Philippine Health Care Products vs. Commissioner of Internal Revenue, 600 SCRA 413 (2009)


Philippine Health is a domestic corporation engaged in the dispensation of the following medical services to individuals who enter into health care agreements with  – Preventive, Diagnostic and Curative medical services. Individuals enrolled in its health care program pay an annual membership fee.

The Commissioner of Internal Revenue [CIR] sent the petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes. Petitioner protested and filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.

The CTA partially granted the petition ordering the petitioner to pay for the VAT.

CIR appealed the CTA decision insofar as it cancelled the DST assessment. He claimed that the petitioner’s health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.  The CA rendered its decision. It held that the petitioner’s health care agreement was in the nature of a non-life insurance contract subject to DST.

WON Health Maintenance Organizations Are Not Engaged In The Insurance Business thus is  not  liable for DST on its health care agreements.


NO Health Maintenance Organizations Are Not Engaged In The Insurance Business. Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions, 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. If 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,” 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. Even if the 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.

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 the petitioner’s business is miniscule compared to its non insurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business.

American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or 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.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance 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.”

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. 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. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.

Petitioner’s objective is to provide medical services at reduced cost, not to distribute risk like an insurer.

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