By DOUGLAS YOUNG Contributing Reporter The Los Angeles City Council helped ensure that five health maintenance organizations including four in the San Fernando Valley would stay in the city by cutting a deal that lowers their taxes by as much as $18 million in the coming year. But the deal wasn’t good just for the HMOs. Those on both sides say the agreement is perhaps the strongest indication yet that Los Angeles is serious about becoming more business-friendly. “I think this is a sign that we understand that our business tax structure has serious problems that need to be corrected, that must be corrected,” said City Councilwoman Laura Chick, whose West Valley district is home to four of the HMOs and who helped negotiate the deal. “We can’t be ostriches that stick our heads in the sand.” Michael Gagan, a Rose & Kindel lobbyist who represented the HMOs, agreed that the deal represents a change at City Hall. Throughout the long negotiations, Gagan said there was a willingness on the part of city officials to make the tax code more attractive to business. “What I noticed toward the end of our negotiations was a shift in the attitude of many of our participants,” he said. But the HMO deal did not come quickly, nor easily. Over the last year and a half, the four HMOs in the Valley plus another in downtown L.A. banded together in a cooperative effort to fight their city tax bill all of them threatening to leave L.A. if the issue were not resolved. A deal was struck last month but the process cost the HMOs hundreds of man-hours and hundreds of thousands of dollars in expenses including $175,000 in lobbying expenses alone. Under the agreement, approved by the City Council last month, the five HMOs will pay a collective $7.5 million in annual gross receipts taxes to the city each year less than the $25 million they were originally assessed. The city is expected this month to give final approval to a formula that only assesses the HMOs on business they do within the city of Los Angeles, unlike the previous formula that assessed them based on company-wide revenues. That previous formula, and the prospect of paying millions of dollars in back taxes, prompted the five Blue Cross of California, CareAmerica Health Plans, Health Net and Prudential HealthCare in the Valley, and Maxicare Health Plans in downtown L.A. to band together. “We were all kind of nervous about the city imposing a significant tax increase on us,” said Dennis Eder, chief executive of CareAmerica.” One of the first things the new L.A. Healthcare Headquarters Association did was hire a lobbying firm, Rose & Kindel. Gagan led officials from each of the five health care giants into Chick’s office one November day in 1996 to discuss the matter. “I sat and listened to them explaining the situation they were in,” said Chick, recalling the visit. “My impression was, we kind of swept them in when they went for-profit and didn’t take a step back and say, ‘There are some unique aspects to them as an industry, and we need to look at those unique aspects and come up with something that makes sense.’ ” About two weeks later, Chick introduced her first motion to the City Council, calling for a resolution of the issue. Then the task began to find a solution that would be acceptable to all. There was a lot at stake. The HMOs faced the prospect of losing millions of dollars, while city officials already stung by complaints that Los Angeles is unfriendly to business faced the threat that these companies would move elsewhere if the issue were not resolved to their satisfaction. “I definitely thought, if we didn’t resolve this problem, then they would look to leave the city in the coming years,” said Chick. Most of the parties acknowledged early on that the tax code put an unfair burden on the HMOs and needed changing. The main challenge was finding a new taxation model. Gagan said one of Chick’s major roles in the process was keeping everyone’s eyes on what was feasible, and keeping them focused on the real issues. “She was the glue that held the whole process together,” he said. “I give her extremely high marks for her patience and persistence. … She kept everybody in the same arena.” The HMOs spent most of the first five months of 1997 furnishing city officials with numbers. “Some of the memorable moments were when my eyes would glaze over when we started talking about certain tax formulas,” Chick said. “Sometimes the discussions got very complicated.” The number-crunching and brainstorming produced eight different tax models, which city and HMO officials began to examine in early summer. That was the period when some nerves began to fray. One of the biggest problems, Chick recalled, was a wave of negative publicity about HMOs at the time. “To some, (HMOs) aren’t the most loved entities now,” Chick said. “One of my concerns was that some of these issues might muddy the waters.” Another distraction came in August, when it was revealed that the city had been running an annual deficit of as much as $75 million. “That made city officials very nervous about anything that could reduce revenues from the business license tax,” Gagan said. Despite the setbacks and distractions, the City Council approved a new methodology on Dec. 9 that reduced the HMOs’ annual tax burden from $25 million to $7 million in a quiet, 12-3 vote. “I am fairly satisfied with what seems to be the final outcome in the allocation methodology that was proposed and has been approved by the City Council,” said Eder of CareAmerica, reflecting the general sentiments of most parties involved. “I believe this is something we could have achieved a year ago, but we finally achieved our main goal, which was to ensure we weren’t paying a disproportionate share of taxes in the city.” Rocky Delgadillo, deputy mayor for economic development, said the HMO deal joins recent tax cuts for the printing industry and the multimedia industry as a sign that City Hall is reaching out to business. “I think it’s just another in a long series of demonstrable events that have begun to change the image of Los Angeles,” Delgadillo said. “The reality is that Los Angeles, because of his size, can actually respond in a way to business that is far greater than other, smaller cities can. And we are demonstrating that again and again.” Business Journal Staff Reporter Daniel Taub contributed to this story.
