Dental insurance coverage big Delta Dental of California is going through mounting criticism for paying its CEO exorbitantly, flying board members and their companions to Barbados for a gathering, and spending a small fraction of its income on charitable work — all whereas receiving important state and federal tax breaks due to its nonprofit standing.
Now, the corporate — which has 36.5 million enrollees in 15 states and the District of Columbia — is hoping to pay $155 million to acquire a 49.5 percent stake in for-profit medical and dental insurer Moda Health.
Consumer advocates are calling on state regulators to scrutinize the deal, arguing that the proposed acquisition is simply the most recent questionable transfer by a nonprofit insurer whose company practices could also be out of step with its tax-exempt standing.
They level out that the corporate paid its chief government, Tony Barth, $14.three million in 2016, two years earlier than he was fired for having a secret relationship with a subordinate. The subsequent 9 highest-paid Delta executives earned greater than $1 million every that yr, bringing the whole compensation for the highest 10 to greater than $30 million in 2016, in line with the insurer’s latest available tax filing.
The firm earned $5.9 billion in income that yr.
“They just appear to be about nothing more than feathering the nests of their own managers,” mentioned Michael Johnson, a former executive with Blue Shield of California turned whistleblower who has drawn consideration to what he describes because the transgressions of nonprofit insurers. “I can’t imagine a more flagrant abuse or dereliction of their duty as a nonprofit.”
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The California Department of Managed Health Care (DMHC), tasked with reviewing the transaction, might impose phrases on the insurer, and even forestall the acquisition of Oregon-based Moda Health if it determines that the cash is meant for use to profit the general public. DMHC has mentioned it doesn’t have the authority to alter a dental well being plan’s nonprofit standing.
Advocates agree whereas arguing the division does have the authority to insist that it adjust to its obligations as a nonprofit. When it involves nonprofit insurers, “the DMHC is the only one who has standing to go to court,” Johnson mentioned.
Delta Dental of California, in a written assertion to Kaiser Health News, mentioned its funding in Moda Health will improve entry to dental care and coverings, and that it makes use of consultants and board oversight to make sure that government pay is suitable.
Nonprofits can take a wide range of varieties, however to be able to qualify for an revenue tax exemption they need to typically present a group profit. In the U.S. well being system, nonprofit hospitals and insurers typically meet that requirement by providing free or discounted companies or performing charity work.
Nonprofit insurers have raised eyebrows previously. In the 1980s, Congress rescinded federal revenue tax-exempt standing from Blue Cross Blue Shield well being plans throughout the nation after figuring out that they weren’t behaving any in a different way than for-profit insurers.
Dental insurance coverage has traditionally drawn much less scrutiny than medical insurance coverage and is much less strictly regulated. While well being insurers have been required by the Affordable Care Act to spend 80 or 85 p.c of premiums on care, dental insurers have no such federal requirement. And when the tax code for nonprofit insurers was rewritten within the 1980s, it allowed nonprofit dental insurers to maintain their federal revenue tax exemption.
Part of what’s being debated now could be to whom Delta Dental is accountable and what its cash should be spent on. It’s a mutual-benefit company, that means it solutions to its members, not the broader public. But in its founding paperwork, it promised to “assist the people of California.”
In December, Consumer Reports, California Pan-Ethnic Health Network, Health Access and the Western Center on Law & Poverty penned a letter to California regulators asking them to evaluate whether or not it’s acceptable for Delta Dental to be investing in a for-profit insurer.
They argued that the nonprofit insurer has benefited from tax breaks for many years and that surplus income earned from shopper premiums must be spent on the general public good.
“We kind of have to ask whether they may have been overcharging on premiums,” mentioned Dena Mendelsohn, a lawyer with Consumer Reports.
Delta Dental has advised the state regulator that despite the fact that it’s a nonprofit, its belongings aren’t topic to charitable belief obligations.
The firm advised Kaiser Health News that its general mission is to enhance dental well being and entry to care, and that it had spent almost $16 million across the nation final yr through the Delta Dental Community Care Foundation — only one approach it says it upholds its nonprofit social welfare obligations.
At about 50 cents per buyer, that charitable work additionally represents a small fraction of what the corporate is spending on the acquisition, advocates are fast to level out.
The state ruled on the aspect of one other nonprofit insurer, Blue Shield of California, when it was the topic of an identical debate in 2015. But in a blow to the insurer, the corporate additionally agreed to relinquish its state tax exemption after an audit criticized the insurer for holding greater than $four billion in belongings and failing to supply reasonably priced insurance coverage to the general public.
In an e mail to Kaiser Health News, Rachel Arrezola, a DMHC spokeswoman, mentioned the division has but to seek out proof that Delta Dental’s belongings are topic to charitable spending necessities, however mentioned the evaluation of the acquisition is ongoing. The deal was mentioned Wednesday at a public meeting in Sacramento.
Beyond the problem of this specific sale, tax-exempt nonprofits should additionally spend company belongings fastidiously. For years, Delta Dental of California’s CEOs have earned tens of millions of dollars, together with the $14.three million in 2016. The firm declined to reveal its government pay for 2017 or 2018.
“That’s a very healthy number,” mentioned Marcus Owens, former director of the arm of the Internal Revenue Service liable for overseeing nonprofits, and presently a companion of the regulation agency Loeb & Loeb. “It’s the kind of level that, if the IRS … had the resources to review cases for compensation, they might actually follow up on that.”
Board compensation has additionally drawn scrutiny, with members receiving from $46,000 to $203,000 in 2016 for one to 2 hours of labor every week, in line with tax filings. Board chairs obtained considerably extra that yr, within the vary of $172,000 to $223,000. And journey for companions and workers to an annual assembly on the Caribbean island of Barbados is a part of that compensation for some board members, in line with tax filings from Delta Dental of Pennsylvania, an affiliate of Delta Dental of California.
Compensation for board members isn’t the norm within the nonprofit world, Owens mentioned, although that doesn’t imply it’s inappropriate, significantly for a corporation as massive as Delta Dental. The company’s bylaws say board members shouldn’t obtain any wage, however could be compensated for the time and expense of making ready for and attending board conferences.
Critics have drawn consideration to excessive government pay at Delta Dental plans in different states as nicely, together with these in Washington, Michigan and Missouri.
Delta Dental of California defended its pay construction, saying, “We need to attract top executive talent to provide best-in-class service to our enrollees/members. Therefore, we are guided by a ‘pay for performance’ philosophy and employ many governance tools to ensure that executive pay is appropriate.”
This KHN story first revealed on California Healthline, a service of the California Health Care Foundation.
Anna Maria Barry-Jester: annab@kff.org”>annab@kff.org, @annabarryjester
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