Panel Accepts Report on Taxing of HMOs

Acting on an administrative recommendation, the City Council’s Budget and Finance Committee approved a report Tuesday that rejects a tax rate reduction requested by several health maintenance organizations based in Los Angeles.

It also approved a recommendation that a special tax code be created that would tax HMOs only on work done within the city limits.

City officials said changing the formula would lower the tax bill for five Los Angeles-based HMOs from about $25 million to about $7 million this year.

The companies, four of which are based in the Valley, had asked that their tax liability be reduced from $5.91 per $1,000 of gross receipts to $4.14 per $1,000.

The new method, called a Total Cost Formula, would tax HMOs for any activity that occurs within the city limits, including money paid to health-care providers.

City officials said that under the proposed code, an HMO’s taxable percentage would be about 16% of its gross taxable receipts, while under the current plan, the taxable percentage is about 65%.

Under the present formula, HMOs are paying about 8% to 10% of the city’s business tax income, said City Clerk J. Michael Carey. “We all believe that wasn’t a reasonable burden they’d have to bear,” he said.

City administrators said the new method would be equitable because HMOs rely on independent contractors, mainly doctors--many of whom are outside the city--to provide services to their clients.

They recommended holding off discussions on lowering the tax rate until a Tax Equity Study is completed for all businesses.

Michael Gagan, a spokesman for the five HMOs, said the companies believe the $5.91 rate is too high.

“Nevertheless, we believe we can read the tea leaves and it’s just not realistic for us to expect this council at this time will entertain a rate reduction.”

The HMOs affected are WellPoint Health Systems, CareAmerica, Health Net, Prudential Health Care, all in Woodland Hills, and Maxicare.

The tax code proposal will next go to the full council for a vote.