Few consumers have heard of the secret, business-to-business payments that the Trump administration wants to ban in an attempt to control drug costs.
But the administration’s plan for drug rebates, announced Thursday, would end the pharmaceutical business as usual, shift billions in revenue and cause far-reaching, unforeseen change, say health policy authorities.
In pointed language sure to anger middlemen who benefit from the deals, administration officials proposed banning rebates paid by drug companies to ensure coverage for their products under Medicare and Medicaid plans.Email Sign-Up
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“A shadowy system of kickbacks,” was how Health and Human Services Secretary Alex Azar described the current system in a Friday speech.
The proposal is a regulatory change applying only to Medicare plans for seniors and managed Medicaid plans for low-income people. But private insurers, who often take cues from government programs, might make a similar shift, administration officials said.
Drug rebates are essentially discounts off the list price. Outlawing them would divert $29 billion in rebates now paid to insurers and pharmacy benefit managers into “seniors’ pocketbooks at the pharmacy counter,” Azar said.
The measure already faces fierce opposition from some in the industry and is unlikely to be implemented as presented or by the proposed 2020 effective date, health policy analysts said.
In any event, it’s hardly a pure win for seniors or patients in general. Consumers are unlikely to collect the full benefit of eliminated rebates.
At the same time, the change would produce uncertain ricochets, including higher drug-plan premiums for consumers, that would produce new winners and losers across the economy.
“It is the most significant proposal that the administration has introduced so far” to try to control drug prices, said Rachel Sachs, a law professor at Washington University in St. Louis. “But I’m struck by the uncertainty that the administration has in what the effects would be.”Possible Winners: Chronically ill patients who take lots of expensive medicine
The list price for many brand-name medicines has doubled or tripled in recent years. But virtually the only ones affected by the full increases are the many patients who pay cash or whose out-of-pocket payments are based on the posted price.
By banning rebates, the administration says its intention is to ensure discounts are passed all the way to the patient instead of the middlemen, the so-called pharmacy benefit managers or PBMs. That means consumers using expensive drugs might see their out-of-pocket costs go down.
If rebates were eliminated for commercial insurance, where deductibles and out-of-pocket costs are generally much higher, chronically ill patients could benefit much more.Drug companies
Ending rebates would give the administration a drug-policy “win” that doesn’t directly threaten pharmaceutical company profits.
“We applaud the administration for taking steps to reform the rebate system” Stephen Ubl, CEO of PhRMA, the main lobby for branded drugs, said after the proposal came out.
The change might also slow the soaring list-price increases that have become a publicity nightmare for the industry. When list prices pop by 5 or 10 percent each year, drugmakers pay part of the proceeds to insurers and PBMs in the form of rebates to guarantee health-plan coverage.
No one is claiming that eliminating rebates would stop escalating list prices, even if all insurers adopted the practice. But some believe it would remove an important factor.Possible Losers: Pharmacy benefit managers
PBMs reap billions of dollars in rebate revenue in return for putting particular products on lists of covered drugs. The administration is essentially proposing to make those payments illegal, at least for Medicare and Medicaid plans.
PBMs, which claim they control costs by negotiating with drugmakers, might have to go back to their roots — processing pharmacy claims for a fee. After recent industry consolidation into a few enormous companies, on the other hand, they might have the market power to charge very high fees, replacing much of the lost rebate revenue.
PBMs “are concerned” that the move “would increase drug costs and force Medicare beneficiaries to pay higher premiums and out-of-pocket expenses,” said JC Scott, CEO of the Pharmaceutical Care Management Association, the PBM lobby.Insurance companies
Insurers, who often receive rebates directly, could also be hurt financially.
“From the start, the focus on rebates has been a distraction from the real issue — the problem is the price” of the drugs, said Matt Eyles, CEO of America’s Health Insurance Plans, a trade group. “We are not middlemen — we are your bargaining power, working hard to negotiate lower prices.”Patients without chronic conditions and high drug costs
Lower out-of-pocket costs at the pharmacy counter would be financed, at least in part, by higher premiums for Medicare and Medicaid plans paid by consumers and the government. Premiums for Medicare Part D plans could rise from $3.20 to $5.64 per month, according to consultants hired by the Department of Health and Human Services.
“There is likely to be a wide variation in how much savings people see based on the drugs they take and the point-of-sale discounts that are negotiated,” said Elizabeth Carpenter, policy practice director at Avalere, a consultancy.
Consumers who don’t need expensive drugs every month could see insurance costs go up slightly without getting the benefits of lower out-of-pocket expense for purchased drugs.
Other policy changes giving health plans more negotiating power against drugmakers would keep a lid on premium increases, administration officials argue.
The first nine months of 2013 started off as a banner year for the Sackler family, owners of the pharmaceutical company that produces OxyContin, the addictive opioid pain medication. Purdue Pharma paid the family $400 million from its profits during that time, claims a lawsuit filed by the Massachusetts attorney general.
However, when profits dropped in the fourth quarter, the family allegedly supported the company’s intense push to increase sales representatives’ visits to doctors and other prescribers.
Purdue had hired a consulting firm to help reps target “high-prescribing” doctors, including several in Massachusetts. One physician in a town south of Boston wrote an additional 167 prescriptions for OxyContin after sales representatives increased their visits, according to the latest version of the lawsuit filed Thursday in Suffolk County Superior Court in Boston.
The lawsuit claims Purdue paid members of the Sackler family more than $4 billion between 2008 and 2016. Eight members of the family who served on the board or as executives as well as several directors and officers with Purdue are named in the lawsuit. This is the first lawsuit among hundreds of others that were previously filed across the country to charge the Sacklers with personally profiting from the harm and death of people taking the company’s opioids.
WBUR along with several other media sued Purdue Pharma to force the release of previously redacted information that was filed in the Massachusetts Superior Court case. When a judge ordered the records to be released with few, if any, redactions this week, Purdue filed two appeals and lost.
The complaint filed by Massachusetts Attorney General Maura Healey says that former Purdue Pharma CEO Richard Sackler allegedly suggested the family sell the company or, if they weren’t able to find a buyer, to milk the drugmaker’s profits and “distribute more free cash flow” to themselves.
That was in 2008, one year after Purdue pleaded guilty to a felony and agreed to stop misrepresenting the addictive potential of its highly profitable painkiller, OxyContin.
At a board meeting in June 2008, the complaint says, the Sacklers voted to pay themselves $250 million. Another payment in September totaled $199 million.
The company continued to receive complaints about OxyContin similar to those that led to the 2007 guilty plea, according to unredacted documents filed in the case.
While the company settled lawsuits in 2009 totaling $2.7 million brought by family members of those who had been harmed by OxyContin throughout the country, the company amped up its marketing of the drug to physicians by spending $121.6 million on sales reps for the coming year. The Sacklers paid themselves $335 million that year.
The lawsuit claims Sackler family members directed efforts to boost sales. An attorney for the family and other board directors is challenging the authority to make that claim in Massachusetts. A motion on jurisdiction in the case hasn’t been heard. That attorney hasn’t responded to a request for comment on the most recent allegations.
Purdue Pharma, in a statement, said the complaint filed by Healey is “part of a continuing effort to single out Purdue, blame it for the entire opioid crisis, and try the case in the court of public opinion rather than the justice system.”
Purdue went on to charge Healey with attempting to “vilify” Purdue in a complaint “riddled with demonstrably inaccurate allegations.” Purdue said it has more than 65 initiatives aimed at reducing the misuse of prescription opioids. The company says Healey fails to acknowledge that most opioid overdose deaths are currently the result of fentanyl.Email Sign-Up
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Purdue fought the release of many sections of the 274-page complaint. Attorneys for the company said at a hearing on Jan. 25 that they had agreed to release much more information in Massachusetts than has been cleared by a judge overseeing hundreds of cases consolidated in Ohio. Purdue filed both state and federal appeals this week to block release of the compensation figures and other information about Purdue’s plan to expand into drugs to treat opioid addiction.
The attorney general’s complaint says that in a ploy to distance themselves from the emerging statistics and studies that showed OxyContin’s addictive characteristics, the Sacklers approved public marketing plans that labeled people hurt by opioids as “junkies” and “criminals.”
Richard Sackler allegedly wrote that Purdue should “hammer” them in every way possible.
While Purdue Pharma publicly denied its opioids were addictive, internally company officials were acknowledging it and devising a plan to profit off them even more, the complaint states.
Kathe Sackler, a board member, pitched “Project Tango,” a secret plan to grow Purdue beyond providing painkillers by also providing a drug, Suboxone, to treat those addicted.
“Addictive opioids and opioid addiction are ‘naturally linked,'” she allegedly wrote in September 2014.
According to the lawsuit, Purdue staff wrote: “It is an attractive market. Large unmet need for vulnerable, underserved and stigmatized patient population suffering from substance abuse, dependence and addiction.”
They predicted that 40-60 percent of the patients buying Suboxone for the first time would relapse and have to take it again, which meant more revenue.
Purdue never went through with it, but Attorney General Healey contends this and other internal documents show the family’s greed and disregard for the welfare of patients.
A version of this story first ran on WBUR’s CommonHealth. You can follow @mbebinger on Twitter.
David Lerman, a Berkeley, Calif., lawyer, changed health plans this year only to learn that his new insurer has no contract with the dominant medical provider in his community.
Anthem Blue Cross of California, one of the state’s largest health insurers, is battling with Sutter Health over how much it should pay to care for tens of thousands of its enrollees in Northern California. Sutter operates 24 hospitals in the region and lists about 5,000 doctors in its network.
“It’s not the peace of mind I thought I was buying to have the entire Sutter network — which is the biggest game in Northern California — be out-of-network,” said Lerman, whose family is insured through his wife’s job as a California State University professor.
Lerman and his family, who are enrolled in an Anthem Blue Cross PPO, can continue to visit Sutter facilities until midyear even if a new contract does not materialize before then. Fortunately, he said, nobody in his family suffers from a chronic illness. But not knowing which providers ultimately will be in his health plan’s network is aggravating, he said.
Contract disputes between insurers and medical providers have been a regular feature of the national health industry for a long time, but the stakes have risen as big players on both sides have expanded to gain market share — and leverage in network negotiations.
Most negotiations are completed before the old contract expires, and consumers usually don’t hear about behind-the-scenes disagreements. But when insurers and providers fail to reach an agreement on time, it can force patients to pay higher prices for care that is no longer covered by their health plans. At the least, it can cause considerable anxiety.
“It is a game of chicken, and at the end of the day somebody blinks and they come to an agreement,” said Wendell Potter, a former senior executive at health insurance giant Cigna who became a critic of the industry and a strong proponent of sweeping health care reform. “The big losers in this are patients, because there’s a period of uncertainty and angst and a real possibility that the physicians and hospitals you want to go to are no longer in-network.”Don't Miss A Story
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Amy Thoma Tan, a Sutter spokeswoman, said in an emailed statement, “We are in active negotiations with Anthem Blue Cross and recognize that a timely agreement — one that protects access and choice — is in the best interest of our patients, employers, hospitals and clinicians.”
A statement by Eric Lail, an Anthem Blue Cross spokesman, was even less enlightening: “As we negotiate with providers, we try to strike a balance between protecting affordability and providing a broad network of providers to create choices, which can take time.”
Sutter, under fire for high prices, has been accused of using its regional market share for financial advantage. As large hospital systems merge with competitors and snap up medical practices, “it’s much more difficult for insurers to say, ‘OK, we’re letting you go,’” said Sabrina Corlette, a research professor at Georgetown University’s Center on Health Insurance Reforms.
Corlette said both sides should have a greater incentive these days to come to an agreement. “When you have a big behemoth health care system and a big behemoth payer with tens of thousands of enrolled lives, the incentives to work something out privately become much stronger,” she said. “The PR risks are so high for both parties.”
Other states have seen their share of feuding between health systems and insurers.
In western Pennsylvania, nearly 50,000 people with Medicare managed-care plans from Highmark Health will lose in-network access to University of Pittsburgh Medical Center hospitals and doctors starting July 1, because of a slow-moving divorce between the two regional health giants.
Among those patients is Judy Hays, a 75-year-old retired office manager from the Pittsburgh suburb of Crescent Township who relies on UPMC’s physicians and hospitals to treat a rare form of leukemia. Now, she plans to change doctors mid-treatment because she wants to keep her insurance, which she said has paid for her expensive medications. “It’s very tough. These people have been taking care of me for the last nine years. I can’t have any interruption in my care,” Hays told Kaiser Health News. “I’m very angry about it.”
In Georgia, WellStar Health System, with 11 hospitals and numerous medical offices, plans to stop accepting Anthem’s individual policyholders as in-network patients on Feb. 4, amid a contract dispute between the two companies.
In 2017, an impasse between Anthem and the Hartford HealthCare system in Connecticut forced hundreds of thousands of patients to go out-of-network before the two parties finally inked a deal. The patients’ bills were retroactively treated as in-network, so patients did not suffer financially.
However, “there were stories of people who had to cancel surgeries and switch providers,” said Ted Doolittle, Connecticut’s state health care advocate. “There was all this anxiety and disruption.”
Under pressure from their constituents, Connecticut lawmakers last year passed legislation enabling consumers to continue getting care at in-network prices for 60 days during contract disputes. The new law is “an improvement,” said Doolittle, who had urged legislators to pass such legislation.
In the current California dispute, Anthem Blue Cross members with PPOs can still use Sutter doctors and hospitals at in-network rates for the next six months, said Thoma Tan, the Sutter spokeswoman. People with HMOs face more uncertainty.
Lail, the Anthem Blue Cross spokesman, said in an emailed statement that “our consumers can continue to see their Sutter care providers for the time being as these negotiations continue.” But as required by state law, the insurer has notified patients with Medicare and Medi-Cal HMO plans that they may be reassigned to non-Sutter providers, Lail said.
There are exceptions that will allow pregnant women, very young children and some other patients to continue receiving care from Sutter at in-network rates, regardless of the type of insurance they have with Anthem Blue Cross, Thoma Tan said.
Sutter’s market dominance in California and its high prices for inpatient care have long drawn criticism. One patient reported that Sutter charged $1,555 for a 10-minute ER visit to treat a cut finger, including $55 for a gel bandage and $487 for a tetanus shot.
Last year, state Attorney General Xavier Becerra sued the giant health system, alleging it had illegally overcharged patients and drove out competition in California. Sutter has contended that Becerra overstepped his authority and that limiting Sutter’s ability to negotiate with insurers will harm consumers.
Anthem Blue Cross, which insures hundreds of thousands of Californians and whose parent company, Anthem, generated profits of $3.8 billion in 2017, has also drawn the ire of state regulators. The Department of Managed Care fined it $5 million in 2017 for failing to respond in a timely way to consumer complaints. The state previously had fined Anthem Blue Cross for consumer grievances totaling $6 million between 2002 and 2017.
In Berkeley, David Lerman just wants Anthem and Sutter to resolve their differences so his family will have access to the most comprehensive coverage options.
“As a consumer, is there no place where you can go and not worry that you’ll not be covered?” he fretted. “If I’m sick, do I go to the local hospital — or to the airport and fly to Europe?”
Newsletter editor Brianna Labuskes, who reads everything on health care to compile our daily Morning Briefing, offers the best and most provocative stories for the weekend.
Happy Friday! I’m here to tell you that if you aren’t following the Subsys opioid trial you are missing out—salacious and horrifying details galore are emerging, including stories about executives giving doctors lap dances. (Clickbait-y as it may seem, it does paint a damning picture of the roots of this epidemic.) More on that later, but first here’s what else you may have missed this week.
“Medicare-for-all” may have once been a fringe policy proposal, but now it’s all but a litmus test for progressive Democrats who are tossing their hats in the ring for 2020 — as exemplified this week by Sen. Kamala Harris saying she’d go all-in for MFA to the point of killing off private insurers. Although she later walked it back, the idea sent a bit of a shock wave through the party and highlighted how the issue is likely to become a dividing line in the sand between moderates and progressives as the 2020 field emerges.
Republicans hit the proverbial fundraising jackpot this week, due to a few missteps by Virginia Democrats about late-term abortions.
While defending a bill on lifting restrictions for late-term abortions, a Virginia lawmaker said the measure would allow a woman to terminate a pregnancy until the moment she gives birth. (The lawmaker later said that she misspoke and wished she had been quicker on her feet when faced with the question.)
Adding fuel to that particular fire, Gov. Ralph Northam gave a radio interview about hypothetical scenarios where an infant who is severely deformed or unable to survive after birth could be left to die. The statements led to accusations from Republicans that the governor supports infanticide. And, in the background of all this, New York just passed a law that allows abortion after the 24th week of a pregnancy when there is “an absence of fetal viability, or the abortion is necessary to protect the patient’s life or health.”
The debate bubbled up to the national level when President Donald Trump and Vice President Mike Pence — with their eyes on 2020 — decided to weigh in, branding the Democrats as the “party of late-term abortion” and issuing a “call to action for all Americans,” respectively. The issue is widely seen as a unifying one for the right, and conservatives have already seized on the comments to blast out in fundraising emails.
And you know those heartbeat bills that are popular in red states? They continue to be knocked down by courts and governors’ vetoes alike, but they just keep coming. Here’s a look at their history and why they have such lasting power, despite numerous defeats.
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New rules proposed by the Trump administration go after the “opaque rebate system” that flourishes between drugmakers and the middlemen known as pharmacy benefit managers. The Trump administration says the current system encourages pharma companies to set high list prices so they can pay larger rebates to insurers and those middlemen to increase the use and sales of their products.
Under the rules, rebates would be viewed as illegal kickbacks instead of standard operating procedure. Those applauding the proposal: PhRMA. Not huge fans? Insurers.
In a sign of the changing times, the pharmaceutical industry was put on notice this week when two powerful congressional committees placed high drug prices firmly at the top of their agendas. The optics of the simultaneous hearings really set the stage for pharma’s new reality on Capitol Hill — one that’s just slightly less welcoming than the industry has had in the past.
If you remember last year (I know, it feels very long ago now since January lasted for about three months), you’ll recall a fierce battle over “right-to-try” legislation. Now that the bill has been enacted, even its supporters are left wondering if they were indeed sold false hope, as critics warned.
In a move that could make nearly four times as many veterans eligible for private health care, the administration loosened drive-time regulations for the Choice program. Before, only veterans who were 40 miles from a VA clinic could seek private care under those particular restrictions. Now, veterans just have to prove that it’s more than a 30-minute drive. The change, though it may seem small, could make a big difference for those who live in rural or high-traffic areas.
On to the lap dances! But, honestly, there has been major movement in the courts this week regarding the opioid epidemic.
The previously mentioned Subsys trial is underway. (If you don’t know, Subsys is a fentanyl spray designed for cancer patients.) Insys Therapeutics founder John Kapoor and four other executives are facing racketeering and conspiracy charges on allegations that they used speaker fees to ramp up the product’s sales and lied to insurers about which patients were getting the drug. “This is a case about greed, about greed and its consequences, the consequences of putting profits over people,” Assistant U.S. Attorney David Lazarus said in his opening statement. Meanwhile, Kapoor is trying to shrug off responsibility of it all onto his underlings.
Massachusetts’ 274-page civil complaint against Purdue (the maker of OxyContin), eight members of the family that founded it, company directors and current and former executives was made public this week. There were already portions of the document that had been released, but the full thing further details the Sackler family’s involvement in the marketing of the painkiller; decisions that were made re: damage control when the opioid crisis crested; and insight into how the company considered pushing into the addiction-treatment landscape (executives said the business of selling opioids and treating addiction were “naturally linked.”)
And then over in Ohio, a massive, consolidated nationwide lawsuit against Purdue and other opioid makers and distributors is heating up. The judge overseeing the case had hoped to settle it out of court, but it’s been awhile since he asked both sides to come to an agreement, and the litigation has only become more bloated and difficult to resolve. Court watchers expect the trial, if it happens, to be reminiscent of the Big Tobacco reckoning in the ’90s.
You want to know how the health industry views the new Atul Gawande-led health initiative created by Amazon, Berkshire Hathaway and JPMorgan Chase? Just look to the trade secrets lawsuit UnitedHealth filed, and the nearly seven hours spent in court fighting over it. The case involved a former midlevel executive for Optum, who was shocked at the ferocity of the lawsuit since he’d never even met the company’s CEO. But as tech companies get more and more interested in the health care field, the established players are feeling the need to defend their turf.
In the miscellaneous file this week:
• Trump donated $100,000 from his salary to go toward alcohol-abuse research. The issue is personal to the president, who often cites his brother’s struggles with the disease.
• Check out this devastating look at a former football star who seemed to be living the perfect American dream. He suspected he had the degenerative neurological disorder CTE. His autopsy confirmed those fears.
• In a scary study, researchers find that witnessing domestic violence carries the same risk of harm to a child’s mental health and learning as if the child had been abused directly. Even scarier: exposure to domestic violence even when an infant is sleeping or in utero can reduce parts of the brain and change its overall structure.
• There’s a bit of “Schadenfreude” going on among critics of the anti-vaccination movement, because the epicenter of the recent outbreak of measles in the Northwest was a hot spot for anti-vaxxers.
• A Rawandan medical school offers lessons on providing care without all the high-tech gadgets so beloved in the U.S.
• I have to say I got a kick out of this look back at the history of wild weight loss strategies (tapeworms! ack!)
I’ll leave you with a warning from the Centers for Disease Control and Prevention: If you have a hedgehog, it’s time to stop kissing and snuggling with it. They can spread salmonella. On that note, have a great weekend!
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Dental insurance giant Delta Dental of California is facing mounting criticism for paying its CEO exorbitantly, flying board members and their companions to Barbados for a meeting, and spending a small fraction of its revenue on charitable work — all while receiving significant state and federal tax breaks because of its nonprofit status.
Now, the company — 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 just the latest questionable move by a nonprofit insurer whose corporate practices may be out of step with its tax-exempt status.
They point out that the company paid its chief executive, Tony Barth, $14.3 million in 2016, two years before he was fired for having a secret relationship with a subordinate. The next nine highest-paid Delta executives earned more than $1 million each that year, bringing the total compensation for the top 10 to more than $30 million in 2016, according to the insurer’s latest available tax filing.
The company earned $5.9 billion in revenue that year.
“They just appear to be about nothing more than feathering the nests of their own managers,” said Michael Johnson, a former executive with Blue Shield of California turned whistleblower who has drawn attention to what he describes as the transgressions of nonprofit insurers. “I can’t imagine a more flagrant abuse or dereliction of their duty as a nonprofit.”Email Sign-Up
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The California Department of Managed Health Care (DMHC), tasked with reviewing the transaction, could impose terms on the insurer, or even prevent the purchase of Oregon-based Moda Health if it determines that the money is supposed to be used to benefit the public. DMHC has said it doesn’t have the authority to change a dental health plan’s nonprofit status.
Advocates agree while arguing the department does have the authority to insist that it comply with its obligations as a nonprofit. When it comes to nonprofit insurers, “the DMHC is the only one who has standing to go to court,” Johnson said.
Delta Dental of California, in a written statement to Kaiser Health News, said its investment in Moda Health will increase access to dental care and treatments, and that it uses consultants and board oversight to ensure that executive pay is appropriate.
Nonprofits can take a variety of forms, but in order to qualify for an income tax exemption they must generally provide a community benefit. In the U.S. health system, nonprofit hospitals and insurers often meet that requirement by offering free or discounted services or performing charity work.
Nonprofit insurers have raised eyebrows in the past. In the 1980s, Congress rescinded federal income tax-exempt status from Blue Cross Blue Shield health plans across the nation after determining that they weren’t behaving any differently than for-profit insurers.
Dental insurance has historically drawn less scrutiny than medical insurance and is less strictly regulated. While health insurers were required by the Affordable Care Act to spend 80 or 85 percent of premiums on care, dental insurers have no such federal requirement. And when the tax code for nonprofit insurers was rewritten in the 1980s, it allowed nonprofit dental insurers to keep their federal income tax exemption.
Part of what’s being debated now is to whom Delta Dental is responsible and what its money must be spent on. It’s a mutual-benefit corporation, meaning it answers to its members, not the broader public. But in its founding documents, 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 assess whether it’s appropriate for Delta Dental to be investing in a for-profit insurer.
They argued that the nonprofit insurer has benefited from tax breaks for decades and that surplus revenue earned from consumer premiums should be spent on the public good.
“We kind of have to ask whether they may have been overcharging on premiums,” said Dena Mendelsohn, a lawyer with Consumer Reports.
Delta Dental has told the state regulator that even though it is a nonprofit, its assets are not subject to charitable trust obligations.
The company told Kaiser Health News that its overall mission is to improve dental health and access to care, and that it had spent nearly $16 million around the country last year via the Delta Dental Community Care Foundation — just one way it says it upholds its nonprofit social welfare obligations.
At about 50 cents per customer, that charitable work also represents a small fraction of what the company is spending on the purchase, advocates are quick to point out.
The state ruled on the side of another nonprofit insurer, Blue Shield of California, when it was the subject of a similar debate in 2015. But in a blow to the insurer, the company also agreed to relinquish its state tax exemption after an audit criticized the insurer for holding more than $4 billion in assets and failing to provide affordable insurance to the public.
In an email to Kaiser Health News, Rachel Arrezola, a DMHC spokeswoman, said the department has yet to find evidence that Delta Dental’s assets are subject to charitable spending requirements, but said the review of the purchase is ongoing. The deal was discussed Wednesday at a public meeting in Sacramento.
Beyond the issue of this particular sale, tax-exempt nonprofits must also spend corporate assets carefully. For years, Delta Dental of California’s CEOs have earned millions of dollars, including the $14.3 million in 2016. The company declined to disclose its executive pay for 2017 or 2018.
“That’s a very healthy number,” said Marcus Owens, former director of the arm of the Internal Revenue Service responsible for overseeing nonprofits, and currently a partner of the law firm 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 also drawn scrutiny, with members receiving from $46,000 to $203,000 in 2016 for one to two hours of work each week, according to tax filings. Board chairs received substantially more that year, in the range of $172,000 to $223,000. And travel for companions and staff to an annual meeting on the Caribbean island of Barbados is part of that compensation for some board members, according to tax filings from Delta Dental of Pennsylvania, an affiliate of Delta Dental of California.
Compensation for board members is not the norm in the nonprofit world, Owens said, though that doesn’t mean it’s inappropriate, particularly for a company as large as Delta Dental. The corporation’s bylaws say board members shouldn’t receive any salary, but can be compensated for the time and expense of preparing for and attending board meetings.
Delta Dental of California defended its pay structure, 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.”