G.R. No.

167330 September 18, 2009 surcharge plus 20% interest from January 20, 1997 until fully paid for
the 1996 VAT deficiency and ₱31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until fully paid for
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is
vs.
declared void and without force and effect. The 1996 and 1997
COMMISSIONER OF INTERNAL REVENUE, Respondent.
deficiency DST assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST from collecting
RESOLUTION the said DST deficiency tax.

CORONA, J.: SO ORDERED.

ARTICLE II Respondent appealed the CTA decision to the [Court of Appeals (CA)]
Declaration of Principles and State Policies insofar as it cancelled the DST assessment. He claimed that petitioner’s
health care agreement was a contract of insurance subject to DST under
Section 185 of the 1997 Tax Code.
Section 15. The State shall protect and promote the right to health of the
people and instill health consciousness among them.
On August 16, 2004, the CA rendered its decision. It held that
petitioner’s health care agreement was in the nature of a non-life
ARTICLE XIII insurance contract subject to DST.
Social Justice and Human Rights

WHEREFORE, the petition for review is GRANTED. The Decision of the

Section 11. The State shall adopt an integrated and comprehensive Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and
approach to health development which shall endeavor to make essential
1997 deficiency documentary stamp tax assessment and ordered
goods, health and other social services available to all the people at petitioner to desist from collecting the same is REVERSED and SET
affordable cost. There shall be priority for the needs of the ASIDE.
underprivileged sick, elderly, disabled, women, and children. The State
shall endeavor to provide free medical care to paupers.1
Respondent is ordered to pay the amounts of ₱55,746,352.19 and
₱68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and
For are a motion for reconsideration and supplemental motion for
1997, respectively, plus 25% surcharge for late payment and 20%
reconsideration dated July 10, 2008 and July 14, 2008, respectively, interest per annum from January 27, 2000, pursuant to Sections 248 and
filed by petitioner Philippine Health Care Providers, Inc. 2 249 of the Tax Code, until the same shall have been fully paid.

We recall the facts of this case, as follows: SO ORDERED.

Petitioner is a domestic corporation whose primary purpose is "[t]o Petitioner moved for reconsideration but the CA denied it. Hence,
establish, maintain, conduct and operate a prepaid group practice health petitioner filed this case.
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 xxx xxx xxx
organization." Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive,
In a decision dated June 12, 2008, the Court denied the petition and
diagnostic and curative medical services provided by its duly licensed
affirmed the CA’s decision. We held that petitioner’s health care
physicians, specialists and other professional technical staff
agreement during the pertinent period was in the nature of non-life
participating in the group practice health delivery system at a hospital or
insurance which is a contract of indemnity, citing Blue Cross Healthcare,
clinic owned, operated or accredited by it.
Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also
ruled that petitioner’s contention that it is a health maintenance
xxx xxx xxx organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the
beneficiaries under their plans are treated as insurance contracts.
On January 27, 2000, respondent Commissioner of Internal Revenue
Moreover, DST is not a tax on the business transacted but an excise on
[CIR] sent petitioner a formal demand letter and the corresponding the privilege, opportunity or facility offered at exchanges for the
assessment notices demanding the payment of deficiency taxes, transaction of the business.
including surcharges and interest, for the taxable years 1996 and 1997
in the total amount of ₱224,702,641.18. xxxx
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting
The deficiency [documentary stamp tax (DST)] assessment was
the following arguments:
imposed on petitioner’s health care agreement with the members of its
health care program pursuant to Section 185 of the 1997 Tax Code xxxx
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged in
xxx xxx xxx the business of fidelity bonds and other insurance policies.
Petitioner, as an HMO, is a service provider, not an insurance
Petitioner protested the assessment in a letter dated February 23, 2000. company.
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 (b) The Court, in dismissing the appeal in CIR v. Philippine
deficiency VAT and DST assessments.
National Bank, affirmed in effect the CA’s disposition that
health care services are not in the nature of an insurance
On April 5, 2002, the CTA rendered a decision, the dispositive portion of business.
which read:
(c) Section 185 should be strictly construed.
WHEREFORE, in view of the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to ₱22,054,831.75 inclusive of 25%
 (d) Legislative intent to exclude health care agreements from that can be engaged by the enrolled member, i.e., preventive, diagnostic
items subject to DST is clear, especially in the light of the and curative medical services. Except for the curative aspect of the
amendments made in the DST law in 2002. medical service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.
(e) Assuming arguendo that petitioner’s agreements are
contracts of indemnity, they are not those contemplated under Health Maintenance Organizations Are Not Engaged In The
Section 185. Insurance Business

(f) Assuming arguendo that petitioner’s agreements are akin We said in our June 12, 2008 decision that it is irrelevant that petitioner
to health insurance, health insurance is not covered by is an HMO and not an insurer because its agreements are treated as
Section 185. 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.15
(g) The agreements do not fall under the phrase "other branch
of insurance" mentioned in Section 185.
Petitioner, however, submits that it is of critical importance to
characterize the business it is engaged in, that is, to determine whether
(h) The June 12, 2008 decision should only apply
it is an HMO or an insurance company, as this distinction is
sprospectively.
indispensable in turn to the issue of whether or not it is liable for DST on
its health care agreements.16
(i) Petitioner availed of the tax amnesty benefits under
RA5 9480 for the taxable year 2005 and all prior years.
A second hard look at the relevant law and jurisprudence convinces the
Therefore, the questioned assessments on the DST are now
Court that the arguments of petitioner are meritorious.
rendered moot and academic.6

Section 185 of the National Internal Revenue Code of 1997 (NIRC of

Oral arguments were held in Baguio City on April 22, 2009. The parties
1997) provides:
submitted their memoranda on June 8, 2009.

Section 185. Stamp tax on fidelity bonds and other insurance policies.
In its motion for reconsideration, petitioner reveals for the first time that
– On all policies of insurance or bonds or obligations of the nature of
it availed of a tax amnesty under RA 94807 (also known as the "Tax
indemnity for loss, damage, or liability made or renewed by any
Amnesty Act of 2007") by fully paying the amount of ₱5,127,149.08
person, association or company or corporation transacting the
representing 5% of its net worth as of the year ending December 31,
business of accident, fidelity, employer’s liability, plate, glass, steam
2005.8
boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all
We find merit in petitioner’s motion for reconsideration. bonds, undertakings, or recognizances, conditioned for the performance
of the duties of any office or position, for the doing or not doing of
anything therein specified, and on all obligations guaranteeing the
Petitioner was formally registered and incorporated with the Securities validity or legality of any bond or other obligations issued by any
and Exchange Commission on June 30, 1987.9 It is engaged in the province, city, municipality, or other public body or organization, and on
dispensation of the following medical services to individuals who enter all obligations guaranteeing the title to any real estate, or guaranteeing
into health care agreements with it:
any mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a documentary
Preventive medical services such as periodic monitoring of health stamp tax of fifty centavos (₱0.50) on each four pesos (₱4.00), or
problems, family planning counseling, consultation and advices on diet, fractional part thereof, of the premium charged. (Emphasis supplied)
exercise and other healthy habits, and immunization;
It is a cardinal rule in statutory construction that no word, clause,
Diagnostic medical services such as routine physical examinations, x- sentence, provision or part of a statute shall be considered surplusage
rays, urinalysis, fecalysis, complete blood count, and the like and 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. 17 This principle is
Curative medical services which pertain to the performing of other expressed in the maxim Ut magis valeat quam pereat, that is, we choose
remedial and therapeutic processes in the event of an injury or sickness the interpretation which gives effect to the whole of the statute – its every
on the part of the enrolled member.10 word.18

Individuals enrolled in its health care program pay an annual From the language of Section 185, it is evident that two requisites must
membership fee. Membership is on a year-to-year basis. The medical concur before the DST can apply, namely: (1) the document must be
services are dispensed to enrolled members in a hospital or clinic a policy of insurance or an obligation in the nature of
owned, operated or accredited by petitioner, through physicians, indemnity and (2) the maker should be transacting the business
medical and dental practitioners under contract with it. It negotiates with of accident, fidelity, employer’s liability, plate, glass, steam boiler,
such health care practitioners regarding payment schemes, financing burglar, elevator, automatic sprinkler, or other branch
and other procedures for the delivery of health services. Except in cases of insurance (except life, marine, inland, and fire insurance).
of emergency, the professional services are to be provided only by
petitioner's physicians, i.e. those directly employed by it11 or whose
services are contracted by it.12 Petitioner also provides hospital services Petitioner is admittedly an HMO. Under RA 7875 (or "The National
such as room and board accommodation, laboratory services, operating Health Insurance Act of 1995"), an HMO is "an entity that provides,
rooms, x-ray facilities and general nursing care.13 If and when a member offers or arranges for coverage of designated health services needed by
avails of the benefits under the agreement, petitioner pays the plan members for a fixed prepaid premium."19 The payments do not vary
participating physicians and other health care providers for the services with the extent, frequency or type of services provided.
rendered, at pre-agreed rates.14
The question is: was petitioner, as an HMO, engaged in the business of
To avail of petitioner’s health care programs, the individual members are insurance during the pertinent taxable years? We rule that it was not.
required to sign and execute a standard health care agreement
embodying the terms and conditions for the provision of the health care
services. The same agreement contains the various health care services
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) payment, the substantial reduction in cost by quantity purchasing
enumerates what constitutes "doing an insurance business" or in short, getting the medical job done and paid for; not, except
"transacting an insurance business:" 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,
a) making or proposing to make, as insurer, any insurance
therefore, a substantial difference between contracting in this way for
contract;
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.
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any
That an incidental element of risk distribution or assumption may be
other legitimate business or activity of the surety;
present should not outweigh all other factors. If attention is focused only
on that feature, the line between insurance or indemnity and other types
c) doing any kind of business, including a reinsurance of legal arrangement and economic function becomes faint, if not extinct.
business, specifically recognized as constituting the doing of This is especially true when the contract is for the sale of goods or
an insurance business within the meaning of this Code; services on contingency. But obviously it was not the purpose of the
insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all
d) doing or proposing to do any business in substance contracts, particularly conditional sales and contingent service
equivalent to any of the foregoing in a manner designed to agreements. The fallacy is in looking only at the risk element, to the
evade the provisions of this Code. exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on
In the application of the provisions of this Code, the fact that no profit is whether that or something else to which it is related in the
derived from the making of insurance contracts, agreements or particular plan is its principal object purpose.24 (Emphasis supplied)
transactions or that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that the making In California Physicians’ Service v. Garrison,25 the California court felt
thereof does not constitute the doing or transacting of an insurance
that, after scrutinizing the plan of operation as a whole of the corporation,
business. it was service rather than indemnity which stood as its principal purpose.

Various courts in the United States, whose jurisprudence has a

There is another and more compelling reason for holding that the service
persuasive effect on our decisions,21 have determined that HMOs are is not engaged in the insurance business. Absence or presence of
not in the insurance business. One test that they have applied is whether assumption of risk or peril is not the sole test to be applied in
the assumption of risk and indemnification of loss (which are elements determining its status. The question, more broadly, is whether,
of an insurance business) are the principal object and purpose of the looking at the plan of operation as a whole, ‘service’ rather than
organization or whether they are merely incidental to its business. If ‘indemnity’ is its principal object and purpose. Certainly the objects
these are the principal objectives, the business is that of insurance. But and purposes of the corporation organized and maintained by the
if they are merely incidental and service is the principal purpose, then California physicians have a wide scope in the field of social
the business is not insurance. service. Probably there is no more impelling need than that of
adequate medical care on a voluntary, low-cost basis for persons
Applying the "principal object and purpose test,"22 there is significant of small income. The medical profession unitedly is endeavoring
American case law supporting the argument that a corporation (such as to meet that need. Unquestionably this is ‘service’ of a high order
an HMO, whether or not organized for profit), whose main object is to and not ‘indemnity.’26 (Emphasis supplied)
provide the members of a group with health services, is not engaged in
the insurance business.
American courts have pointed out that the main difference between an
HMO and an insurance company is that HMOs undertake to provide or
The rule was enunciated in Jordan v. Group Health arrange for the provision of medical services through participating
Association23 wherein the Court of Appeals of the District of Columbia physicians while insurance companies simply undertake to indemnify
Circuit held that Group Health Association should not be considered as the insured for medical expenses incurred up to a pre-agreed
engaged in insurance activities since it was created primarily for the limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and
distribution of health care services rather than the assumption of Blue Shield of New Jersey27 is clear on this point:
insurance risk.
The basic distinction between medical service corporations and ordinary
xxx Although Group Health’s activities may be considered in one aspect health and accident insurers is that the former undertake to provide
as creating security against loss from illness or accident more truly they prepaid medical services through participating physicians, thus
constitute the quantity purchase of well-rounded, continuous medical relieving subscribers of any further financial burden, while the latter only
service by its members. xxx The functions of such an organization undertake to indemnify an insured for medical expenses up to, but not
are not identical with those of insurance or indemnity companies. beyond, the schedule of rates contained in the policy.
The latter are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its extension in kind,
xxx xxx xxx
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 The primary purpose of a medical service corporation, however, is an
members and doing so at lower prices made possible by quantity undertaking to provide physicians who will render services to
purchasing and economies in operation. Its primary purpose is to subscribers on a prepaid basis. Hence, if there are no physicians
reduce the cost rather than the risk of medical care; to broaden the participating in the medical service corporation’s plan, not only will
service to the individual in kind and quantity; to enlarge the number the subscribers be deprived of the protection which they might
receiving it; to regularize it as an everyday incident of living, like reasonably have expected would be provided, but the corporation
purchasing food and clothing or oil and gas, rather than merely will, in effect, be doing business solely as a health and accident
protecting against the financial loss caused by extraordinary and indemnity insurer without having qualified as such and rendering itself
unusual occurrences, such as death, disaster at sea, fire and subject to the more stringent financial requirements of the General
tornado. It is, in this instance, to take care of colds, ordinary aches and Insurance Laws….
pains, minor ills and all the temporary bodily discomforts as well as the
more serious and unusual illness. To summarize, the distinctive
A participating provider of health care services is one who agrees in
features of the cooperative are the rendering of service, its
writing to render health care services to or for persons covered by a
extension, the bringing of physician and patient together, the
contract issued by health service corporation in return for which the
preventive features, the regularization of service as well as
health service corporation agrees to make payment directly to the officials charged with the implementation of the law, their competence,
participating provider.28 (Emphasis supplied) expertness, experience and informed judgment, and the fact that they
frequently are the drafters of the law they interpret.36
Consequently, the mere presence of risk would be insufficient to
override the primary purpose of the business to provide medical services A Health Care Agreement Is Not An Insurance Contract
as needed, with payment made directly to the provider of these Contemplated Under Section 185 Of The NIRC of 1997
services.29 In short, even if petitioner assumes the risk of paying the cost
of these services even if significantly more than what the member has
Section 185 states that DST is imposed on "all policies of insurance…
prepaid, it nevertheless cannot be considered as being engaged in the
or obligations of the nature of indemnity for loss, damage, or liability…."
insurance business.
In our decision dated June 12, 2008, we ruled that petitioner’s health
care agreements are contracts of indemnity and are therefore insurance
By the same token, any indemnification resulting from the payment for contracts:
services rendered in case of emergency by non-participating health
providers would still be incidental to petitioner’s purpose of providing and
It is … incorrect to say that the health care agreement is not based on
arranging for health care services and does not transform it into an
loss or damage because, under the said agreement, petitioner assumes
insurer. To fulfill its obligations to its members under the agreements,
the liability and indemnifies its member for hospital, medical and related
petitioner is required to set up a system and the facilities for the delivery
expenses (such as professional fees of physicians). The term "loss or
of such medical services. This indubitably shows that indemnification is
damage" is broad enough to cover the monetary expense or liability a
not its sole object.
member will incur in case of illness or injury.

In fact, a substantial portion of petitioner’s services covers preventive

Under the health care agreement, the rendition of hospital, medical and
and diagnostic medical services intended to keep members from
professional services to the member in case of sickness, injury or
developing medical conditions or diseases. 30 As an HMO, it is its
emergency or his availment of so-called "out-patient services" (including
obligation to maintain the good health of its members. Accordingly, its
physical examination, x-ray and laboratory tests, medical consultations,
health care programs are designed to prevent or to minimize
vaccine administration and family planning counseling) is the contingent
the possibility of any assumption of risk on its part. Thus, its
event which gives rise to liability on the part of the member. In case of
undertaking under its agreements is not to indemnify its members
exposure of the member to liability, he would be entitled to
against any loss or damage arising from a medical condition but, on the
indemnification by petitioner.
contrary, to provide the health and medical services needed to prevent
such loss or damage.31
Furthermore, the fact that petitioner must relieve its member from liability
by paying for expenses arising from the stipulated contingencies belies
Overall, petitioner appears to provide insurance-type benefits to its
its claim that its services are prepaid. The expenses to be incurred by
members (with respect to its curative medical services), but these are
each member cannot be predicted beforehand, if they can be predicted
incidental to the principal activity of providing them medical care. The
at all. Petitioner assumes the risk of paying for the costs of the services
"insurance-like" aspect of petitioner’s business is miniscule compared to
even if they are significantly and substantially more than what the
its noninsurance activities. Therefore, since it substantially provides
member has "prepaid." Petitioner does not bear the costs alone but
health care services rather than insurance services, it cannot be
distributes or spreads them out among a large group of persons bearing
considered as being in the insurance business.
a similar risk, that is, among all the other members of the health care
program. This is insurance.37
It is important to emphasize that, in adopting the "principal purpose test"
used in the above-quoted U.S. cases, we are not saying that petitioner’s
We reconsider. We shall quote once again the pertinent portion of
operations are identical in every respect to those of the HMOs or health
Section 185:
providers which were parties to those cases. What we are stating is that,
for the purpose of determining what "doing an insurance business"
means, we have to scrutinize the operations of the business as a whole Section 185. Stamp tax on fidelity bonds and other insurance policies.
and not its mere components. This is of course only prudent and – On all policies of insurance or bonds or obligations of the nature
appropriate, taking into account the burdensome and strict laws, rules of indemnity for loss, damage, or liability made or renewed by any
and regulations applicable to insurers and other entities engaged in the person, association or company or corporation transacting the business
insurance business. Moreover, we are also not unmindful that there are of accident, fidelity, employer’s liability, plate, glass, steam boiler,
other American authorities who have found particular HMOs to be burglar, elevator, automatic sprinkler, or other branch of insurance
actually engaged in insurance activities.32 (except life, marine, inland, and fire insurance), xxxx (Emphasis
supplied)
Lastly, it is significant that petitioner, as an HMO, is not part of the
insurance industry. This is evident from the fact that it is not supervised In construing this provision, we should be guided by the principle that
by the Insurance Commission but by the Department of Health. 33 In fact, tax statutes are strictly construed against the taxing authority. 38 This is
in a letter dated September 3, 2000, the Insurance Commissioner because taxation is a destructive power which interferes with the
confirmed that petitioner is not engaged in the insurance business. This personal and property rights of the people and takes from them a portion
determination of the commissioner must be accorded great weight. It is of their property for the support of the government. 39 Hence, tax laws
well-settled that the interpretation of an administrative agency which is may not be extended by implication beyond the clear import of their
tasked to implement a statute is accorded great respect and ordinarily language, nor their operation enlarged so as to embrace matters not
controls the interpretation of laws by the courts. The reason behind this specifically provided.40
rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34
We are aware that, in Blue Cross and Philamcare, the Court
The rationale for this rule relates not only to the emergence of the pronounced that a health care agreement is in the nature of non-life
multifarious needs of a modern or modernizing society and the insurance, which is primarily a contract of indemnity. However, those
establishment of diverse administrative agencies for addressing and cases did not involve the interpretation of a tax provision. Instead, they
satisfying those needs; it also relates to the accumulation of experience dealt with the liability of a health service provider to a member under the
and growth of specialized capabilities by the administrative agency terms of their health care agreement. Such contracts, as contracts of
charged with implementing a particular statute. In Asturias Sugar adhesion, are liberally interpreted in favor of the member and strictly
Central, Inc. vs. Commissioner of Customs,35 the Court stressed that against the HMO. For this reason, we reconsider our ruling that Blue
executive officials are presumed to have familiarized themselves with all Cross and Philamcare are applicable here.
the considerations pertinent to the meaning and purpose of the law, and
to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency 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 Fourth. In case of emergency, petitioner is obliged to reimburse the
contingent event. An insurance contract exists where the following member who receives care from a non-participating physician or
elements concur: hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not confined
to the happening of a contingency but includes incidents even in the
1. The insured has an insurable interest;
absence of illness or injury.

2. The insured is subject to a risk of loss by the happening of

In Michigan Podiatric Medical Association v. National Foot Care
the designed peril;
Program, Inc.,43 although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment received from
3. The insurer assumes the risk; a non-designated doctor, this did not make defendant an insurer.
Citing Jordan, the Court determined that "the primary activity of the
defendant (was) the provision of podiatric services to subscribers in
4. Such assumption of risk is part of a general scheme to
consideration of prepayment for such services."44 Since indemnity of the
distribute actual losses among a large group of persons insured was not the focal point of the agreement but the extension of
bearing a similar risk and medical services to the member at an affordable cost, it did not partake
of the nature of a contract of insurance.
5. In consideration of the insurer’s promise, the insured pays
a premium.41 Fifth. Although risk is a primary element of an insurance contract, it is
not necessarily true that risk alone is sufficient to establish it. Almost
Do the agreements between petitioner and its members possess all anyone who undertakes a contractual obligation always bears a certain
these elements? They do not. degree of financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the usual
insurance contracts.
First. 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 Indeed, petitioner, as an HMO, undertakes a business risk when it offers
not a contract of insurance: to provide health services: the risk that it might fail to earn a reasonable
return on its investment. But it is not the risk of the type peculiar only to
insurance companies. Insurance risk, also known as actuarial risk, is the
It does not necessarily follow however, that a contract containing all the risk that the cost of insurance claims might be higher than the premiums
four elements mentioned above would be an insurance contract. The paid. The amount of premium is calculated on the basis of assumptions
primary purpose of the parties in making the contract may negate made relative to the insured.45
the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical
payments, it promises to represent such clients in all suits for or against However, assuming that petitioner’s commitment to provide medical
them, is not engaged in the insurance business. Its contracts are simply services to its members can be construed as an acceptance of the risk
for the purpose of rendering personal services. On the other hand, a that it will shell out more than the prepaid fees, it still will not qualify as
contract by which a corporation, in consideration of a stipulated amount, an insurance contract because petitioner’s objective is to provide
agrees at its own expense to defend a physician against all suits for medical services at reduced cost, not to distribute risk like an insurer.
damages for malpractice is one of insurance, and the corporation will be
deemed as engaged in the business of insurance. Unlike the lawyer’s
In sum, an examination of petitioner’s agreements with its members
retainer contract, the essential purpose of such a contract is not to leads us to conclude that it is not an insurance contract within the context
render personal services, but to indemnify against loss and damage of our Insurance Code.
resulting from the defense of actions for malpractice. 42 (Emphasis
supplied)
There Was No Legislative Intent To Impose DST On Health Care
Agreements Of HMOs
Second. 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 Furthermore, militating in convincing fashion against the imposition of
by petitioner as an HMO. Under the agreement, the member pays DST on petitioner’s health care agreements under Section 185 of the
petitioner a predetermined consideration in exchange for the hospital, NIRC of 1997 is the provision’s legislative history. The text of Section
medical and professional services rendered by the petitioner’s physician 185 came into U.S. law as early as 1904 when HMOs and health care
or affiliated physician to him. In case of availment by a member of the agreements were not even in existence in this jurisdiction. It was
benefits under the agreement, petitioner does not reimburse or imposed under Section 116, Article XI of Act No. 1189 (otherwise known
indemnify the member as the latter does not pay any third party. Instead, as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and
it is the petitioner who pays the participating physicians and other health became effective on August 1, 1904. Except for the rate of tax, Section
care providers for the services rendered at pre-agreed rates. The 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent
member does not make any such payment. portion of Section 116, to wit:

In other words, there is nothing in petitioner's agreements that gives rise ARTICLE XI
to a monetary liability on the part of the member to any third party- Stamp Taxes on Specified Objects
provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or "indemnity"
Section 116. There shall be levied, collected, and paid for and in respect
presuppose that a liability or claim has already been incurred. There is
to the several bonds, debentures, or certificates of stock and
no indemnity precisely because the member merely avails of medical
indebtedness, and other documents, instruments, matters, and things
services to be paid or already paid in advance at a pre-agreed price
mentioned and described in this section, or for or in respect to the
under the agreements.
vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or persons
Third. According to the agreement, a member can take advantage of the who shall make, sign, or issue the same, on and after January first,
bulk of the benefits anytime, e.g. laboratory services, x-ray, routine nineteen hundred and five, the several taxes following:
annual physical examination and consultations, vaccine administration
as well as family planning counseling, even in the absence of any peril,
xxx xxx xxx
loss or damage on his or her part.
Third xxx (c) on all policies of insurance or bond or obligation of the The Power To Tax Is Not The Power To Destroy
nature of indemnity for loss, damage, or liability made or renewed
by any person, association, company, or corporation transacting
As a general rule, the power to tax is an incident of sovereignty and is
the business of accident, fidelity, employer’s liability, plate glass,
unlimited in its range, acknowledging in its very nature no limits, so that
steam boiler, burglar, elevator, automatic sprinkle, or other branch
security against its abuse is to be found only in the responsibility of the
of insurance (except life, marine, inland, and fire
legislature which imposes the tax on the constituency who is to pay
insurance) xxxx (Emphasis supplied)
it.51 So potent indeed is the power that it was once opined that "the
power to tax involves the power to destroy."52
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914)
was enacted revising and consolidating the laws relating to internal
Petitioner claims that the assessed DST to date which amounts to ₱376
revenue. The aforecited pertinent portion of Section 116, Article XI of
million53 is way beyond its net worth of ₱259 million.54 Respondent never
Act No. 1189 was completely reproduced as Section 30 (l), Article III of
disputed these assertions. Given the realities on the ground, imposing
Act No. 2339. The very detailed and exclusive enumeration of items
the DST on petitioner would be highly oppressive. It is not the purpose
subject to DST was thus retained.
of the government to throttle private business. On the contrary, the
government ought to encourage private enterprise.55 Petitioner, just like
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was any concern organized for a lawful economic activity, has a right to
again reproduced as Section 1604 (l), Article IV of Act No. 2657 maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA,
(Administrative Code). Upon its amendment on March 10, 1917, the et al.:57
pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. proprietary rights of a taxpayer. It must be exercised fairly, equally and
466 (the NIRC of 1939), which codified all the internal revenue laws of uniformly, lest the tax collector kill the "hen that lays the golden egg."58
the Philippines. In an amendment introduced by RA 40 on October 1,
1946, the DST rate was increased but the provision remained
Legitimate enterprises enjoy the constitutional protection not to be taxed
substantially the same.
out of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
Thereafter, on June 3, 1977, the same provision with the same DST rate matter and should not be allowed. It is counter-productive and ultimately
was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs subversive of the nation’s thrust towards a better economy which will
1457 and 1959, enacted on June 11, 1978 and October 10, 1984 ultimately benefit the majority of our people.59
respectively, the DST rate was again increased.1avvphi1
Petitioner’s Tax Liability Was Extinguished Under The Provisions
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section Of RA 9840
234 of the NIRC of 1977 was renumbered as Section 198. And under
Section 23 of EO47 273 dated July 25, 1987, it was again renumbered
Petitioner asserts that, regardless of the arguments, the DST
and became Section 185.
assessment for taxable years 1996 and 1997 became moot and
academic60 when it availed of the tax amnesty under RA 9480 on
On December 23, 1993, under RA 7660, Section 185 was amended but, December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net
again, only with respect to the rate of tax. worth as of the year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is
entitled to immunity from payment of taxes as well as additions thereto,
Notwithstanding the comprehensive amendment of the NIRC of 1977 by
and the appurtenant civil, criminal or administrative penalties under the
RA 8424 (or the NIRC of 1997), the subject legal provision was retained
1997 NIRC, as amended, arising from the failure to pay any and all
as the present Section 185. In 2004, amendments to the DST provisions
internal revenue taxes for taxable year 2005 and prior years.61
were introduced by RA 924348 but Section 185 was untouched.

Far from disagreeing with petitioner, respondent manifested in its

On the other hand, the concept of an HMO was introduced in the
memorandum:
Philippines with the formation of Bancom Health Care Corporation in
1974. The same pioneer HMO was later reorganized and renamed
Integrated Health Care Services, Inc. (or Intercare). However, there are Section 6 of [RA 9840] provides that availment of tax amnesty entitles a
those who claim that Health Maintenance, Inc. is the HMO industry taxpayer to immunity from payment of the tax involved, including the
pioneer, having set foot in the Philippines as early as 1965 and having civil, criminal, or administrative penalties provided under the 1997
been formally incorporated in 1991. Afterwards, HMOs proliferated [NIRC], for tax liabilities arising in 2005 and the preceding years.
quickly and currently, there are 36 registered HMOs with a total
enrollment of more than 2 million.49
In view of petitioner’s availment of the benefits of [RA 9840], and without
conceding the merits of this case as discussed above, respondent
We can clearly see from these two histories (of the DST on the one hand concedes that such tax amnesty extinguishes the tax liabilities of
and HMOs on the other) that when the law imposing the DST was first petitioner. This admission, however, is not meant to preclude a
passed, HMOs were yet unknown in the Philippines. However, when the revocation of the amnesty granted in case it is found to have been
various amendments to the DST law were enacted, they were already granted under circumstances amounting to tax fraud under Section 10
in existence in the Philippines and the term had in fact already been of said amnesty law.62 (Emphasis supplied)
defined by RA 7875. If it had been the intent of the legislature to impose
DST on health care agreements, it could have done so in clear and
Furthermore, we held in a recent case that DST is one of the taxes
categorical terms. It had many opportunities to do so. But it did not. The
covered by the tax amnesty program under RA 9480.63 There is no other
fact that the NIRC contained no specific provision on the DST liability of
conclusion to draw than that petitioner’s liability for DST for the taxable
health care agreements of HMOs at a time they were already known as
years 1996 and 1997 was totally extinguished by its availment of the tax
such, belies any legislative intent to impose it on them. As a matter of
amnesty under RA 9480.
fact, petitioner was assessed its DST liability only on January 27,
2000, after more than a decade in the business as an HMO.50
Is The Court Bound By A Minute Resolution In Another Case?
Considering that Section 185 did not change since 1904 (except for the
rate of tax), it would be safe to say that health care agreements were Petitioner raises another interesting issue in its motion for
never, at any time, recognized as insurance contracts or deemed reconsideration: whether this Court is bound by the ruling of the
engaged in the business of insurance within the context of the provision. CA64 in CIR v. Philippine National Bank65 that a health care agreement
of Philamcare Health Systems is not an insurance contract for purposes The rate of DST under Section 185 is equivalent to 12.5% of the
of the DST. premium charged.74 Its imposition will elevate the cost of health care
services. This will in turn necessitate an increase in the membership
fees, resulting in either placing health services beyond the reach of the
In support of its argument, petitioner cites the August 29, 2001 minute
ordinary wage earner or driving the industry to the ground. At the end of
resolution of this Court dismissing the appeal in Philippine National
the day, neither side wins, considering the indispensability of the
Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R.
services offered by HMOs.
No. 148680 by minute resolution was a judgment on the merits; hence,
the Court should apply the CA ruling there that a health care agreement
is not an insurance contract. WHEREFORE, the motion for reconsideration is GRANTED. The
August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
It is true that, although contained in a minute resolution, our dismissal of
deficiency DST assessment against petitioner is
the petition was a disposition of the merits of the case. When we
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist
dismissed the petition, we effectively affirmed the CA ruling being
from collecting the said tax.
questioned. As a result, our ruling in that case has already become
final.67 When a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive requirements, the No costs.
challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained.68 But what is its effect on other
SO ORDERED.
cases?

With respect to the same subject matter and the same issues concerning
the same parties, it constitutes res judicata.69 However, if other parties
or another subject matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent. Thus, in CIR v.
Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-
Nickel71 involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution dated
February 17, 2003 sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case "ha(d) no bearing" on the latter
case because the two cases involved different subject matters as they
were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a

minute resolution and a decision. The constitutional requirement under
the first paragraph of Section 14, Article VIII of the Constitution that the
facts and the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute resolutions.
A minute resolution is signed only by the clerk of court by authority of
the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the proviso of Section 4(3)
of Article VIII speaks of a decision.73 Indeed, as a rule, this Court lays
down doctrines or principles of law which constitute binding precedent
in a decision duly signed by the members of the Court and certified by
the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and
since petitioner’s liability for DST on its health care agreement was not
the subject matter of G.R. No. 148680, petitioner cannot successfully
invoke the minute resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioner’s
health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within
the ambit of Section 185 of the NIRC and there was never any legislative
intent to impose the same on HMOs like petitioner, the same should not
be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for

adequate medical services at a cost which the average wage earner can
afford. HMOs arrange, organize and manage health care treatment in
the furtherance of the goal of providing a more efficient and inexpensive
health care system made possible by quantity purchasing of services
and economies of scale. They offer advantages over the pay-for-service
system (wherein individuals are charged a fee each time they receive
medical services), including the ability to control costs. They protect their
members from exposure to the high cost of hospitalization and other
medical expenses brought about by a fluctuating economy. Accordingly,
they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with
affordable health services.