Insurance Presentation 2

8/4/2019 Insurance Presentation 2

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G.R. No. 167330PHILIPPINE HEALTH CARE PROVIDERS,INC., Petitioner,

vs.

COMMISSIONER OF INTERNALREVENUE, Respondent.

G.R. No. 125678

PHILAMCARE HEALTH SYSTEMS, INC., Petitioner,vs.

COURT OF APPEALS and JULITA TRINOS, Respondents.


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This is based on a Motion for Reconsideration filed by the

petitioner.

Philippine Health Care Providers, Inc. is a domestic

corporation primarily engaged in the business of providing

prepaid group practice health care delivery system. On

January 27, 2000, the Commissioner of Internal Revenue sent

an assessment letter to the petitioner informing it and

demanding payment of P224, 702, 614. 18 in back taxes,

surcharge, and interests. The deficiency is composed mostly

of unpaid documentary stamp tax (DST) imposed on the

petitioners agreement with its members.


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Petitioner protested before the CIR but due to the latters

inaction; it filed a petition for review before the Court of Tax

Appeals. The CTA rendered a decision partially granting the

petition for review. The petitioner was ordered to pay P53M

instead of the original P225M. Furthermore, the CIR wasordered to desist from collecting DST tax

Respondent CIR appealed the decision before the Court

of Appeals. According to him, the petitioners healthcare

agreement is a contract of insurance and as such, is subjectto DST under Section 185 of the 1997 Tax Code. The CA

rendered a decision reversing the earlier decision of the CTA.

It ordered the petitioner to pay P123M in DST.


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Petitioner appealed the decision

before the Supreme Court whichaffirmed the CAs decision. The SC

held that the petitioners health care

agreement during the pertinent

period was in the nature of non-lifeinsurance which is a contract of

indemnity. The Court further ruled

that contracts between companies

like petitioner and its beneficiaries

under their plans are treated as

insurance contract. The petitioner

filed a motion for reconsideration.


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Whether or not the health care agreement

between petitioner and its beneficiaries is an

insurance contract.


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The Supreme Court ruled in favor of the petitioner andgranted the motion for reconsideration. The Court ruled thatthe health care agreement between the petitioners and itsbeneficiaries is not a contract of insurance.

The Court based its decision on the fact that the HMOagreement does not qualify as an insurance business basedon the principal object and purpose test. The test is basedon Section 2 (2) of the Insurance Code. Accordingly, anenterprise is considered engaged in an insurance business

when the principal object of the enterprise is the assumptionof risk and the indemnification of loss. If the enterpriseassumes risk and indemnifies beneficiaries for losses, then itis an insurance company.


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American courts have pointed out that the main differencebetween an HMO and an insurance company is that HMOsundertake to provide or arrange for the provision of medicalservices through participating physicians while insurancecompanies simply undertake to indemnify the insured for medicalexpenses incurred up to a pre-agreed limit.

A substantial portion of petitioners services covers preventive anddiagnostic medical services intended to keep members fromdeveloping medical conditions or diseases. As an HMO, it is itsobligation to maintain the good health of itsmembers. Accordingly, its health care programs are designed to

prevent or to minimize the possibility of any assumption of riskon its part. Thus, its undertaking under its agreements is not toindemnify its members against any loss or damage arising from amedical condition but, on the contrary, to provide the health andmedical services needed to prevent such loss or damage.


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Overall, petitioner appears to provide insurance-type benefits toits members (with respect to its curative medical services), butthese are incidental to the principal activity of providing themmedical care. The insurance-like aspect of petitioners businessis miniscule compared to its non-insurance activities. Therefore,since it substantially provides health care services rather thaninsurance services, it cannot be considered as being in theinsurance business.

Lastly, it is significant that petitioner, as an HMO, is not part ofthe insurance industry. This is evident from the fact that it is notsupervised by the Insurance Commission but by the Department ofHealth. In fact, in a letter dated September 3, 2000, the Insurance

Commissioner confirmed that petitioner is not engaged in theinsurance business. This determination of the commissioner mustbe accorded great weight. It is well-settled that the interpretation ofan administrative agency which is tasked to implement a statute isaccorded great respect and ordinarily controls the interpretation oflaws by the courts.


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HEALTH MAINTENANCE ORGANIZATIONS ARENOT ENGAGED IN THE INSURANCE BUSINESS

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

policy of insurance or an obligation in the nature of indemnity and (2) themaker should be transacting the business of accident, fidelity, employers

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 Insurance Act of 1995), an HMO is an entity that provides, offers orarranges for coverage of designated health services needed by plan members for a fixed

prepaid premium.The payments do not vary with the extent, frequency or

type of services provided.


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PRINCIPAL OBJECT AND PURPOSE TEST

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 theassumption 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, there is significantAmerican 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.


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A HEALTH CARE AGREEMENT IS NOT AN

INSURANCE CONTRACT CONTEMPLATED

UNDER SECTION 185 OF THE NIRC OF 1997

Section 185. Stamp tax on fidelity bonds and other insurance policies . On all

policies of insurance or bonds or obligations of the nature of

indemnity for loss, damage, or liability made or renewed by anyperson, association or company or corporation transacting the business

of accident, fidelity, employers liability, plate, glass, steam boiler,

burglar, elevator, automatic sprinkler, or other branch of insurance

(except life, marine, inland, and fire insurance)


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First. In our jurisdiction, a commentator of our insurance laws has pointed out

that, even if a contract contains all the elements of an insurance contract, if its

primary purpose is the rendering of service, it is not a contract of insurance:

The primary purpose of the parties in making the contract may negate the existence of an

insurance contract

Second. Not all the necessary elements of a contract of insurance are present in

petitioners 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 petitioners physician or affiliated physician to him. In case of

availment by a member of the benefits under the agreement, petitioner does notreimburse or indemnify the member as the latter does not pay any third

party. Instead, 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.


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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 physicalexamination 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. In 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.

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.


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In the application of the provisions of this Code, the fact thatIn the application of the provisions of this Code, the fact thatno profit is derived from the making of insurance contracts,no profit is derived from the making of insurance contracts,

agreements or transactions or that no separate or directagreements or transactions or that no separate or direct

consideration is received therefore, shall not be deemedconsideration is received therefore, shall not be deemed

conclusiveconclusive to show that the making thereof does notto show that the making thereof does not

constitute the doing or transacting of an insurance business.constitute the doing or transacting of an insurance business.

Section 2 (2) of PD 1460Section 2 (2) of PD 1460 (otherwise known as the Insurance Code) enumerates(otherwise known as the Insurance Code) enumerateswhat constitutes doing an insurance business or transacting an insurancewhat constitutes doing an insurance business or transacting an insurance

business:business:

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

b)b) making or proposing to make, as surety, any contract of suretyship as a vocationmaking 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 theand not as merely incidental to any other legitimate business or activity of the

surety;surety;

c)c) doing any kind of business, including a reinsurance business, specificallydoing any kind of business, including a reinsurance business, specificallyrecognized as constituting the doing of an insurance business within the meaningrecognized as constituting the doing of an insurance business within the meaning

of this Code;of this Code;

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


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THERE WAS NO LEGISLATIVE INTENT

TO IMPOSE DST ON HEALTH CARE

AGREEMENTS OF HMOS

Section 116, Article XI of Act No. 1189 (otherwise known as the Internal

Revenue Law of 1904) enacted on July 2, 1904 and became effective on

August 1, 1904

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was

enacted revising and consolidating the laws relating to internal revenue

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again

reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative

Code)

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

History of Documentary Stamp Tax


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Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466(the NIRC of 1939), which codified all the internal revenue laws of the

Philippines

On June 3, 1977, the same provision with the same DST rate was reproduced

in PD 1158 (NIRC of 1977) as Section 234

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of

the NIRC of 1977 was renumbered as Section 198. And under Section 23 of

EO 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

In 2004, amendments to the DST provisions were introduced by RA 9243 but

Section 185 was untouched.

History of Documentary Stamp Tax


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The concept of an HMO was introduced in the Philippines with the

formation of Bancom Health Care Corporation in 1974. The same pioneerHMO was later reorganized and renamed Integrated Health Care Services,

Inc. (or Intercare). However, there are those who claim that Health

Maintenance, Inc. 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 registeredHMOs with a total enrollment of more than 2 million.

History of Health MaintenanceOrganizations (HMOs)


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NoteNoteWe 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. If it had been the intent of the legislature to impose DST onhealth care agreements, it could have done so in clear and categorical

terms. It had many opportunities to do so. But it did not. The fact that

the NIRC 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 matterof fact, petitioner was assessed its DST liability only on January 27, 2000,

after more than a decade in the business as an HMO.


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THE POWER TO TAX IS NOTTHE POWER TO DESTROY

As a general rule, the power to tax is an incident of sovereignty and isunlimited 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 thelegislature which imposes the tax on the constituency who is to pay it. So

potent indeed is the power that it was once opined that the power to tax

involves the power to destroy.

Petitioner claims that the assessed DST to date which amounts to P376

million is way beyond its net worth of P259 million. Respondent neverdisputed these assertions. Given the realities on the ground, imposing the

DST on petitioner would be highly oppressive. It is not the purpose of the

government to throttle private business.


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On the contrary, the government ought to encourage private enterprise.

Petitioner, just like any concern organized for a lawful economic activity,has a right to maintain a legitimate business. As aptly held in Roxas, et al. v.

CTA, et al.:

The power of taxation is sometimes called also the power to destroy. Therefore it should

be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must beexercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden

egg.

Legitimate enterprises enjoy the constitutional protection not to be taxed

out of existence. Incurring losses because of a tax imposition may be an

acceptable consequence but killing the business of an entity is anothermatter and should not be allowed. It is counter-productive and ultimately

subversive of the nations thrust towards a better economy which will

ultimately benefit the majority of our people.


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PETITIONERS TAX LIABILITYWAS 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 when it availed of the

tax amnesty under RA 9480 on December 10, 2007. It paid

P5,127,149.08 representing 5% of its net worth as of the year endedDecember 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 NIRC, as amended,

arising from the failure to pay any and all internal revenue taxes for taxable

year 2005 and prior years.

Furthermore, we held in a recent case that DST is one of the taxes covered by

the tax amnesty program under RA 9480. There is no other conclusion to

draw than that petitioners liability for DST for the taxable years 1996 and 1997

was totally extinguished by its availment of the tax amnesty under RA 9480.


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Ernani Trinos, deceased husband of respondent JulitaErnani Trinos, deceased husband of respondent Julita

Trinos, applied for a health care coverage with petitionerTrinos, applied for a health care coverage with petitioner

Philamcare Health Systems, Inc. In the standard applicationPhilamcare Health Systems, Inc. In the standard application

form, he answered no to the following question:form, he answered no to the following question:

Have you or any of your family members everHave you or any of your family members ever

consulted or been treated for high blood pressure, heartconsulted or been treated for high blood pressure, heart

trouble, diabetes, cancer, liver disease, asthma or peptictrouble, diabetes, cancer, liver disease, asthma or pepticulcer? (If Yes, give details).ulcer? (If Yes, give details).


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The application was approved for a period of one year fromThe application was approved for a period of one year from

March 1, 1988 to March 1, 1989. Accordingly, he was issued HealthMarch 1, 1988 to March 1, 1989. Accordingly, he was issued HealthCare Agreement No. P010194. Under the agreement, respondentsCare Agreement No. P010194. Under the agreement, respondents

husband was entitled to avail of hospitalization benefits, whetherhusband was entitled to avail of hospitalization benefits, whether

ordinary or emergency, listed therein. He was also entitled to availordinary or emergency, listed therein. He was also entitled to avail

of "outof "out--patient benefits" such as annual physical examinations,patient benefits" such as annual physical examinations,preventive health care and other outpreventive health care and other out--patient services.patient services.

Upon the termination of the agreement, theUpon the termination of the agreement, the

same was extended for another year fromsame was extended for another year from

March 1, 1989 to March 1, 1990, then fromMarch 1, 1989 to March 1, 1990, then fromMarch 1, 1990 to June 1, 1990. The amount ofMarch 1, 1990 to June 1, 1990. The amount of

coverage was increased to a maximum sum ofcoverage was increased to a maximum sum of

P75,000.00 per disability.P75,000.00 per disability.


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After her husband was discharged from the MMC, he wasattended 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. In the

morning of April 13, 1990, Ernani had fever and was feeling very

weak. Respondent was constrained to bring him back to theChinese 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 wasdocketed as Civil Case No. 90-53795. She asked for

reimbursement of her expenses plus moral damages and

attorneys fees. After trial, the lower court ruled against

petitioners.


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On appeal, the Court of Appeals affirmed the decision of the

trial court but deleted all awards for damages and absolved

petitioner Reverente. Petitioners motion for reconsideration

was denied. Hence, petitioner brought the instant petition forreview, raising the primary argument that a health care

agreement is not an insurance contract; hence the

"incontestability clause" under the Insurance Code does not

apply.


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Whether or not a healthcare agreement is

not an insurance contract.Whether or not the petitioner is liable


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The Supreme Court ruled that there is a valid insurancecontract, after all, all the elements for an insurance contractare contract are present and alleged concealment answersmade in good faith and without intent to deceive will not

avoid the policy. The insurer, in case of material fact, is notjustified in relying upon such statement, but obligated tomake further inquiry.


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Yes. The health care agreement was in the nature of non-lifeinsurance, which is primarily a contract of indemnity. Once themember incurs hospital, medical or any other expense arisingfrom sickness, injury or other stipulated contingent, the healthcare provider must pay for the same to the extent agreed uponunder the contract.

Petitioner alleges that respondent was not the legal wife of thedeceased member considering that at the time of their marriage,the deceased was previously married to another woman who wasstill alive. The health care agreement is in the nature of a contractof indemnity. Hence, payment should be made to the party who

incurred the expenses. It is not controverted that respondent paidall the hospital and medical expenses. She is therefore entitled toreimbursement. The records adequately prove the expensesincurred by respondent for the deceaseds hospitalization,medication and the professional fees of the attending physicians.


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CONTRACT OF INSURANCE IS

A CONTRACT OF INDEMNITY

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. In consideration of the insurers promise, the insured pays a premium.


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The Court pronounced that a health careagreement 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 taxprovision. Instead, 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.


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SECTION 10 OF THE INSURANCE

CODE

(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 orprevent the performance; and

(4) of any person upon whose life any estate or interest vested in him depends.

In the case at bar, the insurable interest of respondents husband in obtaining

the health care agreement was his own health. The health care agreement wasin 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.

Every person has an insurable interest in the life and health:


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SECTION 27 OF THE INSURANCE CODE

The cancellation of health care agreements as in insurance policies require the

concurrence of the following conditions:

Prior notice of cancellation to insured;

Notice must be based on the occurrence after effective date of the policy of

one or more of the grounds mentioned;

Must be in writing, mailed or delivered to the insured at the address shown inthe policy;

Must state the grounds relied upon provided in Section 64 of the Insurance

Code and upon request of insured, to furnish facts on which cancellation is

based.

"a concealment entitles the injured party to rescind a contract of insurance."The right to rescind shouldbe exercised previous to the commencement of an action on the contract.


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Petitioner cannot rely on the stipulation regarding "Invalidation 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 theAgreement from the very

beginning and liability of Philamcare shall be limited

Petitioner argues that respondents husband concealed a material fact in his application. It appears that in

the application for health coverage, petitioners required respondents 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.1

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 respondents husband

who was not a medical doctor. Where matters of opinion or judgment are called for, answers madeWhere 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.in good faith and without intent to deceive will not avoid a policy even though they are untrue.


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Incontestability Clause

Clause in life insurance policy that stipulates that the

policy shall be incontestable after a stated period.

Requisites:

Life insurance policy

Payable on the death of the insured

It has been in force during the lifetime of the insuredfor a period of at least two years from the date of its

issue or of its last reinstatement

INCONTESTABILITY CLAUSE: APPLICABILITY


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On appeal, the Court of Appeals affirmed the decision of the trial court butdeleted all awards for damages and absolved petitioner Reverente. Petitioners

motion for reconsideration was denied. 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

Insurance Code does not apply.

Anent the incontestability of the membership of respondents 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 Inc. 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.

INCONTESTABILITY CLAUSE: APPLICABILITY


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THETHE

ENDEND

Insurance Presentation 2

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