Insurance Case Digest: Philippine Health Care Providers, Inc. v. CIR (2009)

G.R. No. 167330 September 18, 2009

Lessons Applicable: Elements (Insurance)

FACTS:

Philippine Health Care Providers, Inc. is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.
January 27, 2000: Commissioner of Internal Revenue (CIR) sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18

Petitioner protested the assessment in a letter dated February 23, 2000.
CIR did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.

CTA: PARTIALLY GRANTED

to pay VAT
DST assessment CANCELLED AND SET ASIDE

CIR: health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code
CA: health care agreement was in the nature of a non-life insurance contract subject to DST
Court Affirmed CA

ISSUE:

W/N the Philippine Health Care Providers, Inc (HMO) was engaged in the business of insurance during the pertinent taxable years - NO
W/N the Philippine Health Care Providers, Inc enters into an insurance contract - NO

HELD: motion for reconsideration is GRANTED

1. NO

P.D. 612 Insurance Code

Sec. 2 (2)

(2) The term "doing an insurance business" or "transacting an insurance business", within the meaning of this Code, shall include:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;

(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business

2. NO

basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy
A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider

any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioner’s purpose of providing and arranging for health care services and does not transform it into an insurer.

As an HMO, it is its obligation to maintain the good health of its members

its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business.
principal purpose test

purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components

letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: - NOT present
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.

no indemnity
member can take advantage of the bulk of the benefits anytime even in the absence of any peril, loss or damage on his or her part.
assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury

Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance

HMO, undertakes a business risk when it offers to provide health services. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.
In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance. The primary purpose of the parties in making the contract may negate the existence of an insurance contract.
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