Should Nonprofits Stay Closer to the Red with Reserves?: A Blue Shield Inquiry
As seen in a recent post here, the California Franchise Tax Board did not cite a reason for revoking Blue Shield’s state tax exemption. Many have speculated that its unusually large reserves and attendant issues were the main causes. Blue Shield has $4.2 billion in operating reserves, which is four times the amount Blue Cross and Blue Shield Association requires of its members. This raises two interesting questions (1) what should Blue Shield use the reserves for as a nonprofit and (2) should we penalize nonprofits for having large reserves?
According to the LA Times, public debate has centered on the call for Blue Shield to use its reserves to reduce premiums. Glenn Melnick, a healthcare economist and professor at USC, has noted that Blue Shield should aim to reduce its premiums to a level lower than that of for-profit companies. In thinking about the public purpose of nonprofits, one is perhaps disturbed if the cost of a nonprofit’s service is on par or more expensive than that of a for-profit. To reach this conclusion, one need only look to the recent actions of another big nonprofit in the same healthcare space in California. Kaiser Permanente dropped its rates this year while Blue Shield increased its rates. Albeit, as I posted in December, for-profits certainly would not mind nonprofits’ engaging in price gouging practices as they already feel threatened by the competitive or lower prices of nonprofits and are seeking legal redress. In the ideal world of consumers, Blue Shield would have lower premiums, and for-profit companies would feel increased pressure to lower the amount they charge as Melnick suggests. Instead, Blue Shield already has big plans for a large portion of its reserves, and those plans have nothing to do with passing along reduced rates to consumers. It is planning to use $1.2 billion of its reserves to acquire Care1st, a Medicaid managed-care plan.
At the same time, is it wrong for a nonprofit to have large reserves as a matter of course? A few years ago, The Chronicle of Philanthropy ran a series of posts on this topic. Rick Moyers argues against the stigmatism and penalties associated with nonprofits’ maintaining reserves. He explains that nonprofit directors and board members generally try to avoid having reserves because it makes their organization appear not to need additional funding. Given Blue Shield’s exemption loss, this issue is brought squarely into the legal arena. Historically, nonprofits have been cautioned informally against “accumulating funds that could be used for current program activities” under the US Better Business Bureau’s Wise Giving Alliance’ standards (which translates into not having reserves totaling more than three years of operating expenses). These standards are mentioned in my forthcoming article, which deals with how we can better measure the performance of charities with the end goal of establishing an efficient charitable market where donations are put to their most productive use. In terms of measuring the performance of for-profits, investors do not disfavor them if they decide against using all available funds to further their objectives. Perhaps what is underlying the uproar is that customers are not receiving a measurable benefit from Blue Shield’s decision.
Khrista Johnson