Philippine Health Care Providers vs.

CIR (2009)

Summary Cases:

● Philippine Health Care Providers, Inc. vs. Commissioner of Internal Revenue 554 SCRA 411

Subject:

Statutory Construction on Surplusages; Health Maintenance Organization (HMO); Nature of Insurance

Facts:

This is a Motion for Reconsideration (MR) of the Supreme Court’s decision.

Petitioner Philippine Health Care Providers (PHCP) is a domestic corporation whose primary purpose is
“[t]o 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.” Its
members pay an annual membership fee and are entitled to various preventive, diagnostic and curative
medical services.

Commissioner of Internal Revenue (CIR) assessed PHCP deficiency documentary stamp taxes (DST)
for the years 1996 and 1997 and these were imposed on the health care agreement with its members.
VAT was also assessed. PHCP protested but because the CIR did not act on it, petitioner filed a petition
for review with the Court of Tax Appeals (CTA) seeking cancellation of the deficiency VAT and DST.

CTA ruled that PHCP was liable for VAT but DST was cancelled. CIR appealed in so far as the
cancellation of the DST claiming that PHCP’s health care agreement was a contract of insurance subject
to DST under Sec. 185 of the 1997 Tax Code.

SC ruled that petitioner’s health care agreement during the pertinent period was in the nature of non-life
insurance which is a contract of indemnity, and that it is liable for DST, because DST is not a tax on the
business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the
transaction of the business.

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In its MR, petitioner reveals for the first time that it availed of a tax amnesty under RA 9480.

Held:

Statutory Construction; Surplusages

1. It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a
construction which renders every word operative is preferred over that which makes some words idle
and nugatory. This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose
the interpretation which gives effect to the whole of the statute – its every word.

Health Maintenance Organization (HMO) is not engaged in the insurance business

2. Applying the “principal object and purpose test,” there is significant American case law supporting the
argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is
to provide the members of a group with health services, is not engaged in the insurance business.

3. The functions of such an organization are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its
descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence,
not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and doing so at lower prices made possible by
quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the
risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and
gas, rather than merely protecting against the financial loss caused by extraordinary and unusual
occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious
and unusual illness. To summarize, the distinctive features of the cooperative (HMO) are the rendering
of service, its extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in
short, getting the medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service, even on the contingency that it be needed,
and contracting merely to stand its cost when or after it is rendered.

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4. American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit.

Concept of Insurance

5. 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:

(a) The insured has an insurable interest;

(b) The insured is subject to a risk of loss by the happening of the designed peril;

(c) The insurer assumes the risk;

(d) 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

(e) In consideration of the insurer’s promise, the insured pays a premium

6. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To
begin with, there is no loss, damage or liability on the part of the member that should be indemnified by
petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration
in exchange for the hospital, medical and professional services rendered by the petitioner’s physician or
affiliated physician to him.

Documentary Stamp Tax (DST)

7. From the language of Section 185 of the Tax Code, it is evident that two requisites must concur
before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).

8. When the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in existence in
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the Philippines and the term had in fact already been defined by RA 7875. The fact that the NIRC
contained no specific provision on the DST liability of health care agreements of HMOs at a time they
were already known as such, belies any legislative intent to impose it on them.

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