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.”
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 set to be 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.”