Plan Would Lighten HMO Tax Burden

After months of intensive negotiations, city officials are putting the final touches on a proposal to knock off millions of dollars from taxes paid by local health maintenance organizations--but not as much as the local companies had requested.

Under a new formula that probably will be presented to the Los Angeles City Council later this month, five large HMOs that have been disputing their tax burden would collectively pay about $7 million annually, far less than the $25 million to $30 million they owe under the current code.

“This should significantly reduce their tax liability,” City Clerk Mike Carey said Thursday.

But whether the decrease will be enough to mollify the HMOs--four of them located in Woodland Hills, forming the backbone of Warner Center--is unclear.

Although the companies agreed with portions of the proposed modifications, their lobbyist, Michael Gagan, accused the city of making eleventh-hour changes that would force the HMOs to pay a higher rate than bargained for, as well as taxes the city contends are in arrears.

“It’s premature to say exactly what the HMOs will do, but we do believe that the rules were changed on us unfairly at the last minute,” said Gagan, whose clients have threatened to leave Los Angeles over the tax issue.

The five health-care organizations have scheduled a meeting next week to consider the proposal. “We haven’t adopted a formal position. We have expressed to the city that we’re not happy with what’s being proposed,” he said. “We have not said that we are going to oppose it, [but] we don’t like it.”

The new formula, developed by the city clerk, the city’s chief legislative analyst and the city administrative officer, would allow the HMOs to break out the receipts generated by independent contractors--doctors and clinics--that are not in the city of Los Angeles, and exempt that income from taxation. This was a key point for the HMOs, which work with health providers throughout the region, not just in Los Angeles.

But the remaining gross receipts would still be subject to the city’s top business tax rate of $5.19 per $1,000. Also, Carey said, the city will seek to claim back taxes using the new formula for the years during which the HMOs refused to pay the amount they owed under the current code. In the case of one of the companies, that extends back to 1989.

Cumulatively, the five HMOs--CareAmerica, Maxicare, Health Net, Prudential and WellPoint--have withheld nearly $57 million in taxes for the years 1994 to 1996. However, the shortfall has not opened a large gap in the city’s budget, because officials had come to expect nonpayment and took it into account while budgeting.

Revamping the code to reduce the HMOs’ official tax burden would therefore not burn a hole in the city’s coffers, since “this is money that we weren’t getting anyway,” Carey said.

For their part, the HMOs agree with the proposed methodology for determining taxes, using only the income from city-based contractors to calculate taxable receipts, Gagan said. But the companies pushed for a lower levy of $4.14 per $1,000, which would have kept them paying the same, or slightly more than, the amount they had been paying up to this point--roughly $5 million a year.

And Gagan accused the city of reneging on a promise to wipe the slate clean and drop the issue of back taxes.

“We like the methodology, but we don’t like the retroactive application of it. We thought we had compromised substantially with the city already,” Gagan said, noting that the new formula would still result in an increase in city revenue, from the $5 million the HMOs now pay to $7 million.

Carey denied that the city had ever promised to erase any arrears owed by the five companies. “That would be treating these folks far differently than we treat any other business,” he said.

Carey and his colleagues hope to present their report to the City Council by the end of the month. Adopting the proposal would require a change in current city ordinances.

The tax-break issue arose last winter when the five HMOs threatened to pull out of Los Angeles unless officials dramatically amended the code. The cities of Burbank, El Segundo and Glendale, among others, have actively courted the companies with promises of lower taxes and lease rates.

Mayor Richard Riordan endorsed a tax break, following the lead of Councilwoman Laura Chick, whose west San Fernando Valley district is home to four of the five HMOs. Both Riordan and Chick have received political donations from some of those organizations.

Karen Constine, Chick’s chief aide, said Thursday that her office has not yet seen a draft of the proposed changes. But Constine said her boss had become concerned that under the current code the five HMOs would be paying close to 10% of the entire gross-receipts tax revenue the city collects each year.

“What the council member has always been concerned about it is, is this an equitable way to determine taxes for this type of industry?” Constine said. “We’ve always had a strong feeling that something was wrong.”