Compromise Nears to Keep 5 HMOs in City

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 sought.

The compromise would appease the health firms 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 total 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 for WellPoint Health Systems in Woodland Hills said 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.

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

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.

Additionally, there is no available office space in these cities, and new offices planned for Glendale and Burbank are estimated to cost as much as $36 per square foot annually.

The taxes owed by the HMOs add up to just $1 per year per square foot, according to Gagen, so even if they get no tax reduction, it is still cheaper to stay here.

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 example, 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 they use are not generally employees, but rather independent contractors. As such, they fell under a portion of the law that says money collected by and for independent contractors should be considered income. Under the likely compromise, HMOs will be exempted from this provision.