Supreme Court exempts HMOs from documentary stamp tax

MANILA, Philippines - The Supreme Court (SC) has exempted health maintenance organizations (HMO) from payment of documentary stamp tax (DST), classifying these as non-insurance firms.

Using American jurisprudence, the SpecialFirst Division of the High Court ruled that HMOs undertake to arrange for the provision of medical services through participating physicians, which are different from insurance companies that simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit.

“As an HMO, it (Philippine Health Care Providers, Inc.) is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility 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,” the Court explained in its 40-page resolution promulgated last Sept.18.

One test used by US courts the SC said, 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.

In adopting the “principal purpose test,” the Court held that although it appears that PHCP provides insurance-type benefits to its members, this aspect “is miniscule” compared to its non-insurance activities.

In fact, a substantial portion of PHCP’s services, according to the Court, covers preventive and diagnostic medical services intended to keep members from developing medical conditions or diseases.

The Court further said that the nature of HMOs as non-insurance is the fact that it is supervised by the Department of Health (DOH) - not by the Insurance Commission.

Even the Insurance Commissioner, according to the Court, has confirmed in its letter dated Sept. 3, 2000, that PHPC is not engaged in the insurance business.

“This determination of the commissioner must be accorded great weight. It 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 SC said.

The SC issued the ruling, reversing an earlier decision that ordered Philippine Health Care Providers, Inc., one of the 36 registered HMOs in the country, to pay the Bureau of Internal Revenue (BIR) the amount of more than P376 million representing deficiency DST, including surcharges and interest, for the years 1996 and 1997.

The Special First Division granted the motion for reconsideration filed by petitioner Philippine Health Care Providers, Inc. seeking the reversal of its June 12, 2008 decision.

“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,” the Court declared in its resolution dated Sept. 18, 2009.

In reversing its June 12 decision, the Court noted that various courts in the United States, whose jurisprudence has influenced its decision in some cases, have determined that HMOs are not in the insurance business.

Contrary to its previous ruling, the Court this time declared that a health care agreement is not an insurance contract contemplated under Section 185 of the 1997 Tax Code.