Republic of the Philippines take care of the sick and disabled persons enrolled in the health care

SUPREME COURT plan and to provide for the administrative, legal, and financial
Manila responsibilities of the organization." Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to
SPECIAL FIRST DIVISION various preventive, diagnostic and curative medical services provided
by its duly licensed physicians, specialists and other professional
G.R. No. 167330               September 18, 2009 technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, 
vs. x x x           x x x          x x x
COMMISSIONER OF INTERNAL REVENUE, Respondent.
On January 27, 2000, respondent Commissioner of Internal Revenue
RESOLUTION [CIR] sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes,
CORONA, J.: including surcharges and interest, for the taxable years 1996 and
1997 in the total amount of ₱224,702,641.18. xxxx
ARTICLE II
Declaration of Principles and State Policies The deficiency [documentary stamp tax (DST)] assessment was
imposed on petitioner’s health care agreement with the members of
Section 15. The State shall protect and promote the right to health of its health care program pursuant to Section 185 of the 1997 Tax Code
the people and instill health consciousness among them. xxxx

ARTICLE XIII x x x           x x x          x x x
Social Justice and Human Rights
Petitioner protested the assessment in a letter dated February 23,
Section 11. The State shall adopt an integrated and comprehensive 2000. As respondent did not act on the protest, petitioner filed a
approach to health development which shall endeavor to make petition for review in the Court of Tax Appeals (CTA) seeking the
essential goods, health and other social services available to all the cancellation of the deficiency VAT and DST assessments.
people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The On April 5, 2002, the CTA rendered a decision, the dispositive portion
State shall endeavor to provide free medical care to paupers.1 of which read:

For resolution are a motion for reconsideration and supplemental WHEREFORE, in view of the foregoing, the instant Petition for
motion for reconsideration dated July 10, 2008 and July 14, 2008, Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to
respectively, filed by petitioner Philippine Health Care Providers, Inc.2 PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully
We recall the facts of this case, as follows: 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 the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-
Petitioner is a domestic corporation whose primary purpose is "[t]o
88 is declared void and without force and effect. The 1996 and 1997
establish, maintain, conduct and operate a prepaid group practice
deficiency DST assessment against petitioner is hereby CANCELLED
health care delivery system or a health maintenance organization to
AND SET ASIDE. Respondent is ORDERED to DESIST from the beneficiaries under their plans are treated as insurance contracts.
collecting the said DST deficiency tax. Moreover, DST is not a tax on the business transacted but an excise
on the privilege, opportunity or facility offered at exchanges for the
SO ORDERED. transaction of the business.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] Unable to accept our verdict, petitioner filed the present motion for
insofar as it cancelled the DST assessment. He claimed that reconsideration and supplemental motion for reconsideration,
petitioner’s health care agreement was a contract of insurance subject asserting the following arguments:
to DST under Section 185 of the 1997 Tax Code.
(a) The DST under Section 185 of the National Internal
On August 16, 2004, the CA rendered its decision. It held that Revenue of 1997 is imposed only on a company engaged in
petitioner’s health care agreement was in the nature of a non-life the business of fidelity bonds and other insurance policies.
insurance contract subject to DST. Petitioner, as an HMO, is a service provider, not an insurance
company.
WHEREFORE, the petition for review is GRANTED. The Decision of
the Court of Tax Appeals, insofar as it cancelled and set aside the (b) The Court, in dismissing the appeal in CIR v. Philippine
1996 and 1997 deficiency documentary stamp tax assessment and National Bank, affirmed in effect the CA’s disposition that
ordered petitioner to desist from collecting the same is REVERSED health care services are not in the nature of an insurance
and SET ASIDE. business.

Respondent is ordered to pay the amounts of ₱55,746,352.19 and (c) Section 185 should be strictly construed.
₱68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and
1997, respectively, plus 25% surcharge for late payment and 20% (d) Legislative intent to exclude health care agreements from
interest per annum from January 27, 2000, pursuant to Sections 248 items subject to DST is clear, especially in the light of the
and 249 of the Tax Code, until the same shall have been fully paid. amendments made in the DST law in 2002.

SO ORDERED. (e) Assuming arguendo that petitioner’s agreements are

contracts of indemnity, they are not those contemplated under
Petitioner moved for reconsideration but the CA denied it. Hence, Section 185.
petitioner filed this case.
(f) Assuming arguendo that petitioner’s agreements are akin to
x x x           x x x          x x x health insurance, health insurance is not covered by Section
185.
In a decision dated June 12, 2008, the Court denied the petition and
affirmed the CA’s decision. We held that petitioner’s health care (g) The agreements do not fall under the phrase "other branch
agreement during the pertinent period was in the nature of non-life of insurance" mentioned in Section 185.
insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. (h) The June 12, 2008 decision should only apply
CA.4We also ruled that petitioner’s contention that it is a health prospectively.
maintenance organization (HMO) and not an insurance company is
irrelevant because contracts between companies like petitioner and
 (i) Petitioner availed of the tax amnesty benefits under by it11 or whose services are contracted by it. 12 Petitioner also
RA5 9480 for the taxable year 2005 and all prior years. provides hospital services such as room and board accommodation,
Therefore, the questioned assessments on the DST are now laboratory services, operating rooms, x-ray facilities and general
rendered moot and academic.6 nursing care.13 If and when a member avails of the benefits under the
agreement, petitioner pays the participating physicians and other
Oral arguments were held in Baguio City on April 22, 2009. The health care providers for the services rendered, at pre-agreed rates.14
parties submitted their memoranda on June 8, 2009.
To avail of petitioner’s health care programs, the individual members
In its motion for reconsideration, petitioner reveals for the first time are required to sign and execute a standard health care agreement
that it availed of a tax amnesty under RA 94807(also known as the embodying the terms and conditions for the provision of the health
"Tax Amnesty Act of 2007") by fully paying the amount of care services. The same agreement contains the various health care
₱5,127,149.08 representing 5% of its net worth as of the year ending services that can be engaged by the enrolled member, i.e.,
December 31, 2005.8 preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member
We find merit in petitioner’s motion for reconsideration. may actually make use of the health care services being offered by
petitioner at any time.
Petitioner was formally registered and incorporated with the Securities
and Exchange Commission on June 30, 1987. 9 It is engaged in the Health Maintenance Organizations Are Not Engaged In The
dispensation of the following medical services to individuals who enter Insurance Business
into health care agreements with it:
We said in our June 12, 2008 decision that it is irrelevant that
Preventive medical services such as periodic monitoring of health petitioner is an HMO and not an insurer because its agreements are
problems, family planning counseling, consultation and advices on treated as insurance contracts and the DST is not a tax on the
diet, exercise and other healthy habits, and immunization; business but an excise on the privilege, opportunity or facility used in
the transaction of the business.15
Diagnostic medical services such as routine physical examinations,
x-rays, urinalysis, fecalysis, complete blood count, and the like and Petitioner, however, submits that it is of critical importance to
characterize the business it is engaged in, that is, to determine
Curative medical services which pertain to the performing of other whether it is an HMO or an insurance company, as this distinction is
remedial and therapeutic processes in the event of an injury or indispensable in turn to the issue of whether or not it is liable for DST
sickness on the part of the enrolled member.10 on its health care agreements.16

Individuals enrolled in its health care program pay an annual A second hard look at the relevant law and jurisprudence convinces
membership fee. Membership is on a year-to-year basis. The medical the Court that the arguments of petitioner are meritorious.
services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, Section 185 of the National Internal Revenue Code of 1997 (NIRC of
medical and dental practitioners under contract with it. It negotiates 1997) provides:
with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Section 185. Stamp tax on fidelity bonds and other insurance policies.
Except in cases of emergency, the professional services are to be – On all policies of insurance or bonds or obligations of the nature
provided only by petitioner's physicians, i.e. those directly employed of indemnity for loss, damage, or liability made or renewed by
any person, association or company or corporation transacting Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
the business of accident, fidelity, employer’s liability, plate, glass, enumerates what constitutes "doing an insurance business" or
steam boiler, burglar, elevator, automatic sprinkler, or other branch "transacting an insurance business:"
of insurance (except life, marine, inland, and fire insurance), and
all bonds, undertakings, or recognizances, conditioned for the a) making or proposing to make, as insurer, any insurance
performance of the duties of any office or position, for the doing or not contract;
doing of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other obligations b) making or proposing to make, as surety, any contract of
issued by any province, city, municipality, or other public body or suretyship as a vocation and not as merely incidental to any
organization, and on all obligations guaranteeing the title to any real other legitimate business or activity of the surety;
estate, or guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there shall be c) doing any kind of business, including a reinsurance
collected a documentary stamp tax of fifty centavos (₱0.50) on each business, specifically recognized as constituting the doing of
four pesos (₱4.00), or fractional part thereof, of the premium charged. an insurance business within the meaning of this Code;
(Emphasis supplied)
d) doing or proposing to do any business in substance
It is a cardinal rule in statutory construction that no word, clause, equivalent to any of the foregoing in a manner designed to
sentence, provision or part of a statute shall be considered surplusage evade the provisions of this Code.
or superfluous, meaningless, void and insignificant. To this end, a
construction which renders every word operative is preferred over that In the application of the provisions of this Code, the fact that no profit
which makes some words idle and nugatory.17 This principle is is derived from the making of insurance contracts, agreements or
expressed in the maxim Ut magis valeat quam pereat, that is, we transactions or that no separate or direct consideration is received
choose the interpretation which gives effect to the whole of the statute therefore, shall not be deemed conclusive to show that the making
– its every word.18 thereof does not constitute the doing or transacting of an insurance
business.
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely: (1) the Various courts in the United States, whose jurisprudence has a
document must be a policy of insurance or an obligation in the persuasive effect on our decisions,21 have determined that HMOs are
nature of indemnity and (2) the maker should be transacting the not in the insurance business. One test that they have applied is
business of accident, fidelity, employer’s liability, plate, glass, steam whether the assumption of risk and indemnification of loss (which are
boiler, burglar, elevator, automatic sprinkler, or other branch elements of an insurance business) are the principal object and
of insurance (except life, marine, inland, and fire insurance). purpose of the organization or whether they are merely incidental to
its business. If these are the principal objectives, the business is that
Petitioner is admittedly an HMO. Under RA 7875 (or "The National of insurance. But if they are merely incidental and service is the
Health Insurance Act of 1995"), an HMO is "an entity that provides, principal purpose, then the business is not insurance.
offers or arranges for coverage of designated health services needed
by plan members for a fixed prepaid premium."19 The payments do not Applying the "principal object and purpose test,"22 there is significant
vary with the extent, frequency or type of services provided. American case law supporting the argument that a corporation (such
as an HMO, whether or not organized for profit), whose main object is
The question is: was petitioner, as an HMO, engaged in the business to provide the members of a group with health services, is not
of insurance during the pertinent taxable years? We rule that it was engaged in the insurance business.
not.
The rule was enunciated in Jordan v. Group Health That an incidental element of risk distribution or assumption may be
Association23 wherein the Court of Appeals of the District of Columbia present should not outweigh all other factors. If attention is focused
Circuit held that Group Health Association should not be considered only on that feature, the line between insurance or indemnity and
as engaged in insurance activities since it was created primarily for other types of legal arrangement and economic function becomes
the distribution of health care services rather than the assumption of faint, if not extinct. This is especially true when the contract is for the
insurance risk. sale of goods or services on contingency. But obviously it was not the
purpose of the insurance statutes to regulate all arrangements for
xxx Although Group Health’s activities may be considered in one assumption or distribution of risk. That view would cause them to
aspect as creating security against loss from illness or accident more engulf practically all contracts, particularly conditional sales and
truly they constitute the quantity purchase of well-rounded, continuous contingent service agreements. The fallacy is in looking only at the
medical service by its members. xxx The functions of such an risk element, to the exclusion of all others present or their
organization are not identical with those of insurance or subordination to it. The question turns, not on whether risk is
indemnity companies. The latter are concerned primarily, if not involved or assumed, but on whether that or something else to
exclusively, with risk and the consequences of its descent, not with which it is related in the particular plan is its principal object
service, or its extension in kind, quantity or distribution; with the purpose.24 (Emphasis supplied)
unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned In California Physicians’ Service v. Garrison,25 the California court felt
principally with getting service rendered to its members and that, after scrutinizing the plan of operation as a whole of the
doing so at lower prices made possible by quantity purchasing corporation, it was service rather than indemnity which stood as its
and economies in operation. Its primary purpose is to reduce the principal purpose.
cost rather than the risk of medical care; to broaden the service
to the individual in kind and quantity; to enlarge the number There is another and more compelling reason for holding that the
receiving it; to regularize it as an everyday incident of living, like service is not engaged in the insurance business. Absence or
purchasing food and clothing or oil and gas, rather than merely presence of assumption of risk or peril is not the sole test to be
protecting against the financial loss caused by extraordinary and applied in determining its status. The question, more broadly, is
unusual occurrences, such as death, disaster at sea, fire and whether, looking at the plan of operation as a whole, ‘service’
tornado. It is, in this instance, to take care of colds, ordinary aches rather than ‘indemnity’ is its principal object and
and pains, minor ills and all the temporary bodily discomforts as well purpose. Certainly the objects and purposes of the corporation
as the more serious and unusual illness. To summarize, the organized and maintained by the California physicians have a wide
distinctive features of the cooperative are the rendering of scope in the field of social service. Probably there is no more
service, its extension, the bringing of physician and patient impelling need than that of adequate medical care on a
together, the preventive features, the regularization of service as voluntary, low-cost basis for persons of small income. The
well as payment, the substantial reduction in cost by quantity medical profession unitedly is endeavoring to meet that need.
purchasing in short, getting the medical job done and paid for; Unquestionably this is ‘service’ of a high order and not
not, except incidentally to these features, the indemnification for ‘indemnity.’26 (Emphasis supplied)
cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance American courts have pointed out that the main difference between an
arrangement. There is, therefore, a substantial difference between HMO and an insurance company is that HMOs undertake to provide
contracting in this way for the rendering of service, even on the or arrange for the provision of medical services through participating
contingency that it be needed, and contracting merely to stand its cost physicians while insurance companies simply undertake to indemnify
when or after it is rendered. the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross an insurer. To fulfill its obligations to its members under the
and Blue Shield of New Jersey27 is clear on this point: agreements, petitioner is required to set up a system and the facilities
for the delivery of such medical services. This indubitably shows that
The basic distinction between medical service corporations and indemnification is not its sole object.
ordinary health and accident insurers is that the former undertake to
provide prepaid medical services through participating In fact, a substantial portion of petitioner’s services covers preventive
physicians, thus relieving subscribers of any further financial burden, and diagnostic medical services intended to keep members from
while the latter only undertake to indemnify an insured for medical developing medical conditions or diseases.30 As an HMO, it is its
expenses up to, but not beyond, the schedule of rates contained in obligation to maintain the good health of its members. Accordingly,
the policy. its health care programs are designed to prevent or to minimize
thepossibility of any assumption of risk on its part. Thus, its
x x x           x x x          x x x undertaking under its agreements is not to indemnify its members
against any loss or damage arising from a medical condition but, on
The primary purpose of a medical service corporation, however, is an the contrary, to provide the health and medical services needed to
undertaking to provide physicians who will render services to prevent such loss or damage.31
subscribers on a prepaid basis. Hence, if there are no physicians
participating in the medical service corporation’s plan, not only Overall, petitioner appears to provide insurance-type benefits to its
will the subscribers be deprived of the protection which they members (with respect to its curative medical services), but these are
might reasonably have expected would be provided, but the incidental to the principal activity of providing them medical care. The
corporation will, in effect, be doing business solely as a health "insurance-like" aspect of petitioner’s business is miniscule compared
and accident indemnity insurer without having qualified as such to its noninsurance activities. Therefore, since it substantially provides
and rendering itself subject to the more stringent financial health care services rather than insurance services, it cannot be
requirements of the General Insurance Laws…. considered as being in the insurance business.

A participating provider of health care services is one who agrees in It is important to emphasize that, in adopting the "principal purpose
writing to render health care services to or for persons covered by a test" used in the above-quoted U.S. cases, we are not saying that
contract issued by health service corporation in return for which the petitioner’s operations are identical in every respect to those of the
health service corporation agrees to make payment directly to HMOs or health providers which were parties to those cases. What
the participating provider.28 (Emphasis supplied) we are stating is that, for the purpose of determining what "doing an
insurance business" means, we have to scrutinize the operations of
Consequently, the mere presence of risk would be insufficient to the business as a whole and not its mere components. This is of
override the primary purpose of the business to provide medical course only prudent and appropriate, taking into account the
services as needed, with payment made directly to the provider of burdensome and strict laws, rules and regulations applicable to
these services.29 In short, even if petitioner assumes the risk of paying insurers and other entities engaged in the insurance business.
the cost of these services even if significantly more than what the Moreover, we are also not unmindful that there are other American
member has prepaid, it nevertheless cannot be considered as being authorities who have found particular HMOs to be actually engaged in
engaged in the insurance business. insurance activities.32

By the same token, any indemnification resulting from the payment for Lastly, it is significant that petitioner, as an HMO, is not part of the
services rendered in case of emergency by non-participating health insurance industry. This is evident from the fact that it is not
providers would still be incidental to petitioner’s purpose of providing supervised by the Insurance Commission but by the Department of
and arranging for health care services and does not transform it into Health.33 In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the emergency or his availment of so-called "out-patient services"
insurance business. This determination of the commissioner must be (including physical examination, x-ray and laboratory tests, medical
accorded great weight. It is well-settled that the interpretation of an consultations, vaccine administration and family planning counseling)
administrative agency which is tasked to implement a statute is is the contingent event which gives rise to liability on the part of the
accorded great respect and ordinarily controls the interpretation of member. In case of exposure of the member to liability, he would be
laws by the courts. The reason behind this rule was explained entitled to indemnification by petitioner.
in Nestle Philippines, Inc. v. Court of Appeals:34
Furthermore, the fact that petitioner must relieve its member from
The rationale for this rule relates not only to the emergence of the liability by paying for expenses arising from the stipulated
multifarious needs of a modern or modernizing society and the contingencies belies its claim that its services are prepaid. The
establishment of diverse administrative agencies for addressing and expenses to be incurred by each member cannot be predicted
satisfying those needs; it also relates to the accumulation of beforehand, if they can be predicted at all. Petitioner assumes the risk
experience and growth of specialized capabilities by the of paying for the costs of the services even if they are significantly and
administrative agency charged with implementing a particular statute. substantially more than what the member has "prepaid." Petitioner
In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the does not bear the costs alone but distributes or spreads them out
Court stressed that executive officials are presumed to have among a large group of persons bearing a similar risk, that is, among
familiarized themselves with all the considerations pertinent to the all the other members of the health care program. This is insurance.37
meaning and purpose of the law, and to have formed an independent,
conscientious and competent expert opinion thereon. The courts give We reconsider. We shall quote once again the pertinent portion of
much weight to the government agency officials charged with the Section 185:
implementation of the law, their competence, expertness, experience
and informed judgment, and the fact that they frequently are the Section 185. Stamp tax on fidelity bonds and other insurance policies.
drafters of the law they interpret.36 – On all policies of insurance or bonds or obligations of the
nature of indemnity for loss, damage, or liability made or renewed
A Health Care Agreement Is Not An Insurance Contract by any person, association or company or corporation transacting the
Contemplated Under Section 185 Of The NIRC of 1997 business of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of
Section 185 states that DST is imposed on "all policies of insurance… insurance (except life, marine, inland, and fire insurance), xxxx
or obligations of the nature of indemnity for loss, damage, or (Emphasis supplied)
liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are In construing this provision, we should be guided by the principle that
therefore insurance contracts: tax statutes are strictly construed against the taxing authority. 38 This is
because taxation is a destructive power which interferes with the
It is … incorrect to say that the health care agreement is not based on personal and property rights of the people and takes from them a
loss or damage because, under the said agreement, petitioner portion of their property for the support of the government. 39 Hence,
assumes the liability and indemnifies its member for hospital, medical tax laws may not be extended by implication beyond the clear import
and related expenses (such as professional fees of physicians). The of their language, nor their operation enlarged so as to embrace
term "loss or damage" is broad enough to cover the monetary matters not specifically provided.40
expense or liability a member will incur in case of illness or injury.
We are aware that, in Blue Cross and Philamcare, the Court
Under the health care agreement, the rendition of hospital, medical pronounced that a health care agreement is in the nature of non-life
and professional services to the member in case of sickness, injury or insurance, which is primarily a contract of indemnity. However, those
cases did not involve the interpretation of a tax provision. Instead, clients in all suits for or against them, is not engaged in the insurance
they dealt with the liability of a health service provider to a member business. Its contracts are simply for the purpose of rendering
under the terms of their health care agreement. Such contracts, as personal services. On the other hand, a contract by which a
contracts of adhesion, are liberally interpreted in favor of the member corporation, in consideration of a stipulated amount, agrees at its own
and strictly against the HMO. For this reason, we reconsider our ruling expense to defend a physician against all suits for damages for
that Blue Cross and Philamcare are applicable here. malpractice is one of insurance, and the corporation will be deemed
as engaged in the business of insurance. Unlike the lawyer’s retainer
Section 2 (1) of the Insurance Code defines a contract of insurance as contract, the essential purpose of such a contract is not to render
an agreement whereby one undertakes for a consideration to personal services, but to indemnify against loss and damage resulting
indemnify another against loss, damage or liability arising from an from the defense of actions for malpractice.42 (Emphasis supplied)
unknown or contingent event. An insurance contract exists where the
following elements concur: Second. Not all the necessary elements of a contract of insurance are
present in petitioner’s agreements. To begin with, there is no loss,
1. The insured has an insurable interest; damage or liability on the part of the member that should be
indemnified by petitioner as an HMO. Under the agreement, the
2. The insured is subject to a risk of loss by the happening of member pays petitioner a predetermined consideration in exchange
the designed peril; for the hospital, medical and professional services rendered by the
petitioner’s physician or affiliated physician to him. In case of
3. The insurer assumes the risk; availment by a member of the benefits under the agreement,
petitioner does not reimburse or indemnify the member as the latter
4. Such assumption of risk is part of a general scheme to does not pay any third party. Instead, it is the petitioner who pays the
distribute actual losses among a large group of persons participating physicians and other health care providers for the
bearing a similar risk and services rendered at pre-agreed rates. The member does not make
any such payment.
5. In consideration of the insurer’s promise, the insured pays a
premium.41 In other words, there is nothing in petitioner's agreements that gives
rise to a monetary liability on the part of the member to any third
party-provider of medical services which might in turn necessitate
Do the agreements between petitioner and its members possess all
indemnification from petitioner. The terms "indemnify" or "indemnity"
these elements? They do not.
presuppose that a liability or claim has already been incurred. There is
no indemnity precisely because the member merely avails of medical
First. In our jurisdiction, a commentator of our insurance laws has services to be paid or already paid in advance at a pre-agreed price
pointed out that, even if a contract contains all the elements of an under the agreements.
insurance contract, if its primary purpose is the rendering of service, it
is not a contract of insurance:
Third. According to the agreement, a member can take advantage of
the bulk of the benefits anytime, e.g. laboratory services, x-ray,
It does not necessarily follow however, that a contract containing all routine annual physical examination and consultations, vaccine
the four elements mentioned above would be an insurance administration as well as family planning counseling, even in the
contract. The primary purpose of the parties in making the absence of any peril, loss or damage on his or her part.
contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients whereby in
Fourth. In case of emergency, petitioner is obliged to reimburse the
consideration of periodical payments, it promises to represent such
member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services There Was No Legislative Intent To Impose DST On Health Care
available. The assumption of the expense by petitioner is not confined Agreements Of HMOs
to the happening of a contingency but includes incidents even in the
absence of illness or injury. Furthermore, militating in convincing fashion against the imposition of
DST on petitioner’s health care agreements under Section 185 of the
In Michigan Podiatric Medical Association v. National Foot Care NIRC of 1997 is the provision’s legislative history. The text of Section
Program, Inc.,43 although the health care contracts called for the 185 came into U.S. law as early as 1904 when HMOs and health care
defendant to partially reimburse a subscriber for treatment received agreements were not even in existence in this jurisdiction. It was
from a non-designated doctor, this did not make defendant an insurer. imposed under Section 116, Article XI of Act No. 1189 (otherwise
Citing Jordan, the Court determined that "the primary activity of the known as the "Internal Revenue Law of 1904")46enacted on July 2,
defendant (was) the provision of podiatric services to subscribers in 1904 and became effective on August 1, 1904. Except for the rate of
consideration of prepayment for such services."44 Since indemnity of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the
the insured was not the focal point of the agreement but the extension pertinent portion of Section 116, to wit:
of medical services to the member at an affordable cost, it did not
partake of the nature of a contract of insurance. ARTICLE XI
Stamp Taxes on Specified Objects
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 Section 116. There shall be levied, collected, and paid for and in
anyone who undertakes a contractual obligation always bears a respect to the several bonds, debentures, or certificates of stock and
certain degree of financial risk. Consequently, there is a need to indebtedness, and other documents, instruments, matters, and things
distinguish prepaid service contracts (like those of petitioner) from the mentioned and described in this section, or for or in respect to the
usual insurance contracts. vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or
Indeed, petitioner, as an HMO, undertakes a business risk when it persons who shall make, sign, or issue the same, on and after
offers to provide health services: the risk that it might fail to earn a January first, nineteen hundred and five, the several taxes following:
reasonable return on its investment. But it is not the risk of the type
peculiar only to insurance companies. Insurance risk, also known as x x x           x x x          x x x
actuarial risk, is the risk that the cost of insurance claims might be
higher than the premiums paid. The amount of premium is calculated Third xxx (c) on all policies of insurance or bond or obligation of
on the basis of assumptions made relative to the insured.45 the nature of indemnity for loss, damage, or liability made or
renewed by any person, association, company, or corporation
However, assuming that petitioner’s commitment to provide medical transacting the business of accident, fidelity, employer’s liability,
services to its members can be construed as an acceptance of the plate glass, steam boiler, burglar, elevator, automatic sprinkle, or
risk that it will shell out more than the prepaid fees, it still will not other branch of insurance (except life, marine, inland, and fire
qualify as an insurance contract because petitioner’s objective is to insurance) xxxx (Emphasis supplied)
provide medical services at reduced cost, not to distribute risk like an
insurer. On February 27, 1914, Act No. 2339 (the Internal Revenue Law of
1914) was enacted revising and consolidating the laws relating to
In sum, an examination of petitioner’s agreements with its members internal revenue. The aforecited pertinent portion of Section 116,
leads us to conclude that it is not an insurance contract within the Article XI of Act No. 1189 was completely reproduced as Section 30
context of our Insurance Code. (l), Article III of Act No. 2339. The very detailed and exclusive
enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was We can clearly see from these two histories (of the DST on the one
again reproduced as Section 1604 (l), Article IV of Act No. 2657 hand and HMOs on the other) that when the law imposing the DST
(Administrative Code). Upon its amendment on March 10, 1917, the was first passed, HMOs were yet unknown in the Philippines.
pertinent DST provision became Section 1449 (l) of Act No. 2711, However, when the various amendments to the DST law were
otherwise known as the Administrative Code of 1917. enacted, they were already in existence in the Philippines and the
term had in fact already been defined by RA 7875. If it had been the
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act intent of the legislature to impose DST on health care agreements, it
No. 466 (the NIRC of 1939), which codified all the internal revenue could have done so in clear and categorical terms. It had many
laws of the Philippines. In an amendment introduced by RA 40 on opportunities to do so. But it did not. The fact that the NIRC contained
October 1, 1946, the DST rate was increased but the provision no specific provision on the DST liability of health care agreements of
remained substantially the same. HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner
Thereafter, on June 3, 1977, the same provision with the same DST was assessed its DST liability only on January 27, 2000, after
rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. more than a decade in the business as an HMO.50
Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.1avvphi1 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
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section were never, at any time, recognized as insurance contracts or
234 of the NIRC of 1977 was renumbered as Section 198. And under deemed engaged in the business of insurance within the context of
Section 23 of EO47 273 dated July 25, 1987, it was again renumbered the provision.
and became Section 185.
The Power To Tax Is Not The Power To Destroy
On December 23, 1993, under RA 7660, Section 185 was amended
but, again, only with respect to the rate of tax. As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so
Notwithstanding the comprehensive amendment of the NIRC of 1977 that security against its abuse is to be found only in the responsibility
by RA 8424 (or the NIRC of 1997), the subject legal provision was of the legislature which imposes the tax on the constituency who is to
retained as the present Section 185. In 2004, amendments to the DST pay it.51 So potent indeed is the power that it was once opined that
provisions were introduced by RA 924348 but Section 185 was "the power to tax involves the power to destroy."52
untouched.
Petitioner claims that the assessed DST to date which amounts to
On the other hand, the concept of an HMO was introduced in the ₱376 million53 is way beyond its net worth of ₱259
Philippines with the formation of Bancom Health Care Corporation in million.54 Respondent never disputed these assertions. Given the
1974. The same pioneer HMO was later reorganized and renamed realities on the ground, imposing the DST on petitioner would be
Integrated Health Care Services, Inc. (or Intercare). However, there highly oppressive. It is not the purpose of the government to throttle
are those who claim that Health Maintenance, Inc. is the HMO private business. On the contrary, the government ought to encourage
industry pioneer, having set foot in the Philippines as early as 1965 private enterprise.55 Petitioner, just like any concern organized for a
and having been formally incorporated in 1991. Afterwards, HMOs lawful economic activity, has a right to maintain a legitimate
proliferated quickly and currently, there are 36 registered HMOs with a business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
total enrollment of more than 2 million.49
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally Furthermore, we held in a recent case that DST is one of the taxes
and uniformly, lest the tax collector kill the "hen that lays the golden covered by the tax amnesty program under RA 9480. 63 There is no
egg."58 other conclusion to draw than that petitioner’s liability for DST for the
taxable years 1996 and 1997 was totally extinguished by its availment
Legitimate enterprises enjoy the constitutional protection not to be of the tax amnesty under RA 9480.
taxed out of existence. Incurring losses because of a tax imposition
may be an acceptable consequence but killing the business of an Is The Court Bound By A Minute Resolution In Another Case?
entity is another matter and should not be allowed. It is counter-
productive and ultimately subversive of the nation’s thrust towards a Petitioner raises another interesting issue in its motion for
better economy which will ultimately benefit the majority of our reconsideration: whether this Court is bound by the ruling of the
people.59 CA64 in CIR v. Philippine National Bank65 that a health care agreement
of Philamcare Health Systems is not an insurance contract for
Petitioner’s Tax Liability Was Extinguished Under The Provisions purposes of the DST.
Of RA 9840
In support of its argument, petitioner cites the August 29, 2001 minute
Petitioner asserts that, regardless of the arguments, the DST resolution of this Court dismissing the appeal in Philippine National
assessment for taxable years 1996 and 1997 became moot and Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R.
academic60 when it availed of the tax amnesty under RA 9480 on No. 148680 by minute resolution was a judgment on the merits;
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net hence, the Court should apply the CA ruling there that a health care
worth as of the year ended December 31, 2005 and complied with all agreement is not an insurance contract.
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 It is true that, although contained in a minute resolution, our dismissal
thereto, and the appurtenant civil, criminal or administrative penalties of the petition was a disposition of the merits of the case. When we
under the 1997 NIRC, as amended, arising from the failure to pay any dismissed the petition, we effectively affirmed the CA ruling being
and all internal revenue taxes for taxable year 2005 and prior years.61 questioned. As a result, our ruling in that case has already become
final.67 When a minute resolution denies or dismisses a petition for
Far from disagreeing with petitioner, respondent manifested in its failure to comply with formal and substantive requirements, the
memorandum: challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained.68 But what is its effect on other
Section 6 of [RA 9840] provides that availment of tax amnesty entitles cases?
a taxpayer to immunity from payment of the tax involved, including the
civil, criminal, or administrative penalties provided under the 1997 With respect to the same subject matter and the same issues
[NIRC], for tax liabilities arising in 2005 and the preceding years. concerning the same parties, it constitutes res judicata.69 However, if
other parties or another subject matter (even with the same parties
In view of petitioner’s availment of the benefits of [RA 9840], and and issues) is involved, the minute resolution is not binding precedent.
without conceding the merits of this case as discussed Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous
above, respondent concedes that such tax amnesty extinguishes case, CIR v. Baier-Nickel71 involving the same parties and the
the tax liabilities of petitioner. This admission, however, is not same issues, was previously disposed of by the Court thru a minute
meant to preclude a revocation of the amnesty granted in case it is resolution dated February 17, 2003 sustaining the ruling of the CA.
found to have been granted under circumstances amounting to tax Nonetheless, the Court ruled that the previous case "ha(d) no
fraud under Section 10 of said amnesty law.62 (Emphasis supplied) bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of about by a fluctuating economy. Accordingly, they play an important
different taxable years.72 role in society as partners of the State in achieving its constitutional
mandate of providing its citizens with affordable health services.
Besides, there are substantial, not simply formal, distinctions between
a minute resolution and a decision. The constitutional requirement The rate of DST under Section 185 is equivalent to 12.5% of the
under the first paragraph of Section 14, Article VIII of the Constitution premium charged.74 Its imposition will elevate the cost of health care
that the facts and the law on which the judgment is based must be services. This will in turn necessitate an increase in the membership
expressed clearly and distinctly applies only to decisions, not to fees, resulting in either placing health services beyond the reach of
minute resolutions. A minute resolution is signed only by the clerk of the ordinary wage earner or driving the industry to the ground. At the
court by authority of the justices, unlike a decision. It does not require end of the day, neither side wins, considering the indispensability of
the certification of the Chief Justice. Moreover, unlike decisions, the services offered by HMOs.
minute resolutions are not published in the Philippine Reports. Finally,
the proviso of Section 4(3) of Article VIII speaks of a WHEREFORE, the motion for reconsideration is GRANTED. The
decision.73Indeed, as a rule, this Court lays down doctrines or August 16, 2004 decision of the Court of Appeals in CA-G.R. SP
principles of law which constitute binding precedent in a decision duly No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
signed by the members of the Court and certified by the Chief Justice. deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to
Accordingly, since petitioner was not a party in G.R. No. 148680 and desist from collecting the said tax.
since petitioner’s liability for DST on its health care agreement was
not the subject matter of G.R. No. 148680, petitioner cannot No costs.
successfully invoke the minute resolution in that case (which is not
even binding precedent) in its favor. Nonetheless, in view of the SO ORDERED.
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