City of L.A., HMOs expect to resolve tax dispute in near future.

Debate over an arcane bit of tax code that's had Los Angeles city and local HMO officials wrangling for close to a year is nearly resolved, participants in the discussions say.

"We're in a high learning curve right now," said Don DeBord, chief of the tax and permit division of the Los Angeles City Clerk's office. "We're learning a lot about just what an HMO is. There's a lot of things we didn't know."

The HMOs in question - Blue Cross of California, CareAmerica Health Plans, Health Net, Maxicare Health Plans and Prudential HealthCare - all headquartered in the city of L.A, want a lower business tax than the one the city now requires them to pay. If they don't get it, the HMOs have threatened to relocate to nearby cities with lower, or no city tax.

Among other things, the HMOs want Los Angeles to develop an "apportionment equation" to determine how much of the revenue they generate should be taxed locally. And on that issue, both sides say, progress has been made.

"On apportionment only, there is some common ground," DeBord said. "I'd hope there's a meeting of the minds soon. Nobody wants this thing to drag on any longer than necessary."

Michael Gagen, a consultant hired by the HMOs to represent them in negotiations with city officials, said an agreement could be reached within the next two weeks.

The HMOs have been preemptively deducting revenue from outside Los Angeles from their gross receipts when determining how much to pay the city, Gagen said.

"They'd been filing ... based on their own calculations. Some (HMOs) used provider location, some used subscriber location," or other methods to determine the amount due, he said.

All of the HMOs have operations outside the city of L.A., with some, such as Health Net, generating as much as 30 percent of their revenue outside of California.

DeBord acknowledged that his office's initial estimate that the HMOs are in arrears as much as $57 million will ultimately be revised downward because of the apportionment issue.

A potentially larger issue remains, however, over the definition of "gross receipts" for HMOs.

In a series of audits undertaken last year, DeBord's office determined that the HMOs had wrongly deducted payments to physicians, hospitals and pharmacies from their revenue when determining the amount of business tax they owed.

The city generally taxes businesses based on their gross receipts, or all money they take in from their business activities. That tax rate ranges from around $1 per $1,000 of gross receipts, to nearly $6 per $1,000, depending on the type of business. HMOs currently are in the "professional services" category, which has a $5.91 per $1,000 rate.

The HMOs acknowledge they paid the city an amount based on their gross receipts minus pay-outs for medical services, which in 1995 accounted for between 75 percent and 88 percent of their gross receipts.

Health Net, for example, paid the city a little more than $1.5 million in business taxes last year, on $254 million in what it terms "gross receipts." That amount is computed from Health Net's $2.7 billion in total premium revenues minus the amount it paid out to hospitals, physicians and pharmacies.

If taxed on the full $2.7 billion, the company's tax liability would be about $16 million.

Similarly, CareAmerica paid $211,000 in business tax last year, on $35 million in what it calls "gross receipts." Its total premium revenue of $457 million would have generated roughly $27 million for the city, if fully taxed.

"That's an important issue," said Patrick Gamer, senior vice president for WellPoint Health Systems, which operates Blue Cross of California. "The (amount) that the City Clerk came up with originally was if we were to pay the gross receipts tax on every dollar we earn."

Paul DeMuro, a partner at the law firm of Latham & Watkins in Los Angeles who specializes in health care, said he knows of no other city in the United States that taxes HMOs like L.A.

"Certainly from the (HMOs') standpoint it makes reasonable sense," to deduct pay-outs from their revenues, agreed Phil Dalton, vice president for health care issues at The Camden Group consultancy in El Segundo.

The City of Seattle, like Los Angeles, has a gross receipts business tax. Home to King County Medical Blue Shield, one of Washington's largest HMOs, Seattle taxes HMOs at a rate of $4.15 per $1,000 of total premium revenue after medical pay-outs.

Oakland, headquarters to the massive Kaiser Foundation Health Plan, taxes HMOs only on revenues generated from the services they provide. If an HMO employs its own physicians, known as a "staff model" HMO, the city taxes them on all revenue. If, however, it operates a "group model" business, under which the HMO contracts with physician groups, the city taxes them only on administrative revenue.

"Essentially, what we're saying is the HMO is acting as an agent, an administrative arm, so we do allow them to deduct" medical pay-outs, said Mel McDonald, director of revenue and consumer affairs for the City of Seattle. "After (granting them) the deductions, the HMOs can't gripe too much."

City Councilwoman Laura Chick, whose Third District is where four of the five HMOs are based, has put forward a measure that would allow HMOs to deduct pay-outs when figuring their gross receipts tax, and would re-categorize the companies to a lower fee bracket.

Chick's measure is currently stalled before a City Council budget and finance committee, awaiting the outcome of the ongoing discussions between the city and HMOs.