Compromise to Keep 5 HMOs in L.A. Expected

Five health maintenance organizations that threatened to leave Los Angeles if they were not granted a $15-million tax break are nearing a compromise with the city that they say will keep them from leaving.

“The momentum is all moving toward a resolution that keeps those companies in Los Angeles and keeps their jobs here,” said Gary Mendoza, Mayor Richard Riordan’s deputy for economic development.

The compromise, which would pare the organizations’ tax bills by several million dollars annually, would exempt much of the HMOs’ out-of-town business from taxation.

It would not, however, give the companies the business tax break they had initially sought.

That solution would appease the HMOs but also allow Riordan, who had urged a tax break for HMOs, to save face without appearing to grant them special privileges, such as a reduction of the overall rate for city business taxes.

“We’re willing to live with that rate” of just under $6 per $1,000 of a company’s gross receipts, said Michael Gagen, the consultant hired by the five HMOs to argue their case. “As long as we get an equitable solution administratively.”

Last month, a top executive of WellPoint Health Systems in Woodland Hills said flatly that his company would move without a tax break, and the chief financial officer of CareAmerica said his company was scouting new locations.

But Gagen said Thursday that the companies never really wanted to leave Los Angeles.

“They want to stay here and they want my firm to help deal with city officials to make it happen,” he said.

And, in fact, a check of commercial office rents in the five communities to which the HMOs had threatened to move revealed that in most cases it would be far more expensive to leave Los Angeles than to stay put.

For instance, high-end office space in Warner Center in Woodland Hills, where four of the companies are situated, costs about $22 per square foot annually. Maxicare, which is downtown, pays less than $12 per square foot, according to economic development experts.

Altogether, the companies need 1.5 million square feet of space.

But in Glendale and Burbank--two cities the HMOs had cited as possible destinations--prime offices cost $29 to $31 per square foot.

In Calabasas, prime space costs just under $24 a square foot.

Moreover, there is no available office space in any of these cities, and new offices planned for Glendale and Burbank are estimated to cost as much as $36 per square foot yearly. The taxes owed by the HMOs add up to just $1 per square foot annually, according to Gagen, so even if they receive no tax reduction, it’s still cheaper to stay in Los Angeles.

El Segundo in the South Bay, another community cited as a possible destination for the firms, is not as expensive as the other cities, but the commute would be inconvenient for employees working in Woodland Hills. El Segundo’s director of economic development, Jim Hansen, said the HMOs have not responded to his letter about relocating, and he does not expect them to seriously consider the possibility.

CareAmerica, the company most frequently cited as being on the lookout for out-of-town quarters, did not begin its search because of the tax problem, President and CEO Bob White said. Rather, he said, the company’s Warner Center sublease is up next year, and CareAmerica is simply exploring its options. Taxes are one of three factors that might influence a final decision.

“I never thought that their moving was very viable,” Burbank City Manager Bud Ovrom said of the HMOs. “Their rent was so much cheaper [in their current locations], it wouldn’t nearly be offset by the gross receipts reduction.”

“I’m surprised nobody’s called their bluff on this,” said William R. Boyd, senior vice president of CB Commercial in Glendale.

The tax compromise, which has been in the works for about two weeks, would bring the HMOs in line with other city businesses that are not charged for work done outside the city.

For instance, if a company has employees who work and perform services outside Los Angeles, they are not charged for the income brought in by those employees.

The HMOs were being charged because the doctors and other providers that they use are not generally employees, but independent contractors.

As such, they fell under a portion of the law stipulating that money collected by and for independent contractors should be considered income.

Under the likely compromise, HMOs would be exempted from this provision.

Because the city is still collecting financial information from the companies, it is not yet clear exactly how much money they would save, but Gagen said it would be significant.

What remains to be decided, interim City Clerk Michael Carey said, is how to determine whether income originated inside or outside the city.

One solution would be to decide that if a doctor is outside the city, premiums paid by that doctor’s patients would not count as Los Angeles income. Another method would be to decide that if a patient lives outside the city, his or her premiums would not be taxable.

The compromise is expected to be completed within two weeks, and sent to the City Council for review.

Councilwoman Laura Chick, who along with Riordan pushed for tax relief for the HMOs, is pleased with the compromise, said her spokeswoman, Karen Constine.

“We felt that something must be very wrong when five businesses are paying 7% of the total gross receipts tax for the city of Los Angeles,” she said.

The HMOs’ tax problems began brewing a few years ago, when the city hired a phalanx of auditors to tighten up business tax collection.

Spurred by a report on the HMO industry by the Franchise Tax Board, the city decided to look at the burgeoning industry, which had for years paid taxes under an interpretation of the law that allowed them to deduct out-of-town payments as well as funds passed directly to doctors and other health-care providers.

Ten months ago, auditors informed the HMOs they were not allowed to take those deductions, and the companies were slapped with back tax bills totaling $37.8 million. They refused to pay, and appealed to Riordan and Chick.

The issue burst into the public arena last month, when Chick sponsored an ordinance to exempt from taxation any money simply passed from patients to doctors. That would have saved the companies up to $15 million per year.

At the time, the HMOs said they would leave Los Angeles if they were not granted relief and named the cities of Glendale, Burbank, Calabasas, El Segundo, Vernon and Thousand Oaks as possible destinations.