Blue Cross and Blue Shield v. Nixon

• Decision Date: 20 June 2000
• Parties: (Mo.App. W.D. 2000) Blue Cross and Blue Shield of Kansas City, Inc., A Missouri Nonprofit Corporation, et al., v. Jeremiah W. (Jay) Nixon, et al., Respondents WD56493 0
• Court: Missouri Court of Appeals

26 S.W.3d 218 (Mo.App. W.D. 2000)

Blue Cross and Blue Shield of Kansas City, Inc., A Missouri Nonprofit Corporation, et al., v. Jeremiah W. (Jay) Nixon, et al., Respondents

WD56493

Missouri Court of Appeals Western District

06/20/2000

Appeal From: Circuit Court of Cole County, Hon. Thomas J. Brown

Counsel for Appellant: Paul G. Schepers

Counsel for Respondent: John R. Munich

Opinion Summary: Blue Cross Blue Shield of Kansas City (BCBSKC) filed a declaratory judgment action in the Circuit Court of Cole County for a determination of BCBSKC's status under the Missouri Nonprofit Corporations Act. BCBSKC requested a declaration from the court that it is a mutual benefit corporation. The petition named Attorney General Jay Nixon and Secretary of State Rebecca McDowell Cook as defendants. Defendants requested a declaration that BCBSKC is a public benefit corporation and they asked the court for an injunction prohibiting BCBSKC from taking any actions inconsistent with that status under the Act, or in the alternative, to dissolve BCBSKC. BCBSKC and the Attorney General filed motions for summary judgment and a hearing was held on stipulated facts. Summary judgment was entered in favor of the Attorney General, declaring BCBSKC to be a public benefit corporation and granting the injunction. BCBSKC appealed.

AFFIRMED.

Division One holds: The trial court did not err in finding that BCBSKC qualified as a public benefit corporation under the Act. After examining the purpose for which BCBSKC was originally organized, we determined that it has a public purpose. A public purpose coupled with a dissolution provision meeting the statutory requirements of §355881(4), RSMo (1994), qualified BCBSKC as a public benefit corporation.

Joseph M. Ellis, Judge

Blue Cross Blue Shield of Kansas City (BCBSKC), Grace E. Jackson, and Science of Business, Inc. appeal from the trial court's grant of partial summary judgment in favor of the Attorney General on their petition for declaratory judgment. Appellants brought the declaratory judgment action in the Circuit Court of Cole County for a determination of BCBSKC's status under the Missouri Nonprofit Corporations Act.¹

BCBSKC is a nonprofit Missouri corporation, formed in 1982 by the consolidation of Blue Cross of Kansas City and Blue Shield of Kansas City. Blue Cross of Kansas City was originally established in 1938 as Group Hospital Services, Inc (GHSI). The organization was comprised of Kansas City area hospitals and physicians as a nonprofit benevolent corporation, organized in response to what it saw as a need of Kansas City area residents to insure against catastrophic hospitalization expenses. Its stated primary purpose was to operate a pre-paid health care benefits plan under which participants who paid an enrollment fee and monthly dues received hospital services at minimal or no additional charge,² thereby providing a system through which a large group of individuals would pool money to pay for hospital care as needed by its members. Benefits were available only to subscribers who had paid the requisite enrollment and monthly fees. Appellant Grace E. Jackson is the first individual to be covered by the pre-paid health plan offered by GHSI.³

Another stated purpose of GHSI was to shore up failing nonprofit charitable hospitals in the Kansas City area. Prior to the time of GHSI's incorporation, such hospitals were in financial crisis due to a decrease in charitable donations. They faced the inability to fund the cost of the hospital services they provided from revenues collected from

charitable donations as well as patient fees. At that time, approximately 30% of Kansas City area citizens requiring hospitalization declined such services because of an inability to pay. GHSI's stated intent upon incorporation was to increase the ability of these charitable hospitals to remain open by providing the means for more members of the community to have the ability to pay for hospital services. GHSI changed its name in 1970 to Blue Cross of Kansas City.

At the time of GHSI's incorporation, Section 101(8) of the Federal Revenue Act of 1938 (the predecessor to section 501(c)(4) of the Internal Revenue Code) provided that "civic leagues," "local associations or employees" and not-for-profit organizations "operated exclusively for the promotion of social welfare" could apply for and receive exemption from income tax. GHSI applied for and received tax exempt status under section 101(8) of the Revenue Act. GHSI also applied for social security tax exemption which was denied by the IRS because GHSI was "not organized and operated exclusively for one or more of the purposes specified in section 811(b)(8) and 907(c)(7) of the Social Security Act" (it was not a 501(c)(3) corporation).

Blue Shield of Kansas City originated in 1942 as Surgical Care, Inc. of Kansas City (SCI). The purpose of SCI mirrored that of GHSI except that it provided for pre-paid physician services as opposed to hospitalization services. Recognizing that many area residents did not seek out physicians' services due to an inability to pay, it provided a means by which members could pay small, affordable fees and receive physicians' services as needed at little or no charge. The benefits were only available to subscribers. Fees were originally based upon the subscriber's income, a practice which was subsequently discontinued in favor of flat rate fees. In 1971, SCI changed its name to Blue Shield of Kansas City. Both GHSI and SCI were the first of such plans in the Kansas City area.

In 1982, Blue Cross of Kansas City and Blue Shield of Kansas City merged to form Blue Cross Blue Shield of Kansas City (BCBSKC). As a result of the merger, BCBSKC succeeded to all the assets, rights, title, interest, liabilities, duties and obligations of its predecessors. BCBSKC operated the same type of pre-paid health benefits coverage as its predecessors, had the same purpose and character and its assets were impressed with the same obligations as its predecessors. It continued to derive its assets primarily from dues paid by or on behalf of participants in its plans and continued the practice of providing benefits only to those subscribers who paid the required fees to participate.

Prior to 1986, BCBSKC and its predecessors were classified as section 501(c) (4) organizations operated for the promotion of social welfare under the Internal Revenue Code. BCBSKC concedes that it originally qualified for exempt status because it was deemed to promote social welfare, and Congress and the IRS deemed exemption necessary to encourage such plans. The development of competing commercial for-profit insurance plans which survived without tax exemption prompted the IRS to recommend to Congress that there was no longer a need to grant exempt status to Blue Cross organizations in order to insure their survival. The IRS did not withdraw BCBSKC's exemption, but rather Congress, in enacting the Tax Reform Act of 1986, repealed their entitlement to exemption. See, e.g., Schlesinger, et al., Charity and Community: The Role of Nonprofit Ownership in a Managed Health Care System, 21 J. Health Pol. Pol'y & L. 697, 703-04 (1996).

Neither BCBSKC nor any of its predecessors have ever received a charitable contribution which was deductible to the contributors under section 501(c)(3) of the Internal Revenue Code, nor have any of the organizations ever sold stock or other forms of equity in the corporations. BCBSKC contends that no dividends or return on investment have ever been distributed to any persons by any of the organizations.⁴ From 1987 to 1996, BCBSKC and its controlled subsidiaries made charitable contributions averaging .055% of gross revenues per year. Since 1982, it provided free health checkups and participated in a National Blue Cross program entitled "The Caring Program," which offers health care at discounted rates for children of parents earning less than 150% of the poverty level. Participants are required to pay a monthly $25.00 premium to The Missouri Valley Caring Program for Children, Inc., a nonprofit 501(c)(3) corporation.

In 1994, the Missouri General Assembly adopted House Bill No. 1095, which extensively amended and revised Chapter 355 relating to nonprofit corporations. The chapter is now known as the "Missouri Nonprofit Corporation Act," Section 355.001, and covers sections 355.001 through 355.881. It became effective on July 1, 1995. The new law distinguishes between "mutual benefit" corporations and "public benefit" corporations and requires that all nonprofit corporations in the state be classified under one of the two designations. Section 355.881. The Act further provides that each domestic corporation existing on July 1, 1995 shall be designated a "public benefit" or "mutual benefit" corporation. Id. The Act does not directly define the terms "mutual benefit corporation" or "public benefit corporation." Rather, it prescribes that a "mutual benefit corporation" is "a domestic corporation which is formed as a mutual benefit corporation pursuant to sections 355.096 to 355.121 or is required to be a mutual benefit corporation pursuant to section 355.881." Section 355.066(23) RSMo Cum. Supp. (1999). A "public benefit corporation," on the other hand, is "a domestic corporation which is formed as a public benefit corporation pursuant to sections 355.096 to 355.121,⁵ or is required to be a public benefit corporation pursuant to section 355.881." Section 355.066(28) RSMo Cum. Supp. (1999).

On March 1, 1997, BCBSKC filed a petition for declaratory judgment in the Circuit Court of Cole County, requesting a declaration of the court that it is a mutual benefit corporation pursuant to section 355.881.⁶ In addition, BCBSKC sought a judgment that its assets are not held in a constructive or charitable trust for anyone other than the subscribers of its health plans. The petition named Attorney General Jay Nixon and Secretary of State ...