With Some Give Each Way, Deal With HMOs Is in Reach

Happily, the saber rattling that accompanied early rounds of tax negotiations between the city of Los Angeles and a coalition of five health maintenance organizations has died down. Yet even as a new rate structure moves toward the City Council for approval, the HMOs continue to argue that the proposed taxes are still too high. Considering the new rates would knock millions of dollars off their annual tax bills, the complaints might sound a little like poor mouthing. But both the city and the HMOs have to put on a few finishing touches before this deal is as good as it can be for both private industry and taxpayers.

When the HMOs--four of which are based in Warner Center--switched to for-profit enterprises years ago, they were automatically shifted into the highest bracket of the city’s business tax: $5.91 per $1,000 of gross receipts. Under current rules, the HMOs are taxed on money they collect in premiums but then immediately pay out to contractors like doctors and labs. In protest, the HMOs withheld nearly $57 million in taxes between 1994 and 1996. Instead, they paid what they thought was fair, about $5 million. The disagreement reached a head earlier this year when the HMOs threatened to leave Los Angeles for smaller surrounding cities with lower taxes unless Los Angeles stepped up and reduced the rates.

Their threats--however dubious--got the attention of City Hall. Wisely, the city agreed to stop taxing money the HMOs simply handed off to contractors but kept the HMOs in the highest tax bracket rather than shift them to the rate they wanted: $4.14 per $1,000. As a result, the HMOs would pay about $7.4 million per year. That’s 50% more than they have been paying but millions less than they would pay if current rates were kept in place. In addition, the city wants the HMOs to pay the back taxes at the proposed new rates.

City officials argue that the HMOs deserve to be in the highest tax bracket because they share key performance characteristics with other industries in the same bracket. But the HMOs argue that because the city is creating a new structure to accommodate the special needs of the health-care industry, it should also create new rates. The Times agrees that the rates should not be set in stone but cautions the council against simply reducing them arbitrarily out of fear the HMOs will pick up and leave with their 6,500 jobs.

A Times analysis earlier this year evaluated the HMOs’ threats of leaving Los Angeles and found that the financial and practical benefits may not be as great as some executives hinted. While Los Angeles demands higher taxes than other cities--Burbank, for instance, has no gross receipts business tax--it also offers more to most companies. For instance, the infrastructure of a place like Warner Center, with its wide streets and easy freeway access, is designed to handle big businesses better than most small towns. Those benefits have costs.

Nonetheless, city officials need to justify putting the HMOs in the highest bracket. The HMOs correctly point out that this is a rare opportunity for the city to set a new rate for an industry without raising the ire of every other business in the same bracket. The HMOs’ $4.14 per $1,000 is too low, but even at a rate of, say, $5.25 per $1,000, the city would collect more in taxes from the HMOs than it does now. Plus, it sends the message that Los Angeles is serious about promoting business. At the same time, though, the HMOs must show their willingness to work with the city and pay all back taxes at the new rates.

Over the past seven months, the city and the HMOs have overcome a gulf of differences to create a tax plan that works in principle for both sides. All that remain are details. They are details with lots of zeros attached, yes, but they are not insurmountable.