Major HMOs threaten to leave Los Angeles unless tax is revised.

A handful of Los Angeles-based managed care companies say they may relocate outside city borders if an existing business tax is not revised to exclude them from what they see as double taxation.

At issue is the long-standing Los Angeles City gross receipts tax, which, as its name implies, taxes companies on their gross revenues.

The managed care coalition - including CareAmerica Health Plans, Health Net, Blue Cross of California, Maxicare Health Plans and Prudential HealthCare - argue that taxing them on gross receipts is unfair, as most of the money they take in is immediately paid out to health care providers such as physicians and hospitals.

The managed care companies' net income is far less, they argue.

"The way an HMO works, we take in money, but we don't deliver care per se," said Ross Goldberg, senior vice president for CareAmerica. "We pay (most of our revenues) out to providers. That might be 85 cents on the dollar. The city wants to tax the HMO industry ... on the full dollar. We think we should only be taxed on the 15 cents."

If L.A. doesn't change the tax, the companies might pull up stakes and relocate to any of a number of cities or unincorporated county areas within a few miles of Woodland Hills (where many of the companies are now headquartered), said CareAmerica Chief Financial Officer Dennis Eder.

"We could move just five miles from here and have a significantly reduced tax and we wouldn't lose any employees," Eder said.

CareAmerica is at the forefront of the issue because among the coalition members, its lease will be the first to expire - in another year and a half.

A city budget and finance committee is currently studying the issue, and a report is due out within two weeks. Councilman Richard Alatorre, who is chairman of the committee, has said he does not want to see the HMOs move, and will support efforts to reduce the tax burden on managed care firms.

"He definitely doesn't want to see these people go," said Alatorre spokeswoman Leila Cobo-Hanlon.

Goldberg said a decision by the city to keep the current tax would be penny wise but pound foolish.

"Obviously if the (five) of us (HMOs) picked up and moved out of L.A. ... to adjacent communities, it would have a severe impact on revenue received by the city," he said.

CareAmerica has good reason to hope the city sees things their way. CFO Eder said that in recent years, his firm has not paid the tax on gross revenues, but on revenues minus pay-outs.

"We have been filing in a way that we thought was an appropriate way to file under the city business tax code," Eder said. "City auditors have been reviewing each of the returns of the health plans ... (and) they may be coming to different conclusions."

Eder declined to reveal how much money CareAmerica might owe the city if a ruling is not in its favor.

Medical savings accounts flap 

With the new year has come the first implementation of medical savings accounts and, not surprisingly, the first local ruckus stemming from them.

The accounts - which come out of the Kennedy-Kassenbaum health care bill signed by President Clinton last year - are a way for people to set aside money in tax-free, interest-earning bank accounts to cover health care expenses.

The accounts are paired up with high-deductible catastrophic health insurance, so that when a medical cost arises, account holders pay the first several thousand dollars of expense out of the account, after which insurance picks up the rest. The accounts are championed by supporters as a flexible alternative to managed care.

Because MSAs are still a pilot program, they will only be offered to 750,000 people nationally. Once that cap is met, no new policies can be created.

Apparently anxious to get its share of the MSA pie, Woodland Hills-based Blue Cross of California jumped the gun, according to the California Department of Corporations, by running an ad in the Dec. 18 West Coast edition the Wall Street Journal advertising its MSA product.

The ad ran before the department had approved Blue Cross' offering and, the department claims, Blue Cross made misleading statements in the ad. It failed to mention its financial partner in the MSA product - Mellon Bank - and didn't mention MSA eligibility requirements.

As a result, the DOC slapped a $100,000 fine on Blue Cross and its parent company, WellPoint Health Networks Inc.

For its part, WellPoint says it understands the DOC's concerns, but that it placed the ad in good faith.

"We had filed (for approval of the MSA product) but hadn't heard back from DOC, and so we assumed it was fine to (run) the ad," said Cynthia Coulter, WellPoint's vice president of corporate communications. "But I understand why they were concerned."

Coulter said WellPoint has yet to pay the hefty fine and is "still working through it" with the DOC. "We want to get this resolved," she said, because the company is getting dozens of calls from people who want to sign up for the MSA if and when the product gets DOC approval.