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Los Angeles Times

WellPoint Back Taxes Sought

by Lisa Girion, Times Staff Writer
November 23, 2004

A consumer advocacy group that alleges WellPoint Health Networks Inc. owes California up to $500 million in back taxes filed suit Monday to force state officials to collect.

The suit came as Indianapolis-based Anthem Inc. is poised to complete its $18.4-billion purchase of Thousand Oaks-based WellPoint -- a deal that would create the nation's largest health insurer with about 28 million policyholders.

According to the lawsuit, filed in Los Angeles County Superior Court by the Foundation for Taxpayer and Consumer Rights, WellPoint improperly claimed an exemption for its Blue Cross of California subsidiary from the state's gross premiums tax on health insurers.

The exemption allowed the company to avoid at least $65 million in taxes last year, the suit says. Over the last eight years, WellPoint would have paid $300 million to $500 million more in taxes without the exemption, said Jamie Court, president of the Santa Monica-based organization.

Michael Chee, a spokesman for Blue Cross, declined to comment, saying executives hadn't seen the suit.

Another WellPoint spokesman told The Times in July that the company, which paid $89.6 million in state taxes last year, didn't believe the law required it to pay the premium taxes in question.

"They are saying we're not paying the premium tax," WellPoint's Ken Ferber said at the time. "But under state law it is not required.... There is no violation of tax laws."

WellPoint isn't a defendant in the suit. Instead, it targets state Controller Steve Westly and seeks an injunction ordering him to collect the taxes that the foundation believes the company owes. A spokesman for Westly said the controller hadn't seen the suit and couldn't comment.

The controversy over Blue Cross' tax status has its roots in the mid-1990s, when WellPoint was formed to convert Blue Cross from a nonprofit insurer to a for-profit company, Court said. Since then, WellPoint has become one of the most profitable health insurers in the country and has added a number of other former nonprofit Blue Cross plans to its operations.

According to the suit, WellPoint has avoided paying gross premium taxes on the preferred provider organization coverage sold by Blue Cross of California, which accounts for a substantial portion of Blue Cross' health insurance business. Instead, WellPoint pays the state franchise tax on its Blue Cross of California PPO revenue, claiming the PPO as a health maintenance organization, the suit says.

HMOs aren't considered insurance companies because they sell medical, dental and other care, as opposed to only assuming the financial risk for such care. As such, HMOs are exempted from the premium tax and instead pay the 8.83% franchise tax. The premium tax rate actually is lower, at 2.35%, but because it's assessed on gross premiums, instead of net income, it results in insurers paying a greater share of premium revenue, the suit says.

According to the suit, Blue Cross of California is the only for-profit insurer in the state that doesn't pay the gross premium tax on its PPO revenue. Another WellPoint subsidiary -- Blue Cross Life & Health -- does pay California's premium tax, as do other for-profit insurers including Cigna Corp. and Aetna Inc., Court said.

"This is really a case of one for-profit insurer claiming an exemption that no other for-profit insurer in the state would dare claim," Court said. "It's giving the company a competitive advantage over other companies, and it's making taxpayers foot the bill. This company clearly has the money to pay its tax obligations. And the company that buys it should be prepared to as well."

WellPoint's deal with Anthem had been delayed for months by California Insurance Commissioner John Garamendi. The commissioner opposed it citing concerns about the rich bonuses it would bestow upon executives and fears that policyholders would end up paying $4 billion in transaction costs.

Garamendi relented this month when the companies agreed to earmark $265 million for California healthcare programs.

Although officials in other states now are looking for similar sweeteners, analysts have said they don't expect these negotiations to stop the deal from closing by the end of the month.

It was unclear whether the suit filed Monday could further delay the deal.

The Foundation for Taxpayer and Consumer Rights, which has opposed Anthem's purchase of WellPoint, filed the suit with a "sense of urgency because Anthem and its shareholders need to understand WellPoint's obligations to the state," Court said.