Five months after declaring a compromise on city taxes that would keep five L.A.-based health maintenance organizations from leaving town, negotiators still have not reached a final agreement and a deal may not be cut for months.
The delay is blamed on a variety of factors, including the complexity of the issue, the large number of parties involved, the fact that each HMO operates slightly differently, and the bureaucracy of city government.
“I quit predicting when we would have a solution three or four months ago,” said Michael Gagan, a lobbyist with Rose & Kindel who is representing the HMOs. “It’s become a lot more complex than anyone participating in this originally thought.”
Early this year, the five HMOs Blue Cross of California, CareAmerica Health Plans, Health Net, Maxicare Health Plans and Prudential HealthCare threatened to leave the city unless they were given breaks in their business license taxes that would save them $15 million annually.
The HMOs claimed they were being unfairly taxed on “pass through” fees that HMOs pass from members directly to doctors and other care providers. They want the city to tax them only on administrative fees, which the HMOs retain.
In addition, the HMOs want to be taken out of the “professional services” category of the city’s tax code, where they are charged nearly $6 for every $1,000 of gross revenue, and put into a newly created category for the relatively new HMO industry, where the companies would be taxed at a lower rate.
The HMOs had been quietly pushing for the changes since 1994, when they began withholding a portion of their business taxes on their own. As part of the deal, the HMOs want forgiven $56 million in back taxes racked up by the five companies since 1994.
When their threat to leave the city was made public in January, city officials moved quickly to resolve the issue and prevent the loss of jobs and tax revenue to neighboring cities such as Burbank and Calabasas.
In late February, officials announced a tentative compromise that was expected to be ready for City Council consideration in March.
But that early optimism has given way to long negotiations on core issues of rate of taxation, apportionment methodology and the effective date of the new tax system, said Dave Patton, an assistant vice president at Maxicare Health Plans.
“The bottom line is we’re trying to get into a position where we’re happy and the city’s happy, and we’re trying to figure out where that point is,” Patton said.
Gagan, Patton and others involved in the negotiations say that the smaller, logistical issues are behind much of the delay.
For one thing, each time a new proposal is drafted, it must be reviewed by each of the HMOs as well as the city clerk, the city administrative officer, the chief legislative analyst, the mayor’s office and City Councilwoman Laura Chick, who is sponsoring the HMO tax-cut ordinance and whose district is home to four of the HMOs.
“I think there are two things: One, you can look at the city side and say that our business tax structure is very complex and there are a variety of city experts involved in these kinds of things,” Chick said. “Then there’s, I think, a very interesting private-sector, HMO side. Traditionally you do not find companies that usually compete with each other sitting down and quickly deciding on things.”
The fact that five different companies each have a hand in drafting a new tax structure for the industry has also been an issue, since each of the HMOs while similar in the basic way they do business have slightly different business structures and markets.
“Consequently it’s very difficult to come up with a formula and impose it on five different companies and come up with a formula that treats all five equitably,” Gagan said.
Added Health Net spokesman Kurt Davis: “When you get a lot of parties in any kind of discussion, it takes time. You run a lot of things up the flagpole, and bring them down, and try other things.”
One thing that slowed down negotiations three and a half months ago was the April 8 city election. The city clerk’s office the primary negotiator for the city was forced to devote a couple weeks to preparing for the election and tallying votes.
“We met a lot before the election, but when that happened that caused some scheduling problems obviously,” Patton said. “I think that had a lot to do with it. This is just kind of bad timing.”
Patton and others said a June 30 deadline to resolve the issue passed, and no subsequent deadline has been set.
But lobbyist Gagan expects to see an agreement by the middle of September or, at the very latest, the beginning of October one year after the HMOs first went into formal negotiations with the city over taxes.
“Realistically, if we can settle it in a week, we’ll do it. In a month, we’ll do it. We just don’t know if it’s a week or a month or two months,” Gagan said. “We just can’t pin it down.”
But at least one of the HMOs is optimistic. CareAmerica announced last month that it would be moving to a new corporate office park in West Hills, which is still in the Los Angeles city limits.
CareAmerica officials said they were confident that a compromise with the city would be reached. But they didn’t predict when that would be.