Republic of the PhilippinesSUPREME COURTManila

FRST DVSON
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs.COURT OF
APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, nc. n the
standard application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or
peptic ulcer? (f Yes, give details).
1
The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondent's husband was entitled to avail
of hospitalization benefits, whether ordinary or emergency, listed therein. He
was also entitled to avail of "out-patient benefits" such as annual physical
examinations, preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June
1, 1990. The amount of coverage was increased to a maximum sum of
P75,000.00 per disability.
2
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning
March 9, 1990. While her husband was in the hospital, respondent tried to
claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void. According
to petitioner, there was a concealment regarding Ernani's medical history.
Doctors at the MMC allegedly discovered at the time of Ernani's confinement
that he was hypertensive, diabetic and asthmatic, contrary to his answer in
the application form. Thus, respondent paid the hospitalization expenses
herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a
physical therapist at home. Later, he was admitted at the Chinese General
Hospital. Due to financial difficulties, however, respondent brought her
husband home again. n the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the
Chinese General Hospital where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of
Manila, Branch 44, an action for damages against petitioner and its
president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-
53795. She asked for reimbursement of her expenses plus moral damages
and attorney's fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor
of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of
the late Ernani Trinos in the amount of P76,000.00 plus interest, until the
amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00
to plaintiff;
3. Defendants to pay the reduced amount of

P10,000.00 as exemplary
damages to plaintiff;
4. Defendants to pay attorney's fees of P20,000.00, plus costs of suit.
SO ORDERED.
3
On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente.
4
Petitioner's motion for reconsideration was denied.
5
Hence, petitioner
brought the instant petition for review, raising the primary argument that a
health care agreement is not an insurance contract; hence the
"incontestability clause" under the nsurance Code
6
does not
apply.1wphi1.nt
Petitioner argues that the agreement grants "living benefits," such as
medical check-ups and hospitalization which a member may immediately
enjoy so long as he is alive upon effectivity of the agreement until its
expiration one-year thereafter. Petitioner also points out that only medical
and hospitalization benefits are given under the agreement without any
indemnification, unlike in an insurance contract where the insured is
indemnified for his loss. Moreover, since Health Care Agreements are only
for a period of one year, as compared to insurance contracts which last
longer,
7
petitioner argues that the incontestability clause does not apply, as
the same requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the
nsurance Commission, but a Health Maintenance Organization under the
authority of the Department of Health.
Section 2 (1) of the nsurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent
event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated
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. n consideration of the insurer's promise, the insured pays a premium.
8
Section 3 of the nsurance Code states that any contingent or unknown
event, whether past or future, which may damnify a person having an
insurable interest against him, may be insured against. Every person has an
insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
n the case at bar, the insurable interest of respondent's husband in
obtaining the health care agreement was his own health. The health care
agreement was in the nature of non-life insurance, which is primarily a
contract of indemnity.
9
Once the member incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingent, the
health care provider must pay for the same to the extent agreed upon under
the contract.
Petitioner argues that respondent's husband concealed a material fact in his
application. t appears that in the application for health coverage, petitioners
required respondent's husband to sign an express authorization for any
person, organization or entity that has any record or knowledge of his health
to furnish any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination.
10
Specifically, the
Health Care Agreement signed by respondent's husband states:
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete
and true and bind all parties in interest under the Agreement herein applied
for, that there shall be no contract of health care coverage unless and until
an Agreement is issued on this application and the full Membership Fee
according to the mode of payment applied for is actually paid during the
lifetime and good health of proposed Members; that no information acquired
by any Representative of PhilamCare shall be binding upon PhilamCare
unless set out in writing in the application; that any physician is, by these
presents, expressly authorized to disclose or give testimony at anytime
relative to any information acquired by him in his professional capacity upon
any question affecting the eligibility for health care coverage of the Proposed
Members and that the acceptance of any Agreement issued on this
application shall be a ratification of any correction in or addition to this
application as stated in the space for Home Office Endorsement.
11
(Underscoring ours)
n addition to the above condition, petitioner additionally required the
applicant for authorization to inquire about the applicant's medical history,
thus:
hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare
Health Systems, nc. any and all information relative to any hospitalization,
consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage
only. A photographic copy of this authorization shall be as valid as the
original.
12
(Underscoring ours)
Petitioner cannot rely on the stipulation regarding "nvalidation of agreement"
which reads:
Failure to disclose or misrepresentation of any material information by the
member in the application or medical examination, whether intentional or
unintentional, shall automatically invalidate the Agreement from the very
beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is
deemed material if its revelation would have resulted in the declination of the
applicant by Philamcare or the assessment of a higher Membership Fee for
the benefit or benefits applied for.
13
The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather
than fact, especially coming from respondent's husband who was not a
medical doctor. Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid a policy even
though they are untrue.
14
Thus,
(A)lthough false, a representation of the expectation, intention, belief,
opinion, or judgment of the insured will not avoid the policy if there is no
actual fraud in inducing the acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the rule although the statement is
material to the risk, if the statement is obviously of the foregoing character,
since in such case the insurer is not justified in relying upon such statement,
but is obligated to make further inquiry. There is a clear distinction between
such a case and one in which the insured is fraudulently and intentionally
states to be true, as a matter of expectation or belief, that which he then
knows, to be actually untrue, or the impossibility of which is shown by the
facts within his knowledge, since in such case the intent to deceive the
insurer is obvious and amounts to actual fraud.
15
(Underscoring ours)
The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract.
16
Concealment as a defense for
the health care provider or insurer to avoid liability is an affirmative defense
and the duty to establish such defense by satisfactory and convincing
evidence rests upon the provider or insurer. n any case, with or without the
authority to investigate, petitioner is liable for claims made under the
contract. Having assumed a responsibility under the agreement, petitioner is
bound to answer the same to the extent agreed upon. n the end, the liability
of the health care provider attaches once the member is hospitalized for the
disease or injury covered by the agreement or whenever he avails of the
covered benefits which he has prepaid.
Under Section 27 of the nsurance Code, "a concealment entitles the injured
party to rescind a contract of insurance." The right to rescind should be
exercised previous to the commencement of an action on the contract.
17
n
this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following
conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy
of one or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown
in the policy;
4. Must state the grounds relied upon provided in Section 64 of the
nsurance Code and upon request of insured, to furnish facts on which
cancellation is based.
18
None of the above pre-conditions was fulfilled in this case. When the terms
of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his
obligation.
19
Being a contract of adhesion, the terms of an insurance contract
are to be construed strictly against the party which prepared the contract
the insurer.
20
By reason of the exclusive control of the insurance company
over the terms and phraseology of the insurance contract, ambiguity must be
strictly interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture.
21
This is equally applicable to Health Care
Agreements. The phraseology used in medical or hospital service contracts,
such as the one at bar, must be liberally construed in favor of the subscriber,
and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses
of doubtful import should be strictly construed against the provider.
22
Anent the incontestability of the membership of respondent's husband, we
quote with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems nc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
lie.
23
Finally, petitioner alleges that respondent was not the legal wife of the
deceased member considering that at the time of their marriage, the
deceased was previously married to another woman who was still alive. The
health care agreement is in the nature of a contract of indemnity. Hence,
payment should be made to the party who incurred the expenses. t is not
controverted that respondent paid all the hospital and medical expenses.
She is therefore entitled to reimbursement. The records adequately prove
the expenses incurred by respondent for the deceased's hospitalization,
medication and the professional fees of the attending physicians.
24
WHEREFORE, in view of the foregoing, the petition is DENIED. The
assailed decision of the Court of Appeals dated December 14, 1995 is
AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Puno, and Kapunan, JJ., concur.
Footnote
1
Record, p. 28.
2
Exhibit "4", Record, p. 156.
3
Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp.
134-135.
4
Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima,
concurred in by Associate Justices Fermin A. Martin, Jr. and Conchita Carpio
Morales; Rollo, p. 45.
5
Resolution dated July 23, 1996; Rollo, p. 48.
6
Section 48 of P.D. No. 1460 otherwise known as the nsurance Code.
7
Petition, pp. 13-14; Rollo, pp. 22-23.
8
See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines,
vol. 2, 1986 ed. p. 6.
9
Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).
10
Record, p. 28.
11
Ibid.
12
Ibid.
13
Ibid., p. 13.
14
Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.
15
Herrick v. Union Mut. Fire ns. Co., 48 Me 558; Bryant v. Modern
Woodmen of America, supra; Boutelle v. Westchester Fire ns. Co., 51 Vt 4
cited in 43 Am Jur 2d 1016.
16
Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan
Zee v. Asian Crusader Life Assurance Corp., 122 SCRA 461
[1983].1wphi1.nt
17
Section 48, nsurance Code.
18
Malayan nsurance v. Cruz Arnaldo, 154 SCRA 672 [1987].
19
Heirs of ldefonso Cosculluela, Sr. v. Rico General nsurance Corporation,
179 SCRA 511 [1989].
20
Landicho v. GSS, 44 SCRA 7 [1972]; Western Guaranty Company v.
Court of Appeals, 187 SCRA 652 [1990].
21
44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna nsurance Co. v.
Rhodes, 170 F2d 111; nsurance Co. v. Norton, 96 U.S. 234, 24 L ed 689;
Pfeiffer v. Missouri State Life ns. Co., 174 Ark 783, 297 SW 847.
22
See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109,
66 ALR3d 1196; Hunt v. Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am
Jur 2d 289.
23
Record, p. 257.
24
Exhibit "B", Exhibits "D" to "D-7"; Record, pp. 88-97
G.R. No. 169737 February 12, 2008
BLUE CROSS HEALTH CARE, INC., petitioner, vs.NEOMI
*
and DANILO
OLIVARES, respondents.
D E C I S I O N
CORONA, J.:
This is a petition for review on certiorari
1
of a decision
2
and resolution
3
of the
Court of Appeals (CA) dated July 29, 2005 and September 21, 2005,
respectively, in CA-G.R. SP No. 84163 which affirmed the decision of the
Regional Trial Court (RTC), Makati City, Branch 61 dated February 2, 2004
in Civil Case No. 03-1153,
4
which in turn reversed the decision of the
Metropolitan Trial Court (MeTC), Makati City, Branch 66 dated August 5,
2003 in Civil Case No. 80867.
5
Respondent Neomi T. Olivares applied for a health care program with
petitioner Blue Cross Health Care, nc., a health maintenance firm. For the
period October 16, 2002 to October 15, 2003,
6
she paid the amount of
P11,117. For the same period, she also availed of the additional service of
limitless consultations for an additional amount of P1,000. She paid these
amounts in full on October 17, 2002. The application was approved on
October 22, 2002. n the health care agreement, ailments due to "pre-
existing conditions" were excluded from the coverage.
7
On November 30, 2002, or barely 38 days from the effectivity of her health
insurance, respondent Neomi suffered a stroke and was admitted at the
Medical City which was one of the hospitals accredited by petitioner. During
her confinement, she underwent several laboratory tests. On December 2,
2002, her attending physician, Dr. Edmundo Saniel,
8
informed her that she
could be discharged from the hospital. She incurred hospital expenses
amounting to P34,217.20. Consequently, she requested from the
representative of petitioner at Medical City a letter of authorization in order to
settle her medical bills. But petitioner refused to issue the letter and
suspended payment pending the submission of a certification from her
attending physician that the stroke she suffered was not caused by a pre-
existing condition.
9
She was discharged from the hospital on December 3, 2002. On December
5, 2002, she demanded that petitioner pay her medical bill. When petitioner
still refused, she and her husband, respondent Danilo Olivares, were
constrained to settle the bill.
10
They thereafter filed a complaint for collection
of sum of money against petitioner in the MeTC on January 8, 2003.
11
n its
answer dated January 24, 2003, petitioner maintained that it had not yet
denied respondents' claim as it was still awaiting Dr. Saniel's report.
n a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent]
Neomi T. Olivares called by phone on January 29, 2003. She stated that she
is invoking patient-physician confidentiality. That she no longer has any
relationship with [petitioner]. And that should not release any medical
information concerning her neurologic status to anyone without her approval.
Hence, the same day instructed my secretary to inform your office thru Ms.
Bernie regarding [respondent's] wishes.
xxx xxx xxx
12
n a decision dated August 5, 2003, the MeTC dismissed the complaint for
lack of cause of action. t held:
xxx the best person to determine whether or not the stroke she suffered was
not caused by "pre-existing conditions" is her attending physician Dr. Saniel
who treated her and conducted the test during her confinement. xxx But
since the evidence on record reveals that it was no less than [respondent
Neomi] herself who prevented her attending physician from issuing the
required certification, petitioner cannot be faulted from suspending payment
of her claim, for until and unless it can be shown from the findings made by
her attending physician that the stroke she suffered was not due to pre-
existing conditions could she demand entitlement to the benefits of her
policy.
13
On appeal, the RTC, in a decision dated February 2, 2004, reversed the
ruling of the MeTC and ordered petitioner to pay respondents the following
amounts: (1) P34,217.20 representing the medical bill in Medical City and
P1,000 as reimbursement for consultation fees, with legal interest from the
filing of the complaint until fully paid; (2) P20,000 as moral damages; (3)
P20,000 as exemplary damages; (4) P20,000 as attorney's fees and (5)
costs of suit.
14
The RTC held that it was the burden of petitioner to prove that
the stroke of respondent Neomi was excluded from the coverage of the
health care program for being caused by a pre-existing condition. t was not
able to discharge that burden.
15
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of
Court in the CA. n a decision promulgated on July 29, 2005, the CA affirmed
the decision of the RTC. t denied reconsideration in a resolution
promulgated on September 21, 2005. Hence this petition which raises the
following issues: (1) whether petitioner was able to prove that respondent
Neomi's stroke was caused by a pre-existing condition and therefore was
excluded from the coverage of the health care agreement and (2) whether it
was liable for moral and exemplary damages and attorney's fees.
The health care agreement defined a "pre-existing condition" as:
x x x a disability which existed before the commencement date of
membership whose natural history can be clinically determined, whether or
not the Member was aware of such illness or condition. Such conditions also
include disabilities existing prior to reinstatement date in the case of lapse of
an Agreement. Notwithstanding, the following disabilities but not to the
exclusion of others are considered pre-existing conditions including their
complications when occurring during the first year of a Member's coverage:
. Tumor of nternal Organs
. Hemorrhoids/Anal Fistula
. Diseased tonsils and sinus conditions requiring surgery
V. Cataract/Glaucoma
V. Pathological Abnormalities of nasal septum or turbinates
V. Goiter and other thyroid disorders
V. Hernia/Benign prostatic hypertrophy
V. Endometriosis
X. Asthma/Chronic Obstructive Lung disease
X. Epilepsy
X. Scholiosis/Herniated disc and other Spinal column abnormalities
X. Tuberculosis
X. Cholecysitis
XV. Gastric or Duodenal ulcer
XV. Hallux valgus
XV. Hypertension and other Cardiovascular diseases
XV. Calculi
XV. Tumors of skin, muscular tissue, bone or any form of blood dyscracias
XX. Diabetes Mellitus
XX. Collagen/Auto-mmune disease
After the Member has been continuously covered for 12 months, this pre-
existing provision shall no longer be applicable except for illnesses
specifically excluded by an endorsement and made part of this Agreement.
16
Under this provision, disabilities which existed before the commencement of
the agreement are excluded from its coverage if they become manifest
within one year from its effectivity. Stated otherwise, petitioner is not liable for
pre-existing conditions if they occur within one year from the time the
agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his
report regarding the medical condition of Neomi. Hence, it contends that the
presumption that evidence willfully suppressed would be adverse if produced
should apply in its favor.
17
Respondents counter that the burden was on petitioner to prove that Neomi's
stroke was excluded from the coverage of their agreement because it was
due to a pre-existing condition. t failed to prove this.
18
We agree with respondents.
n Philamcare Health Systems, Inc. v. CA,
19
we ruled that a health care
agreement is in the nature of a non-life insurance.
20
t is an established rule
in insurance contracts that when their terms contain limitations on liability,
they should be construed strictly against the insurer. These are contracts of
adhesion the terms of which must be interpreted and enforced stringently
against the insurer which prepared the contract. This doctrine is equally
applicable to health care agreements.
21
Petitioner never presented any evidence to prove that respondent Neomi's
stroke was due to a pre-existing condition. t merely speculated that Dr.
Saniel's report would be adverse to Neomi, based on her invocation of the
doctor-patient privilege. This was a disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. The following presumptions are
satisfactory if uncontradicted, but may be contradicted and overcome by
other evidence:
xxx xxx xxx
(e) That evidence willfully suppressed would be adverse if produced.
Suffice it to say that this presumption does not apply if (a) the evidence is at
the disposal of both parties; (b) the suppression was not willful; (c) it is
merely corroborative or cumulative and (d) the suppression is an exercise
of a priviIege.
22
Here, respondents' refusal to present or allow the
presentation of Dr. Saniel's report was justified. t was privileged
communication between physician and patient.
Furthermore, as already stated, limitations of liability on the part of the
insurer or health care provider must be construed in such a way as to
preclude it from evading its obligations. Accordingly, they should be
scrutinized by the courts with "extreme jeaIousy"
23
and "care" and with a
"jaundiced eye."
24
Since petitioner had the burden of proving exception to
liability, it should have made its own assessment of whether respondent
Neomi had a pre-existing condition when it failed to obtain the attending
physician's report. t could not just passively wait for Dr. Saniel's report to
bail it out. The mere reliance on a disputable presumption does not meet the
strict standard required under our jurisprudence.
Next, petitioner argues that it should not be held liable for moral and
exemplary damages, and attorney's fees since it did not act in bad faith in
denying respondent Neomi's claim. t insists that it waited in good faith for Dr.
Saniel's report and that, based on general medical findings, it had
reasonable ground to believe that her stroke was due to a pre-existing
condition, considering it occurred only 38 days after the coverage took
effect.
25
We disagree.
The RTC and CA found that there was a factual basis for the damages
adjudged against petitioner. They found that it was guilty of bad faith in
denying a claim based merely on its own perception that there was a pre-
existing condition:
[Respondents] have sufficiently shown that [they] were forced to engage in a
dispute with [petitioner] over a legitimate claim while [respondent Neomi
was] still experiencing the effects of a stroke and forced to pay for her
medical bills during and after her hospitalization despite being covered by
[petitioner's] health care program, thereby suffering in the process extreme
mental anguish, shock, serious anxiety and great stress. [They] have shown
that because of the refusal of [petitioner] to issue a letter of authorization and
to pay [respondent Neomi's] hospital bills, [they had] to engage the services
of counsel for a fee of P20,000.00. Finally, the refusaI of petitioner to pay
respondent Neomi's biIIs smacks of bad faith, as its refusal [was] merely
based on its own perception that a stroke is a pre-existing condition.
(emphasis supplied)
This is a factual matter binding and conclusive on this Court.
26
We see no
reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision
and September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP
No. 84163 are AFFIRMED.
Treble costs against petitioner.
SO ORDERED.
RENATO C. CORONAAssociate Justice
WE CONCUR:
REYNATO S. PUNOChief JusticeChairperson
ANGELINA SANDOVAL-GUTIERREZAssociate Justice ADOLFO S. AZCUN
TERESITA J. LEONARDO-DE CASTROAssociate Justice
C E R T I F I C A T I O N
Pursuant to Section 13, Article V of the Constitution, certify that the
conclusions in the above decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Court's Division.
REYNATO S. PUNOChief Justice
Footnotes
*
The petition spelled the name of respondent as Noemi Olivares but in the
decision of the Court of Appeals, Neomi was used since she signed as such
in the verification and certificate of non-forum shopping attached to her
complaint.
1
Under Rule 45 of the Rules of Court.
2
Penned by Associate Justice Japar B. Dimaampao and concurred in by
Associate Justices Martin S. Villarama, Jr. and Edgardo F. Sundiam of the
Former Fifteenth Division of the Court of Appeals; rollo, pp. 17-25.
3
d., pp. 27-28.
4
Penned by Judge Romeo F. Barza; id., pp. 38-43.
5
Penned by Judge Perpetua Atal-Pao; id., pp. 44-47.
6
d., p. 178.
7
d., p. 39.
8
d., p. 18.
9
d., p. 39.
10
d., p. 109.
11
d., p. 38.
12
d., p. 29.
13
d., p. 47.
14
d., p. 43.
15
d., p. 42.
16
d., p. 114.
17
d., p. 195.
18
d., p. 214.
19
429 Phil. 82 (2002).
20
d., p. 90.
21
d., pp. 93-94, citations omitted.
22
People v. Andal, 344 Phil. 889, 912 (1997), citing People v. Ducay, G.R.
No. 86939, 2 August 1993, 225 SCRA 1 and People v. Navaja, G.R. No.
104044, 30 March 1993, 220 SCRA 624, 633.
23
DBP Pool of Accredited Insurance Companies v. Radio Mindanao
Network, Inc., G.R. No. 147039, 27 January 2006, 480 SCRA 314, 322,
citing Malayan Insurance Corporation v. Court of Appeals, 336 Phil. 977, 989
(1997).
24
Western Guaranty Corporation v. Court of Appeals, G.R. No. 91666, 20
July 1990, 187 SCRA 652, 659-660, citing Taurus Taxi Co., Inc. v. The
Capital Ins. & Surety Co., Inc., G.R. No. L-23491, 31 July 1968, 24 SCRA
454 and Eagle Star Insurance, Ltd. v. Chia Yu, 96 Phil. 696 (1955).
25
Rollo, pp. 196-198.
26
PAL, Inc. v. CA, 326 Phil. 824, 835 (1996), citations omitted
G.R. No. 167330 June 12, 2008
PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
CORONA, J.:
s a health care agreement in the nature of an insurance contract and
therefore subject to the documentary stamp tax (DST) imposed under
Section 185 of Republic Act 8424 (Tax Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it
affirmatively in its August 16, 2004 decision
1
in CA-G.R. SP No. 70479.
Petitioner Philippine Health Care Providers, nc. believes otherwise and
assails the CA decision in this petition for review under Rule 45 of the Rules
of Court.
Petitioner 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."
2
ndividuals 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.
3
The pertinent part of petitioner's membership or health care agreement
4
provides:
VII BENEFITS
Subject to paragraphs V [on pre-existing medical condition] and X [on
claims for reimbursement] of this Agreement, Members shall have the
following Benefits under this Agreement:
In-Patient Services. n the event that a Member contract[s] sickness or
suffers injury which requires confinement in a participating Hospital[,] the
services or benefits stated below shall be provided to the Member free of
charge, but in no case shall [petitioner] be liable to pay more than
P75,000.00 in benefits with respect to anyone sickness, injury or related
causes. f a member has exhausted such maximum benefits with respect to
a particular sickness, injury or related causes, all accounts in excess of
P75,000.00 shall be borne by the enrollee. t is[,] however, understood that
the payment by [petitioner] of the said maximum in n-Patient Benefits to any
one member shall preclude a subsequent payment of benefits to such
member in respect of an unrelated sickness, injury or related causes
happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those which are used
to dissolve blood clots in the vascular systems (i.e., trombolytic agents)
(f) Anesthesia and its administration
(g) Dressings, plaster casts and other miscellaneous supplies
(h) Laboratory tests, x-rays and other necessary diagnostic services
(i) Transfusion of blood and other blood elements
Condition for in-Patient Care. The provision of the services or benefits
mentioned in the immediately preceding paragraph shall be subject to the
following conditions:
(a) The Hospital Confinement must be approved by [petitioner's] Physician,
Participating Physician or [petitioner's] Medical Coordinator in that Hospital
prior to confinement.
(b) The confinement shall be in a Participating Hospital and the
accommodation shall be in accordance with the Member[']s benefit
classification.
(c) Professional services shall be provided only by the [petitioner's]
Physicians or Participating Physicians.
(d) f discharge from the Hospital has been authorized by [petitioner's]
attending Physician or Participating Physician and the Member shall fail or
refuse to do so, [petitioner] shall not be responsible for any charges incurred
after discharge has been authorized.
Out-Patient Services. A Member is entitled free of charge to the following
services or benefits which shall be rendered or administered either in
[petitioner's] Clinic or in a Participating Hospital under the direction or
supervision of [petitioner's] Physician, Participating Physician or [petitioner's]
Medical Coordinator.
(a) Gold Plan Standard Annual Physical Examination on the anniversary
date of membership, to be done at [petitioner's] designated hospital/clinic, to
wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count
(vi) Urinalysis
(vii) Fasting Blood Sugar (FBS)
(viii) SGPT
(ix) Creatinine
(x) Uric Acid
(xi) Resting Electrocardiogram
(xii) Pap Smear (Optional for women 40 years and above)
(b) Platinum Family Plan/Gold Family Plan and Silver Annual Physical
Examination.
The following tests are to be done as part of the Member[']s Annual check-up
program at [petitioner's] designated clinic, to wit:
1) Routine Physical Examination
2) CBC (Complete Blood Count)
* Hemoglobin * Hematocrit
* Differential * RBC/WBC
3) Chest X-ray
4) Urinalysis
5) Fecalysis
(c) Preventive Health Care, which shall include:
(i) Periodic Monitoring of Health Problems
(ii) Family planning counseling
(iii) Consultation and advices on diet, exercise and other healthy habits
(iv) mmunization but excluding drugs for vaccines used
(d) Out-Patient Care, which shall include:
(i) Consultation, including specialist evaluation
(ii) Treatment of injury or illness
(iii) Necessary x-ray and laboratory examination
(iv) Emergency medicines needed for the immediate
relief of symptoms
(v) Minor surgery not requiring confinement
Emergency Care. Subject to the conditions and limitations in this Agreement
and those specified below, a Member is entitled to receive emergency care
[in case of emergency. For this purpose, all hospitals and all attending
physician(s) in the Emergency Room automatically become accredited. n
participating hospitals, the member shall be entitled to the following services
free of charge: (a) doctor's fees, (b) emergency room fees, (c) medicines
used for immediate relief and during treatment, (d) oxygen, intravenous
fluids and whole blood and human blood products, (e) dressings, casts and
sutures and (f) x-rays, laboratory and diagnostic examinations and other
medical services related to the emergency treatment of the patient.]
5
Provided, however, that in no case shall the total amount payable by
[petitioner] for said Emergency, inclusive of hospital bill and professional
fees, exceed P75,000.00.
f the Member received care in a non-participating hospital, [petitioner] shall
reimburse [him]
6
80% of the hospital bill or the amount of P5,000.00[,]
whichever is lesser, and 50% of the professional fees of non-participating
physicians based on [petitioner's] schedule of fees provided that the total
amount[,] inclusive of hospital bills and professional fee shall not exceed
P5,000.00.
On January 27, 2000, respondent Commissioner of nternal Revenue sent
petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and
interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18. The assessment represented the following:
Value Added Tax (VAT) DST
1996 P 45,767,596.23 P 55,746,352.19
1997 54,738,434.03 68,450,258.73
P 100,506,030.26 P 124,196,610.92
The deficiency DST assessment was imposed on petitioner's health care
agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code which provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. - On
aII poIicies of insurance or bonds or obligations of the nature of
indemnity for Ioss, damage, or IiabiIity made or renewed by any
person, association or company or corporation transacting the
business of accident, fidelity, employer's liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except
Iife, marine, inIand, and fire insurance), and all 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 validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate,
or guaranteeing any mercantile credits, which may be made or renewed by
any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00),
or fractional part thereof, of the premium charged. (emphasis supplied)
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in
the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency
VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision,
7
the dispositive portion of
which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest
from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASDE. Respondent is ORDERED to
DESST from collecting the said DST deficiency tax.
SO ORDERED.
8
Respondent appealed the CTA decision to the CA
9
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.
On August 16, 2004, the CA rendered its decision.
10
t held that petitioner's
health care agreement was in the nature of a non-life insurance contract
subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the
Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and
1997 deficiency documentary stamp tax assessment and ordered petitioner
to desist from collecting the same is REVERSED and SET ASDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and
P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
11
Petitioner moved for reconsideration but the CA denied it. Hence, this
petition.
Petitioner essentially argues that its health care agreement is not a contract
of insurance but a contract for the provision on a prepaid basis of medical
services, including medical check-up, that are not based on loss or damage.
Petitioner also insists that it is not engaged in the insurance business. t is a
health maintenance organization regulated by the Department of Health, not
an insurance company under the jurisdiction of the nsurance Commission.
For these reasons, petitioner asserts that the health care agreement is not
subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships
through the execution of specific instruments.
12
t is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction of
the business.
13
n particular, the DST under Section 185 of the 1997 Tax
Code is imposed on the priviIege of making or renewing any poIicy of
insurance (except Iife, marine, inIand and fire insurance), bond or
obligation in the nature of indemnity for loss, damage, or liability.
Under the law, a contract of insurance is an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event.
14
The event insured
against must be designated in the contract and must either be unknown or
contingent.
15
Petitioner's health care agreement is primarily a contract of indemnity. And in
the recent case of Blue Cross Healthcare, Inc. v. Olivares,
16
this Court ruled
that a health care agreement is in the nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for
the provision of medical services. Petitioner does not actually provide
medical or hospital services but merely arranges for the same
17
and pays for
them up to the stipulated maximum amount of coverage. t is also incorrect
to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related expenses (such as
professional fees of physicians). The term "loss or damage" is broad enough
to cover the monetary expense or liability a member will incur in case of
illness or injury.
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or
emergency or his availment of so-called "out-patient services" (including
physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent
event which gives rise to liability on the part of the member. n case of
exposure of the member to liability, he would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim
that its services are prepaid. The expenses to be incurred by each member
cannot be predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the
other members of the health care program. This is insurance.
Petitioner's health care agreement is substantially similar to that involved in
Philamcare Health Systems, Inc. v. CA.
18
The health care agreement in that
case entitled the subscriber to avail of the hospitalization benefits, whether
ordinary or emergency, listed therein. t also provided for "out-patient
benefits" such as annual physical examinations, preventive health care and
other out-patient services. This Court ruled in Philamcare Health Systems,
Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care
agreement was his own health. The heaIth care agreement was in the
nature of non-Iife insurance, which is primariIy a contract of indemnity.
Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingency, the health care provider
must pay for the same to the extent agreed upon under the contract.
19
(emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care
program in obtaining the health care agreement is his own health. Under the
agreement, petitioner is bound to indemnify any member who incurs
hospital, medical or any other expense arising from sickness, injury or other
stipulated contingency to the extent agreed upon under the contract.
Petitioner's contention that it is a health maintenance organization and not
an insurance company is irrelevant. Contracts between companies like
petitioner and the beneficiaries under their plans are treated as insurance
contracts.
20
Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity, or facility offered at exchanges for the transaction of
the business.
21
It is an excise on the faciIities used in the transaction of
the business, separate and apart from the business itseIf.
22
WHEREFORE, the petition is hereby DENIED. The August 16, 2004
decision of the Court of Appeals in CA-G.R. SP No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and
P68,450,258.73 as deficiency documentary stamp tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000 until full payment thereof.
Costs against petitioner.
SO ORDERED.
Puno, C.J., Chairperson, Carpio, Azcuna, Leonardo-de Castro, JJ., concur.
Footnotes
1
Penned by Associate Justice Marina L. Buzon and concurred in by
Associate Justices Mario L. Guaria and Santiago Javier Ranada (retired)
of the Twelfth Division of the Court of Appeals. Rollo, pp. 49-55.
2
Paragraph 14, Petition for Review on Certiorari. d., p. 17.
3
Paragraph 15, id.
4
d., pp. 132-137.
5
The copy of the membership/health care agreement attached to the petition
had been cut in this portion. Reference was therefore made to petitioner's
description of its member's rights and privileges under the health care
agreement as stated in paragraph 20 of the petition. d., p. 11.
6
The copy of the membership/health care agreement attached to the petition
is blurred in this portion.
7
Penned by Associate Judge (now Associate Justice) Juanito C. Castaeda,
Jr. with Associate Judge Amancio Q. Saga (retired) concurring. Presiding
Judge (now Presiding Justice) Ernesto D. Acosta submitted a concurring and
dissenting opinion wherein he concurred with the cancellation of the
deficiency DST assessment and dissented with the affirmation of the
deficiency VAT assessment. Rollo, pp. 107-131.
8
d. On motion for reconsideration, the CTA set aside the deficiency VAT
assessment. On appeal, the CA affirmed the CTA resolution on the motion
for reconsideration. When the case was elevated to this Court, we affirmed
the CA decision. (See Commissioner of Internal Revenue v. Philippine
Health Care Providers, Inc., G.R. No. 168129, 24 April 2007.)
9
Under RA 9282 which took effect on April 23, 2004, decisions of the CTA
are now appealable to the Supreme Court instead of the Court of Appeals.
10
Supra note 1.
11
d.
12
International Exchange Bank v. Commissioner of Internal Revenue, G.R.
No. 171266, 04 April 4, 2007.
13
Philippine Home Assurance Corporation v. CA, 361 Phil. 368 (1999).
14
Section 2(1), nsurance Code.
15
An unknown event is something which is certain to happen but the time of
its happening is not known, while a contingent event is something which is
not certain to take place. Campos, Maria Clara L., nsurance, 1983 edition,
U.P. Law Center, p. 15.
16
G.R. No. 169737, 12 February 2008.
17
Commissioner of Internal Revenue v. Philippine Health Care Providers,
Inc., supra note 8.
18
429 Phil. 82 (2002).
19
d.
20
Lutsky v. Blue Cross Hosp. Service, Inc. of Missouri, 695 S.W.2d 870
(1985); North Kansas City Memorial Hospital v. Wiley, 385 S.W.2d 218
(Mo.App.1964); Myers v. Kitsip Physicians Service, 78 Wash.2d 286, 474
P.2d 109 (1970).
21
Philippine Home Assurance Corporation v. CA, supra note 13.
22
d.
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
R E S O L U T O N
CORONA, J.:
ARTCLE Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the
people and instill health consciousness among them.
ARTCLE XSocial Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive
approach to health development which shall endeavor to make essential
goods, health and other social services available to all the people at
affordable cost. There shall be priority for the needs of the underprivileged
sick, elderly, disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.
1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, nc.
2
We recall the facts of this case, as follows:
Petitioner 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."
ndividuals 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.
x x x x x x x x x
On January 27, 2000, respondent Commissioner of nternal Revenue [CR]
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. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioner's health care agreement with the members of its health care
program pursuant to Section 185 of the 1997 Tax Code xxxx
x x x x x x x x x
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in
the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency
VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of
which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest
from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASDE. Respondent is ORDERED to
DESST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)]
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.
On August 16, 2004, the CA rendered its decision. t held that petitioner's
health care agreement was in the nature of a non-life insurance contract
subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the
Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and
1997 deficiency documentary stamp tax assessment and ordered petitioner
to desist from collecting the same is REVERSED and SET ASDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and
P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner
filed this case.
x x x x x x x x x
n a decision dated June 12, 2008, the Court denied the petition and affirmed
the CA's decision. We held that petitioner's health care agreement during the
pertinent period was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares
3
and Philamcare
Health Systems, Inc. v. CA.
4
We also ruled that petitioner's contention that it
is a health maintenance 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. Moreover,
DST is not a tax on the business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National nternal Revenue of 1997 is
imposed only on a company engaged in the business of fidelity bonds and
other insurance policies. Petitioner, as an HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank,
affirmed in effect the CA's disposition that health care services are not in the
nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject
to DST is clear, especially in the light of the amendments made in the DST
law in 2002.
(e) Assuming arguendo that petitioner's agreements are contracts of
indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioner's agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance"
mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA
5
9480 for the
taxable year 2005 and all prior years. Therefore, the questioned
assessments on the DST are now rendered moot and academic.
6
Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
n its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 9480
7
(also known as the "Tax Amnesty
Act of 2007") by fully paying the amount of P5,127,149.08 representing 5%
of its net worth as of the year ending December 31, 2005.
8
We find merit in petitioner's motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.
9
t is engaged in the dispensation
of the following medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring of health problems,
family planning counseling, consultation and advices on diet, exercise and
other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial
and therapeutic processes in the event of an injury or sickness on the part of
the enrolled member.
10
ndividuals enrolled in its health care program pay an annual membership
fee. Membership is on a year-to-year basis. The medical services are
dispensed to enrolled members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. t negotiates with such health care practitioners
regarding payment schemes, financing and other procedures for the delivery
of health services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians, i.e. those directly
employed by it
11
or whose services are contracted by it.
12
Petitioner also
provides hospital services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and general nursing
care.
13
f and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers
for the services rendered, at pre-agreed rates.
14
To avail of petitioner's health care programs, the individual members are
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 that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of the health care
services being offered by petitioner at any time.
HeaIth Maintenance Organizations Are Not Engaged In The Insurance
Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an
HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of the business.
15
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or
an insurance company, as this distinction is indispensable in turn to the issue
of whether or not it is liable for DST on its health care agreements.
16
A second hard look at the relevant law and jurisprudence convinces the
Court that the arguments of petitioner are meritorious.
Section 185 of the National nternal Revenue Code of 1997 (NRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On
aII poIicies of insurance or bonds or obligations of the nature of
indemnity for Ioss, damage, or IiabiIity made or renewed by any
person, association or company or corporation transacting the
business of accident, fidelity, employer's liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except
Iife, marine, inIand, and fire insurance), and all 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 validity or legality of any bond or other
obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate,
or guaranteeing any mercantile credits, which may be made or renewed by
any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00),
or fractional part thereof, of the premium charged. (Emphasis supplied)
t is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which
renders every word operative is preferred over that which makes some
words idle and nugatory.
17
This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which gives effect
to the whole of the statute its every word.
18
From the language of Section 185, it is evident that two requisites must
concur before the DST can apply, namely: (1) the document must be a
poIicy of insurance or an obIigation in the nature of indemnity and (2)
the maker shouId be transacting the business of accident, fidelity,
employer's liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health
nsurance Act of 1995"), an HMO is "an entity that provides, offers or
arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium."
19
The payments do not vary with the
extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD
20
1460 (otherwise known as the nsurance Code)
enumerates what constitutes "doing an insurance business" or "transacting
an insurance business:"
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.
n 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 therefore, shall not be
deemed conclusive to show that the making thereof does not constitute the
doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive
effect on our decisions,
21
have determined that HMOs are not in the
insurance business. One test that they have applied is whether the
assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization
or whether they are merely incidental to its business. f these are the
principal objectives, the business is that of insurance. But if they are merely
incidental and service is the principal purpose, then the business is not
insurance.
Applying the "principal object and purpose test,"
22
there is significant
American case law supporting the argument that a corporation (such as an
HMO, whether or not organized for profit), whose main object is to provide
the members of a group with health services, is not engaged in the
insurance business.
The rule was enunciated in Jordan v. Group Health Association
23
wherein the
Court of Appeals of the District of Columbia Circuit held that Group Health
Association should not be considered as engaged in insurance activities
since it was created primarily for the distribution of health care services
rather than the assumption of insurance risk.
xxx Although Group Health's activities may be considered in one aspect as
creating security against loss from illness or accident more truly they
constitute the quantity purchase of well-rounded, continuous medical service
by its members. xxx The functions of such an organization are not
identicaI with those of insurance or indemnity companies. The latter are
concerned primarily, if not exclusively, with risk and the consequences of its
descent, not with service, or its extension in kind, quantity or distribution;
with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned
principaIIy with getting service rendered to its members and doing so
at Iower prices made possibIe by quantity purchasing and economies
in operation. Its primary purpose is to reduce the cost rather than the
risk of medicaI care; to broaden the service to the individuaI in kind
and quantity; to enIarge the number receiving it; to reguIarize it as an
everyday incident of Iiving, Iike purchasing food and cIothing or oiI and
gas, rather than mereIy protecting against the financiaI Ioss caused by
extraordinary and unusuaI occurrences, such as death, disaster at sea,
fire and tornado. t is, in this instance, to take care of colds, ordinary aches
and pains, minor ills and all the temporary bodily discomforts as well as the
more serious and unusual illness. To summarize, the distinctive features
of the cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive features, the
reguIarization of service as weII as payment, the substantiaI reduction
in cost by quantity purchasing in short, getting the medicaI job done
and paid for; not, except incidentaIIy to these features, the
indemnification for cost after the services is rendered. Except the Iast,
these are not distinctive or generaIIy characteristic of the insurance
arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency
that it be needed, and contracting merely to stand its cost when or after it is
rendered.
That an incidental element of risk distribution or assumption may be present
should not outweigh all other factors. f attention is focused only on that
feature, the line between insurance or indemnity and other types of legal
arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or 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 contracts, particularly conditional
sales and contingent service agreements. The faIIacy is in Iooking onIy at
the risk eIement, to the excIusion of aII others present or their
subordination to it. The question turns, not on whether risk is invoIved
or assumed, but on whether that or something eIse to which it is
reIated in the particuIar pIan is its principaI object purpose.
24
(Emphasis
supplied)
n California Physicians' Service v. Garrison,
25
the California court felt that,
after scrutinizing the plan of operation as a whole of the corporation, it was
service rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is
not engaged in the insurance business. Absence or presence of
assumption of risk or periI is not the soIe test to be appIied in
determining its status. The question, more broadIy, is whether, Iooking
at the pIan of operation as a whoIe, 'service' rather than 'indemnity' is
its principaI object and purpose. Certainly the objects and purposes of the
corporation organized and maintained by the California physicians have a
wide scope in the field of social service. ProbabIy there is no more
impeIIing need than that of adequate medicaI care on a voIuntary, Iow-
cost basis for persons of smaII income. The medicaI profession
unitedIy is endeavoring to meet that need. UnquestionabIy this is
'service' of a high order and not 'indemnity.'
26
(Emphasis supplied)
American courts have pointed out that the main difference between an HMO
and an insurance company is that HMOs undertake to provide or arrange for
the provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Somerset Orthopedic
Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey
27
is
clear on this point:
The 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.
x x x x x x x x x
The primary purpose of a medical service corporation, however, is an
undertaking to provide physicians who will render services to subscribers on
a prepaid basis. Hence, if there are no physicians participating in the
medicaI service corporation's pIan, not onIy wiII the subscribers be
deprived of the protection which they might reasonabIy have expected
wouId be provided, but the corporation wiII, in effect, be doing
business soIeIy as a heaIth and accident indemnity insurer without
having qualified as such and rendering itself subject to the more stringent
financial requirements of the General nsurance Laws..
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 heaIth service
corporation agrees to make payment directIy to the participating
provider.
28
(Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the
primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services.
29
n short, even if
petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot
be considered as being engaged in the insurance business.
By the same token, 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.
To fulfill its obligations to its members under the agreements, petitioner is
required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.
n fact, a substantial portion of petitioner's services covers preventive and
diagnostic medical services intended to keep members from developing
medical conditions or diseases.
30
As an HMO, it is its obligation to maintain
the good health of its members. AccordingIy, its heaIth care programs are
designed to prevent or to minimize the possibiIity of any assumption of
risk on its part. Thus, 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.
31
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.
t 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
operations are identical in every respect to those of the HMOs or health
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 and not its mere
components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we
are also not unmindful that there are other American authorities who have
found particular HMOs to be actually engaged in insurance activities.
32
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 by the
nsurance Commission but by the Department of Health.
33
n fact, in a letter
dated September 3, 2000, the nsurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of
the commissioner must be accorded great weight. t is well-settled that the
interpretation of an administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:
34
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the
establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience and
growth of specialized capabilities by the administrative agency charged with
implementing a particular statute. n Asturias Sugar Central, Inc. vs.
Commissioner of Customs,
35
the Court stressed that executive officials are
presumed to have familiarized themselves with all 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 officials charged with the
implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the
law they interpret.
36
A HeaIth Care Agreement Is Not An Insurance Contract ContempIated
Under Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance. or
obligations of the nature of indemnity for loss, damage, or liability.." n our
decision dated June 12, 2008, we ruled that petitioner's health care
agreements are contracts of indemnity and are therefore insurance
contracts:
t is . incorrect to say that the health care agreement is not based on loss
or damage because, under the said agreement, petitioner assumes the
liability and indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a
member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or
emergency or his availment of so-called "out-patient services" (including
physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent
event which gives rise to liability on the part of the member. n case of
exposure of the member to liability, he would be entitled to indemnification by
petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim
that its services are prepaid. The expenses to be incurred by each member
cannot be predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the
other members of the health care program. This is insurance.
37
We reconsider. We shall quote once again the pertinent portion of Section
185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On
aII poIicies of insurance or bonds or obIigations of the nature of
indemnity for Ioss, damage, or IiabiIity made or renewed by any person,
association or company or corporation transacting the business of accident,
fidelity, employer's liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance), xxxx (Emphasis supplied)
n construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority.
38
This is because
taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property
for the support of the government.
39
Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.
40
We are aware that, in Blue Cross and Philamcare, the Court pronounced
that a health care agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity. However, those cases did not involve the
interpretation of a tax provision. nstead, they dealt with the liability of a
health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally
interpreted in favor of the member and strictly against the HMO. For this
reason, we reconsider our ruling that Blue Cross and Philamcare are
applicable here.
Section 2 (1) of the nsurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent
event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. n consideration of the insurer's promise, the insured pays a premium.
41
Do the agreements between petitioner and its members possess all these
elements? They do not.
First. n 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:
t does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary
purpose of the parties in making the contract may negate 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 them, is not
engaged in the insurance business. ts contracts are simply for the purpose
of rendering personal services. On the other hand, a contract by which a
corporation, in consideration of a stipulated amount, agrees at its own
expense to defend a physician against all suits for damages for malpractice
is one of insurance, and the corporation will be deemed as engaged in the
business of insurance. Unlike the lawyer's retainer contract, the essential
purpose of such a contract is not to render personal services, but to
indemnify against loss and damage resulting from the defense of actions for
malpractice.
42
(Emphasis supplied)
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 by petitioner
as an HMO. Under the agreement, the member pays petitioner a
predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioner's physician or affiliated
physician to him. n case of availment by a member of the benefits under the
agreement, petitioner does not reimburse or indemnify the member as the
latter does not pay any third party. nstead, it is the petitioner who pays the
participating physicians and other health care providers for the services
rendered at pre-agreed rates. The member does not make any such
payment.
n 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 indemnification from
petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because
the member merely avails of medical services to be paid or already paid in
advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk
of the benefits anytime, e.g. laboratory services, x-ray, routine annual
physical examination and consultations, vaccine administration as well as
family planning counseling, even in the absence of any peril, loss or damage
on his or her part.
Fourth. n case of emergency, petitioner is obliged to reimburse the member
who receives care from a non-participating physician or 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 absence of illness or injury.
n Michigan Podiatric Medical Association v. National Foot Care Program,
Inc.,
43
although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from 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 consideration of prepayment for such services."
44
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.
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 anyone
who undertakes a contractual obligation always bears a certain degree of
financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.
ndeed, petitioner, as an HMO, undertakes a business risk when it offers 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. nsurance 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.
45
However, assuming that petitioner's commitment to provide medical services
to its members can be construed as an acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify as an insurance
contract because petitioner's objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.
n sum, an examination of petitioner's agreements with its members leads us
to conclude that it is not an insurance contract within the context of our
nsurance Code.
There Was No LegisIative Intent To Impose DST On HeaIth Care
Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST
on petitioner's health care agreements under Section 185 of the NRC of
1997 is the provision's legislative history. The text of Section 185 came into
U.S. law as early as 1904 when HMOs and health care agreements were not
even in existence in this jurisdiction. t was imposed under Section 116,
Article X of Act No. 1189 (otherwise known as the "nternal Revenue Law of
1904")
46
enacted on July 2, 1904 and became effective on August 1, 1904.
Except for the rate of tax, Section 185 of the NRC of 1997 is a verbatim
reproduction of the pertinent portion of Section 116, to wit:
ARTCLE XStamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to
the several bonds, debentures, or certificates of stock and indebtedness,
and other documents, instruments, matters, and things mentioned and
described in this section, or for or in respect to the 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 who shall make, sign, or issue
the same, on and after January first, nineteen hundred and five, the several
taxes following:
x x x x x x x x x
Third xxx (c) on aII poIicies of insurance or bond or obIigation of the
nature of indemnity for Ioss, damage, or IiabiIity made or renewed by
any person, association, company, or corporation transacting the
business of accident, fideIity, empIoyer's IiabiIity, pIate gIass, steam
boiIer, burgIar, eIevator, automatic sprinkIe, or other branch of
insurance (except Iife, marine, inIand, and fire insurance) xxxx
(Emphasis supplied)
On February 27, 1914, Act No. 2339 (the nternal Revenue Law of 1914)
was enacted revising and consolidating the laws relating to internal revenue.
The aforecited pertinent portion of Section 116, Article X of Act No. 1189
was completely reproduced as Section 30 (l), Article 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 of Act No. 2339 was again
reproduced as Section 1604 (l), Article V of Act No. 2657 (Administrative
Code). Upon its amendment on March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466
(the NRC of 1939), which codified all the internal revenue laws of the
Philippines. n an amendment introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NRC of 1977) as Section 234. Under PDs 1457 and
1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234
of the NRC of 1977 was renumbered as Section 198. And under Section 23
of EO
47
273 dated July 25, 1987, it was again renumbered and became
Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but,
again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NRC of 1977 by RA
8424 (or the NRC of 1997), the subject legal provision was retained as the
present Section 185. n 2004, amendments to the DST provisions were
introduced by RA 9243
48
but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same
pioneer HMO was later reorganized and renamed ntegrated Health Care
Services, nc. (or ntercare). However, there are those who claim that Health
Maintenance, nc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.
49
We can clearly see from these two histories (of the DST on the one hand
and HMOs on the other) that when the law imposing the DST was first
passed, HMOs were yet unknown in the Philippines. However, when the
various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by
RA 7875. f it had been the intent of the legislature to impose DST on health
care agreements, it could have done so in clear and categorical terms. t had
many opportunities to do so. But it did not. The fact that the NRC contained
no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was assessed its DST
IiabiIity onIy on January 27, 2000, after more than a decade in the
business as an HMO.
50
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 never, at
any time, recognized as insurance contracts or deemed engaged in the
business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
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 that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it.
51
So
potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."
52
Petitioner claims that the assessed DST to date which amounts to P376
million
53
is way beyond its net worth of P259 million.
54
Respondent never
disputed these assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. t is not the purpose of the
government to throttle private business. On the contrary, the government
ought to encourage private enterprise.
55
Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate
business.
56
As aptly held in Roxas, et al. v. CTA, et al.:
57
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. t must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg."
58
Legitimate enterprises enjoy the constitutional protection not to be taxed out
of existence. ncurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
matter and should not be allowed. t is counter-productive and ultimately
subversive of the nation's thrust towards a better economy which will
ultimately benefit the majority of our people.
59
Petitioner's Tax LiabiIity Was Extinguished Under The Provisions Of RA
9840
Petitioner asserts that, regardless of the arguments, the DST assessment for
taxable years 1996 and 1997 became moot and academic
60
when it availed
of the tax amnesty under RA 9480 on December 10, 2007. t paid
P5,127,149.08 representing 5% of its net 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, and the appurtenant civil, criminal or
administrative penalties under the 1997 NRC, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.
61
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a
taxpayer to immunity from payment of the tax involved, including the civil,
criminal, or administrative penalties provided under the 1997 [NRC], for tax
liabilities arising in 2005 and the preceding years.
n view of petitioner's availment of the benefits of [RA 9840], and without
conceding the merits of this case as discussed above, respondent
concedes that such tax amnesty extinguishes the tax IiabiIities of
petitioner. This admission, however, is not meant to preclude a revocation
of the amnesty granted in case it is found to have been granted under
circumstances amounting to tax fraud under Section 10 of said amnesty
law.
62
(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered
by the tax amnesty program under RA 9480.
63
There is no other conclusion
to draw than that petitioner's liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax amnesty under RA
9480.
Is The Court Bound By A Minute ResoIution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration:
whether this Court is bound by the ruling of the CA
64
in CIR v. Philippine
National Bank
65
that a health care agreement of Philamcare Health Systems
is not an insurance contract for purposes of the DST.
n support of its argument, petitioner cites the August 29, 2001 minute
resolution of this Court dismissing the appeal in Philippine National Bank
(G.R. No. 148680).
66
Petitioner argues that the dismissal of G.R. 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.
t is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being 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 challenged decision, together with its findings
of fact and legal conclusions, are deemed sustained.
68
But what is its effect
on other 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-Nickel
71
invoIving 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 V 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. t 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 V speaks
of a decision.
73
ndeed, 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 FinaI Note
Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NRC 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.
t 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.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.
74
ts 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 ordinary wage earner or
driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
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 deficiency DST
assessment against petitioner is hereby CANCELLED and SET ASIDE.
Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
RENATO C. CORONAAssociate Justice
WE CONCUR:
REYNATO S. PUNOChief JusticeChairperson
MINITA V. CHICO-NAZARIO
*
Associate Justice
LUCAS P. BERSAMIN
**
Associate Justice
C E R T F C A T O N
Pursuant to Section 13, Article V of the Constitution, certify that the
conclusions in the above resolution had been reached in consultation before
the case was assigned to the writer of the opinion of the Court's Division.
REYNATO S. PUNOChief Justice
Footnotes
*
Per Special Order No. 698 dated September 4, 2009.
**
Additional member per raffle list of 13 April 2009.
1
1987 Constitution.
2
Now known as Maxicare Healthcare Corp. Rollo, p. 293.
3
G.R. No. 169737, 12 February 2008, 544 SCRA 580.
4
429 Phil. 82 (2002).
5
Republic Act.
6
Rollo, pp. 257-258.
7
Entitled "An Act Enhancing Revenue Administration and Collection by
Granting an Amnesty on All Unpaid nternal Revenue Taxes mposed by the
National Government for Taxable Year 2005 and Prior Years."
8
Rollo, p. 288.
9
d., p. 591.
10
d., pp. 592, 613.
11
This is called the Staff Model, i.e., the HMO employs salaried health care
professionals to provide health care services. (d., pp. 268, 271.)
12
This is referred to as the Group Practice Model wherein the HMO contracts
with a private practice group to provide health services to its members. (d.,
pp. 268, 271, 592.) Thus, it is both a service provider and a service
contractor. t is a service provider when it directly provides the health care
services through its salaried employees. t is a service contractor when it
contracts with third parties for the delivery of health services to its members.
13
d., p. 102.
14
d., p. 280.
15
Decision, p. 422.
16
Rollo, p. 265.
17
Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, 16
January 1998, 284 SCRA 327, 367, citing Shimonek v. Tillanan, 1 P. 2d.,
154.
18
Inding v. Sandiganbayan, G.R. No. 143047, 14 July 2004, 434 SCRA 388,
403.
19
Section 4 (o) (3) thereof. Under this law, it is one of the classes of a "health
care provider."
20
Presidential Decree.
21
Our nsurance Code was based on California and New York laws. When a
statute has been adopted from some other state or country and said statute
has previously been construed by the courts of such state or country, the
statute is deemed to have been adopted with the construction given.
(Prudential Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc.,
G.R. No. 151890, 20 June 2006, 491 SCRA 411, 439; Constantino v. Asia
Life Inc. Co., 87 Phil. 248, 251 [1950]; Gercio v. Sun Life Assurance Co. of
Canada, 48 Phil. 53, 59 [1925]; Cerezo v. Atlantic, Gulf & Pacific Co., 33
Phil. 425, 428-429 [1916]).
22
H. S. de Leon, The nsurance Code of the Philippines Annotated, p. 56
(2002 ed.).
23
107 F.2d 239 (D.C. App. 1939). This is a seminal case which had been
reiterated in succeeding cases, e.g. Smith v. Reserve Nat'l Ins. Co. , 370 So.
2d 186 ( La. Ct. App. 3d Cir. 1979); Transportation Guarantee Co. v. Jellins,
29 Cal.2d 242, 174 P.2d 625 (1946); State v. Anderson, 195 Kan. 649, 408
P.2d 864 (1966); Commissioner of Banking and Insurance v. Community
Health Service, 129 N.J.L. 427, 30 A.2d 44 (1943).
24
d., pp. 247-248.
25
28 Cal. 2d 790 (1946).
26
d., p. 809.
27
345 N.J. Super. 410, 785 A.2d 457 (2001);<
http://lawlibrary.rutgers.edu/courts/appellate/a1562-00.opn.html> (visited July
14, 2009).
28
d., citing Group Health Ins. of N.J. v. Howell, 40 N.J. 436, 451 (1963).
29
L.R. Russ and S.F. Segalla, 1 Couch on ns. 1:46 (3rd ed., December
2008).
30
This involves the determination of a medical condition (such as a disease)
by physical examination or by study of its symptoms (Rollo, p. 613, citing
Black's Law Dictionary, p. 484 [8th ed.]).
31
Rollo, pp. 612-613.
32
One such decision of the United States Supreme Court is Rush Prudential
HMO, Inc. v. Moran (536 U.S. 355 [2002]). n that case, the Court recognized
that HMOs provide both insurance and health care services and that
Congress has understood the insurance aspects of HMOs since the passage
of the HMO Act of 1973. This case is not applicable here. Firstly, this was not
a tax case. Secondly, the Court stated that Congress expressly understood
and viewed HMOs as insurers. t is not the same here in the Philippines. As
will be discussed below, there is no showing that the Philippine Congress
had demonstrated an awareness of HMOs as insurers.
33
See Executive Order No. 119 (1987) and Administrative Order (AO) No. 34
(1994), as amended by AO No. 36 (1996).
34
G.R. No. 86738, 13 November 1991, 203 SCRA 504.
35
140 Phil. 20 (1969).
36
Supra note 34, pp. 510-511.
37
Decision, pp. 420-421.
38
Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No.
148191, 25 November 2003, 416 SCRA 436, citing Miller v. Illinois Cent. R
Co., ll. So. 559, 28 February 1927.
39
Paseo Realty & Development Corporation v. Court of Appeals, G.R. No.
119286, 13 October 2004, 440 SCRA 235, 251.
40
Collector of Int. Rev. v. La Tondea, Inc. and CTA, 115 Phil. 841, 846
(1963).
41
Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No.
156167, 16 May 2005, 458 SCRA 550, 566, citations omitted.
42
M. C. L. Campos, nsurance, pp. 17-18 (1983), citing Physicians' Defense
Co. v. O'Brien, 100 Minn. 490, 111 N.W. 397 (1907).
43
438 N.W.2d 350. (Mich. Ct. App. 1989).
44
d., p. 354.
45
Rollo, p. 702, citing Phillip, Booth et al., Modern Actuarial Theory and
Practice (2005).
46
Entitled "An Act to Provide for the Support of the nsular, Provincial and
Municipal Governments, by nternal Taxation."
47
Executive Order No.
48
An Act Rationalizing the Provisions of the DST of the NRC of 1997, as
amended, and for other purposes.
49
Rollo, pp. 589, 591, citing <http://www.rmaf.org.ph/Awardees/Biography/
Biography BengzonAlf.htm>; <http://doktorko.com/_blog/index.php?
mod=blog_article&a=80&md=897>; <http://www.hmi.com.ph/prof.html>
(visited July 15, 2009).
50
d., p. 592.
51
MCIAA v. Marcos, 330 Phil. 392, 404 (1996).
52
United States Chief Justice Marshall in McCulloch v. Maryland, 17 U.S.
316, 4 Wheat, 316, 4 L ed. 579, 607 (1819).
53
nclusive of penalties.
54
Rollo, p. 589.
55
Manila Railroad Company v. A. L. Ammen Transportation Co., Inc., 48 Phil.
900, 907 (1926).
56
Constitution, Section 3, Article X on Social Justice and Human Rights
reads as follows:
Section 3. xxx
The State shall regulate the relations between workers and employers,
recognizing the right of labor to its just share in the fruits of production and
the right of enterprises to reasonabIe return on investments, and to
expansion and growth. (Emphasis supplied)
57
131 Phil. 773 (1968).
58
d., pp. 780-781.
59
Manatad v. Philippine Telegraph and Telephone Corporation, G.R. No.
172363, 7 March 2008, 548 SCRA 64, 80.
60
Rollo, p. 661.
61
d., pp. 260-261.
62
d., p. 742.
63
Philippine Banking Corporation v. CIR, G.R. No. 170574, 30 January 2009.
64
CA-G.R. SP No. 53301, 18 June 2001.
65
G.R. No. 148680.
66
The dismissal was due to the failure of petitioner therein to attach a
certified true copy of the assailed decision.
67
Del Rosario v. Sandiganbayan, G.R. No. 143419, 22 June 2006, 492
SCRA 170, 177.
68
Complaint of Mr. Aurelio Indencia Arrienda Against SC Justices Puno,
Kapunan, Pardo, Ynares-Santiago, et al., A.M. No. 03-11-30-SC, 9 June
2005, 460 SCRA 1, 14, citing Tan v. Nitafan, G.R. No. 76965, 11 March
1994, 231 SCRA 129; Republic v. CA, 381 Phil. 558, 565 (2000), citing
Bernarte, et al. v. Court of Appeals, et al., 331 Phil. 643, 659 (1996).
69
See Bernarte, et al. v. Court of Appeals, et al., id., p. 567.
70
G.R. No. 153793, 29 August 2006, 500 SCRA 87.
71
Extended Resolution, G.R. No. 156305, 17 February 2003.
72
Supra note 70, p. 102. G.R. No. 156305 referred to the income of Baier-
Nickel for taxable year 1994 while G.R. No. 153793 pertained to Baier-
Nickel's income in 1995.
73
Section 4. xxx
(3) Cases or matters heard by a Division shall be decided or resolved with
the concurrence of a majority of the members who actually took part in the
deliberation on the issues in the case and voted thereon, and in no case,
without the concurrence of at least three of such members. When the
required number is not obtained, the case shall be decided En Banc:
Provided, that no doctrine or principIe of Iaw Iaid down by the Court in a
decision rendered En Banc or in Division may be modified or reversed
except by the Court sitting En Banc. (Emphasis supplied)
74
That is, fifty centavos (P0.50) on each four pesos (P4.00), or a fractional
part thereof, of the premium charged