PHIL. HEALTH CARE PROVIDERS, INC vs. COMMISSIONER OF INTERNAL REVENUE / G.R. No.
167330 / J. Puno / 18 September 2009
Facts:
● Petitioner is a domestic corporation whose primary purpose is to establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and
to provide for the administrative, legal, and financial responsibilities of the organization. On
January 27, 2000, respondent CIR sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18.
● The deficiency assessment was imposed on petitioner’s health care agreement with the
members of its health care program pursuant to Section 185 of the 1997 Tax Code. Petitioner
protested the assessment in a letter dated February 23, 2000.
● As respondent did not act on the protest, petitioner filed a petition for review in the Court of
Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.
● On April 5, 2002, the CTA rendered a decision, ordering the petitioner to PAY the deficiency
VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January
20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT
deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect.
The 1996 and 1997 deficiency DST assessment against petitioner was CANCELLED AND SET
ASIDE. The CIR was ORDERED to DESIST from collecting the said DST deficiency tax.
● Respondent (CIR) appealed the CTA decision to the (CA) insofar as it cancelled the DST
assessment.
● Argument of the Respondent (CIR): The petitioner’s health care agreement was a contract
of insurance subject to DST under Section 185 of the 1997 Tax Code.
● Argument of the Petitioner: They are not engaged in the insurance business and must not
be held liable for DST.
● Decision of the CA: On August 16, 2004, the CA rendered its decision which held that
petitioner’s health care agreement was in the nature of a non-life insurance contract subject to
DST. Respondent is ordered to pay the deficiency Documentary Stamp Tax. Petitioner moved
for reconsideration but this was denied by the Court of Appeals. Hence this petition.
ISSUES/Held:
(1) Whether or not Philippine Health Care Providers, Inc. engaged in insurance
business.
a. NO. because Philippine Health Care Providers, Inc is a Health Maintenane Organization
or an HMO. Health Maintenance Organizations are not engaged in the insurance
business. The SC said in June 12, 2008 decision that it is irrelevant that petitioner
is an HMO and not an insurer because its agreements are treated as
insurance contracts and the DST is not a tax on the business but an excise on
the privilege, opportunity or facility used in the transaction of the business.
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue
of whether or not it is liable for DST on its health care agreements. Petitioner
is admittedly an HMO. Under RA 7878 an HMO is “an entity that provides, offers or
arranges for coverage of designated health services needed by plan members for a
fixed prepaid premium. The payments do not vary with the extent, frequency or type
of services provided. Section 2 (2) of PD 1460 enumerates what constitutes “doing an
insurance business” or “transacting an insurance business” which are making or
proposing to make, as insurer, any insurance contract; making or proposing to make,
as surety, any contract of suretyship as a vocation and not as merely incidental to any
other legitimate business or activity of the surety; doing any kind of business,
including a reinsurance business, specifically recognized as constituting the doing of
an insurance business within the meaning of this Code; doing or proposing to do any
business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.
(2) Whether or not the agreements between petitioner and its members possess all elements
necessary in the insurance contract.
a. NO. For two reasons:
i. Primary purpose is service – In our jurisdiction, a commentator of our
insurance laws has pointed out that, even if a contract contains all the
elements of an insurance contract, if its primary purpose is the rendering of
service, it is not a contract of insurance. The primary purpose of the
business may negate the existence of an insurance contract.
ii. Not all elements are present - Section 2 (1) of the Insurance Code defines a
contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising
from an unknown or contingent event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the
designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute
actual losses among a large group of persons bearing a similar risk
and
5. In consideration of the insurers promise, the insured pays a premium
In this case, there is no loss, damage or liability on the part of the member
that should be indemnified by the company as HMO. Instead, the company
pays a predetermined consideration in exchange for medical and professional
fees availed of. There is no payment to a third party as part of an indemnity.
Only the affiliated physicians and hospitals are paid on behalf of the HMO
member.
There is also no risk of loss involved because the member can avail of
benefits Although there are instances when third parties may be reimbursed
in certain emergency cases, these are incidental to the principal activity of
providing them medical care. The “insurance-like” aspect of petitioner’s
business is miniscule compared to its noninsurance activities. Therefore,
since it substantially provides health care services rather than insurance
services, it cannot be considered as being in the insurance business.
Motion for reconsideration is granted; the earlier decision by the CA dated August 16, 2004 is
cancelled and set aside; the DST assessments are cancelled, and the CIR is ordered to desist from
collecting said taxes.
