inc. for nearly $19 billion.

Other for-profit insurers operating in California pay the premium tax on their PPO business.

WellPoint is one of the most profitable health insurers in the U.S., and its Blue Cross preferred provider coverage is a significant part of its California business.

The company has not paid the premium tax on this business, however, because it considers its PPO a health maintenance organization, the suit said.

Health insurance products, such as PPOs, generally are regulated by the Department of Insurance and subject to premium tax. HMOs are regulated separately by the Department of Managed Health Care and are subject to a franchise tax.

The difference between the premium tax and the franchise tax for Blue Cross is about $65 million a year, the suit said.

Johnson said the policy issues at the heart of the suit were outside the bounds of the court.

“In this case, for policy reasons which have not and cannot be considered by this court ... Blue Cross is regulated by the Department of Managed Health Care ... as a health plan and not under the Department of Insurance as an insurer,” she said in the order. “As such, Blue Cross is subject to a franchise tax which has been assessed and collected.”