is bound to indemnify any member who incurs hospital,

medical or any other expense arising from sickness, injury or

G.R. No. 167330               September 18, 2009 other stipulated contingency to the extent agreed upon under
the contract.
PHILIPPINE HEALTH CARE PROVIDERS, INC.,
Petitioner, G.R. No. 167330               September 18, 2009
vs. COMMISSIONER OF INTERNAL REVENUE,
Respondent. PHILIPPINE HEALTH CARE PROVIDERS, INC.,
Petitioner,
Facts: vs. COMMISSIONER OF INTERNAL REVENUE,
The petitioner, a prepaid health-care organization offering Respondent.
benefits to its members. The CIR found that the organization
had a deficiency in the payment of the DST under Section 185 CORONA, J.:
of the 1997 Tax Code which stipulated its implementation:
“On all policies of insurance or bonds or obligations of the ARTICLE II
nature of indemnity for loss, damage, or liability made or Declaration of Principles and State Policies
renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employer's Section 15. The State shall protect and promote the right to
liability, plate, glass, steam boiler, burglar, elevator, automatic health of the people and instill health consciousness among
sprinkler, or other branch of insurance (except life, marine, them.
inland, and fire insurance)”
The CIR sent a demand for the payment of deficiency taxes,
including surcharges and interest, for 1996-1997 in the total ARTICLE XIII
amount of P224,702,641.18. Social Justice and Human Rights
The petitioner protested to the CIR, but it didn’t act on the
appeal. Hence, the company had to go to the CTA. The latter Section 11. The State shall adopt an integrated and
declared judgment against them and reduced the taxes. It comprehensive approach to health development which shall
ordered them to pay 22 million pesos for deficiency VAT for endeavor to make essential goods, health and other social
1997 and 31 million deficiency VAT for 1996. services available to all the people at affordable cost. There
CA denied the company’s appeal an d increased taxes to 55 shall be priority for the needs of the underprivileged sick,
and 68 million for 1996 to 1997. elderly, disabled, women, and children. The State shall
endeavor to provide free medical care to paupers.1
Issues: WON a health care agreement in the nature of an
insurance contract and therefore subject to the documentary For resolution are a motion for reconsideration and
stamp tax (DST) imposed under Section 185 of Republic Act supplemental motion for reconsideration dated July 10, 2008
8424 (Tax Code of 1997) and July 14, 2008, respectively, filed by petitioner Philippine
Health Care Providers, Inc.2
Held: Yes. Petition dismissed.
We recall the facts of this case, as follows:
Ratio:
The DST is levied on the exercise by persons of certain
Petitioner is a domestic corporation whose primary purpose is
privileges conferred by law for the creation, revision, or
"[t]o establish, maintain, conduct and operate a prepaid group
termination of specific legal relationships through the
practice health care delivery system or a health maintenance
execution of specific instruments.
organization to take care of the sick and disabled persons
The DST is an excise upon the privilege, opportunity, or
enrolled in the health care plan and to provide for the
facility offered at exchanges for the transaction of the
administrative, legal, and financial responsibilities of the
business. In particular, the DST under Section 185 of the 1997
organization." Individuals enrolled in its health care programs
Tax Code is imposed on the privilege of making or renewing
pay an annual membership fee and are entitled to various
any policy of insurance (except life, marine, inland and fire
preventive, diagnostic and curative medical services provided
insurance), bond or obligation in the nature of indemnity for
by its duly licensed physicians, specialists and other
loss, damage, or liability.
professional technical staff participating in the group practice
Petitioner's health care agreement is primarily a contract of
health delivery system at a hospital or clinic owned, operated
indemnity. And in the recent case of Blue Cross Healthcare,
or accredited by it.
Inc. v. Olivares, this Court ruled that a health care agreement
is in the nature of a non-life insurance policy.
Its health care agreement is not a contract for the provision of x x x           x x x          x x x
medical services. Petitioner does not actually provide medical
or hospital services but merely arranges for the same On January 27, 2000, respondent Commissioner of Internal
It is also incorrect to say that the health care agreement is not Revenue [CIR] sent petitioner a formal demand letter and the
based on loss or damage because, under the said agreement, corresponding assessment notices demanding the payment of
petitioner assumes the liability and indemnifies its member for deficiency taxes, including surcharges and interest, for the
hospital, medical and related expenses (such as professional taxable years 1996 and 1997 in the total amount of
fees of physicians). The term "loss or damage" is broad ₱224,702,641.18. xxxx
enough to cover the monetary expense or liability a member
will incur in case of illness or injury. The deficiency [documentary stamp tax (DST)] assessment
Philamcare Health Systems, Inc. v. CA.- The health care was imposed on petitioner’s health care agreement with the
agreement was in the nature of non-life insurance, which is members of its health care program pursuant to Section 185 of
primarily a contract of indemnity. the 1997 Tax Code xxxx
Similarly, the insurable interest of every member of
petitioner's health care program in obtaining the health care x x x           x x x          x x x
agreement is his own health. Under the agreement, petitioner

Page 1 of 10
Petitioner protested the assessment in a letter dated February Unable to accept our verdict, petitioner filed the present
23, 2000. As respondent did not act on the protest, petitioner motion for reconsideration and supplemental motion for
filed a petition for review in the Court of Tax Appeals (CTA) reconsideration, asserting the following arguments:
seeking the cancellation of the deficiency VAT and DST
assessments. (a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged in
On April 5, 2002, the CTA rendered a decision, the dispositive the business of fidelity bonds and other insurance policies.
portion of which read: Petitioner, as an HMO, is a service provider, not an insurance
company.
WHEREFORE, in view of the foregoing, the instant Petition
for Review is PARTIALLY GRANTED. Petitioner is hereby (b) The Court, in dismissing the appeal in CIR v. Philippine
ORDERED to PAY the deficiency VAT amounting to National Bank, affirmed in effect the CA’s disposition that
₱22,054,831.75 inclusive of 25% surcharge plus 20% interest health care services are not in the nature of an insurance
from January 20, 1997 until fully paid for the 1996 VAT business.
deficiency and ₱31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until fully paid for (c) Section 185 should be strictly construed.
the 1997 VAT deficiency. Accordingly, VAT Ruling No.
[231]-88 is declared void and without force and effect. The (d) Legislative intent to exclude health care agreements from
1996 and 1997 deficiency DST assessment against petitioner items subject to DST is clear, especially in the light of the
is hereby CANCELLED AND SET ASIDE. Respondent is amendments made in the DST law in 2002.
ORDERED to DESIST from collecting the said DST
deficiency tax.
(e) Assuming arguendo that petitioner’s agreements are
contracts of indemnity, they are not those contemplated under
SO ORDERED. Section 185.

Respondent appealed the CTA decision to the [Court of (f) Assuming arguendo that petitioner’s agreements are akin
Appeals (CA)] insofar as it cancelled the DST assessment. He to health insurance, health insurance is not covered by Section
claimed that petitioner’s health care agreement was a contract 185.
of insurance subject to DST under Section 185 of the 1997
Tax Code.
(g) The agreements do not fall under the phrase "other branch
of insurance" mentioned in Section 185.
On August 16, 2004, the CA rendered its decision. It held that
petitioner’s health care agreement was in the nature of a non-
life insurance contract subject to DST. (h) The June 12, 2008 decision should only apply
prospectively.
WHEREFORE, the petition for review is GRANTED. The
Decision of the Court of Tax Appeals, insofar as it cancelled (i) Petitioner availed of the tax amnesty benefits under RA5
and set aside the 1996 and 1997 deficiency documentary 9480 for the taxable year 2005 and all prior years. Therefore,
stamp tax assessment and ordered petitioner to desist from the questioned assessments on the DST are now rendered
collecting the same is REVERSED and SET ASIDE. moot and academic.6

Respondent is ordered to pay the amounts of ₱55,746,352.19 Oral arguments were held in Baguio City on April 22, 2009.
and ₱68,450,258.73 as deficiency Documentary Stamp Tax The parties submitted their memoranda on June 8, 2009.
for 1996 and 1997, respectively, plus 25% surcharge for late
payment and 20% interest per annum from January 27, 2000, In its motion for reconsideration, petitioner reveals for the first
pursuant to Sections 248 and 249 of the Tax Code, until the time that it availed of a tax amnesty under RA 94807 (also
same shall have been fully paid. known as the "Tax Amnesty Act of 2007") by fully paying the
amount of ₱5,127,149.08 representing 5% of its net worth as
SO ORDERED. of the year ending December 31, 2005.8

Petitioner moved for reconsideration but the CA denied it. We find merit in petitioner’s motion for reconsideration.
Hence, petitioner filed this case.
Petitioner was formally registered and incorporated with the
x x x           x x x          x x x Securities and Exchange Commission on June 30, 1987.9 It is
engaged in the dispensation of the following medical services
to individuals who enter into health care agreements with it:
In 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 Preventive medical services such as periodic monitoring of
was in the nature of non-life insurance which is a contract of health problems, family planning counseling, consultation and
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and advices on diet, exercise and other healthy habits, and
Philamcare Health Systems, Inc. v. CA.4 We also ruled that immunization;
petitioner’s contention that it is a health maintenance
organization (HMO) and not an insurance company is Diagnostic medical services such as routine physical
irrelevant because contracts between companies like petitioner examinations, x-rays, urinalysis, fecalysis, complete blood
and the beneficiaries under their plans are treated as insurance count, and the like and
contracts. Moreover, DST is not a tax on the business
transacted but an excise on the privilege, opportunity or Curative medical services which pertain to the performing of
facility offered at exchanges for the transaction of the other remedial and therapeutic processes in the event of an
business. injury or sickness on the part of the enrolled member.10

Page 2 of 10
Individuals enrolled in its health care program pay an annual fractional part thereof, of the premium charged. (Emphasis
membership fee. Membership is on a year-to-year basis. The supplied)
medical services are dispensed to enrolled members in a
hospital or clinic owned, operated or accredited by petitioner, It is a cardinal rule in statutory construction that no word,
through physicians, medical and dental practitioners under clause, sentence, provision or part of a statute shall be
contract with it. It negotiates with such health care considered surplusage or superfluous, meaningless, void and
practitioners regarding payment schemes, financing and other insignificant. To this end, a construction which renders every
procedures for the delivery of health services. Except in cases word operative is preferred over that which makes some words
of emergency, the professional services are to be provided idle and nugatory.17 This principle is expressed in the maxim
only by petitioner's physicians, i.e. those directly employed by Ut magis valeat quam pereat, that is, we choose the
it11 or whose services are contracted by it.12 Petitioner also interpretation which gives effect to the whole of the statute –
provides hospital services such as room and board its every word.18
accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.13 If and when a member From the language of Section 185, it is evident that two
avails of the benefits under the agreement, petitioner pays the requisites must concur before the DST can apply, namely: (1)
participating physicians and other health care providers for the the document must be a policy of insurance or an obligation
services rendered, at pre-agreed rates.14 in the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employer’s
To avail of petitioner’s health care programs, the individual liability, plate, glass, steam boiler, burglar, elevator, automatic
members are required to sign and execute a standard health sprinkler, or other branch of insurance (except life, marine,
care agreement embodying the terms and conditions for the inland, and fire insurance).
provision of the health care services. The same agreement
contains the various health care services that can be engaged Petitioner is admittedly an HMO. Under RA 7875 (or "The
by the enrolled member, i.e., preventive, diagnostic and National Health Insurance Act of 1995"), an HMO is "an
curative medical services. Except for the curative aspect of the entity that provides, offers or arranges for coverage of
medical service offered, the enrolled member may actually designated health services needed by plan members for a fixed
make use of the health care services being offered by prepaid premium."19 The payments do not vary with the
petitioner at any time. extent, frequency or type of services provided.

Health Maintenance Organizations Are Not Engaged In The question is: was petitioner, as an HMO, engaged in the
The Insurance Business business of insurance during the pertinent taxable years? We
rule that it was not.
We said in our June 12, 2008 decision that it is irrelevant that
petitioner is an HMO and not an insurer because its Section 2 (2) of PD20 1460 (otherwise known as the Insurance
agreements are treated as insurance contracts and the DST is Code) enumerates what constitutes "doing an insurance
not a tax on the business but an excise on the privilege, business" or "transacting an insurance business:"
opportunity or facility used in the transaction of the business.15
a) making or proposing to make, as insurer,
Petitioner, however, submits that it is of critical importance to any insurance contract;
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 b) making or proposing to make, as surety,
not it is liable for DST on its health care agreements. 16 any contract of suretyship as a vocation and
not as merely incidental to any other
legitimate business or activity of the surety;
A second hard look at the relevant law and jurisprudence
convinces the Court that the arguments of petitioner are
meritorious. c) doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
Section 185 of the National Internal Revenue Code of 1997 business within the meaning of this Code;
(NIRC of 1997) provides:
d) doing or proposing to do any business in
Section 185. Stamp tax on fidelity bonds and other insurance substance equivalent to any of the foregoing
policies. – On all policies of insurance or bonds or in a manner designed to evade the
obligations of the nature of indemnity for loss, damage, or provisions of this Code.
liability made or renewed by any person, association or
company or corporation transacting the business of
accident, fidelity, employer’s liability, plate, glass, steam In the application of the provisions of this Code, the fact that
boiler, burglar, elevator, automatic sprinkler, or other branch no profit is derived from the making of insurance contracts,
of insurance (except life, marine, inland, and fire agreements or transactions or that no separate or direct
insurance), and all bonds, undertakings, or recognizances, consideration is received therefore, shall not be deemed
conditioned for the performance of the duties of any office or conclusive to show that the making thereof does not constitute
position, for the doing or not doing of anything therein the doing or transacting of an insurance business.
specified, and on all obligations guaranteeing the validity or
legality of any bond or other obligations issued by any Various courts in the United States, whose jurisprudence has a
province, city, municipality, or other public body or persuasive effect on our decisions,21 have determined that
organization, and on all obligations guaranteeing the title to HMOs are not in the insurance business. One test that they
any real estate, or guaranteeing any mercantile credits, which have applied is whether the assumption of risk and
may be made or renewed by any such person, company or indemnification of loss (which are elements of an insurance
corporation, there shall be collected a documentary stamp tax business) are the principal object and purpose of the
of fifty centavos (₱0.50) on each four pesos (₱4.00), or organization or whether they are merely incidental to its
business. If these are the principal objectives, the business is
Page 3 of 10
that of insurance. But if they are merely incidental and service is related in the particular plan is its principal object
is the principal purpose, then the business is not insurance. purpose.24 (Emphasis supplied)

Applying the "principal object and purpose test,"22 there is In California Physicians’ Service v. Garrison,25 the California
significant American case law supporting the argument that a court felt that, after scrutinizing the plan of operation as a
corporation (such as an HMO, whether or not organized for whole of the corporation, it was service rather than indemnity
profit), whose main object is to provide the members of a which stood as its principal purpose.
group with health services, is not engaged in the insurance
business. There is another and more compelling reason for holding that
the service is not engaged in the insurance business. Absence
The rule was enunciated in Jordan v. Group Health or presence of assumption of risk or peril is not the sole
Association23 wherein the Court of Appeals of the District of test to be applied in determining its status. The question,
Columbia Circuit held that Group Health Association should more broadly, is whether, looking at the plan of operation
not be considered as engaged in insurance activities since it as a whole, ‘service’ rather than ‘indemnity’ is its
was created primarily for the distribution of health care principal object and purpose. Certainly the objects and
services rather than the assumption of insurance risk. purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social
xxx Although Group Health’s activities may be considered in service. Probably there is no more impelling need than that
one aspect as creating security against loss from illness or of adequate medical care on a voluntary, low-cost basis for
accident more truly they constitute the quantity purchase of persons of small income. The medical profession unitedly
well-rounded, continuous medical service by its members. xxx is endeavoring to meet that need. Unquestionably this is
The functions of such an organization are not identical ‘service’ of a high order and not ‘indemnity.’26 (Emphasis
with those of insurance or indemnity companies. The latter supplied)
are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its extension American courts have pointed out that the main difference
in kind, quantity or distribution; with the unusual occurrence, between an HMO and an insurance company is that HMOs
not the daily routine of living. Hazard is predominant. On the undertake to provide or arrange for the provision of medical
other hand, the cooperative is concerned principally with services through participating physicians while insurance
getting service rendered to its members and doing so at companies simply undertake to indemnify the insured for
lower prices made possible by quantity purchasing and medical expenses incurred up to a pre-agreed limit. Somerset
economies in operation. Its primary purpose is to reduce Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue
the cost rather than the risk of medical care; to broaden Shield of New Jersey27 is clear on this point:
the service to the individual in kind and quantity; to
enlarge the number receiving it; to regularize it as an The basic distinction between medical service corporations
everyday incident of living, like purchasing food and and ordinary health and accident insurers is that the former
clothing or oil and gas, rather than merely protecting undertake to provide prepaid medical services through
against the financial loss caused by extraordinary and participating physicians, thus relieving subscribers of any
unusual occurrences, such as death, disaster at sea, fire further financial burden, while the latter only undertake to
and tornado. It is, in this instance, to take care of colds, indemnify an insured for medical expenses up to, but not
ordinary aches and pains, minor ills and all the temporary beyond, the schedule of rates contained in the policy.
bodily discomforts as well as the more serious and unusual
illness. To summarize, the distinctive features of the x x x           x x x          x x x
cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, The primary purpose of a medical service corporation,
the substantial reduction in cost by quantity purchasing in however, is an undertaking to provide physicians who will
short, getting the medical job done and paid for; not, render services to subscribers on a prepaid basis. Hence, if
except incidentally to these features, the indemnification there are no physicians participating in the medical service
for cost after the services is rendered. Except the last, these corporation’s plan, not only will the subscribers be
are not distinctive or generally characteristic of the deprived of the protection which they might reasonably
insurance arrangement. There is, therefore, a substantial have expected would be provided, but the corporation will,
difference between contracting in this way for the rendering of in effect, be doing business solely as a health and accident
service, even on the contingency that it be needed, and indemnity insurer without having qualified as such and
contracting merely to stand its cost when or after it is rendering itself subject to the more stringent financial
rendered. requirements of the General Insurance Laws….

That an incidental element of risk distribution or assumption A participating provider of health care services is one who
may be present should not outweigh all other factors. If agrees in writing to render health care services to or for
attention is focused only on that feature, the line between persons covered by a contract issued by health service
insurance or indemnity and other types of legal arrangement corporation in return for which the health service
and economic function becomes faint, if not extinct. This is corporation agrees to make payment directly to the
especially true when the contract is for the sale of goods or participating provider.28 (Emphasis supplied)
services on contingency. But obviously it was not the purpose
of the insurance statutes to regulate all arrangements for Consequently, the mere presence of risk would be insufficient
assumption or distribution of risk. That view would cause to override the primary purpose of the business to provide
them to engulf practically all contracts, particularly medical services as needed, with payment made directly to the
conditional sales and contingent service agreements. The provider of these services.29 In short, even if petitioner
fallacy is in looking only at the risk element, to the assumes the risk of paying the cost of these services even if
exclusion of all others present or their subordination to it. significantly more than what the member has prepaid, it
The question turns, not on whether risk is involved or nevertheless cannot be considered as being engaged in the
assumed, but on whether that or something else to which it insurance business.

Page 4 of 10
By the same token, any indemnification resulting from the thereon. The courts give much weight to the government
payment for services rendered in case of emergency by non- agency officials charged with the implementation of the law,
participating health providers would still be incidental to their competence, expertness, experience and informed
petitioner’s purpose of providing and arranging for health care judgment, and the fact that they frequently are the drafters of
services and does not transform it into an insurer. To fulfill its the law they interpret.36
obligations to its members under the agreements, petitioner is
required to set up a system and the facilities for the delivery of A Health Care Agreement Is Not An Insurance Contract
such medical services. This indubitably shows that Contemplated Under Section 185 Of The NIRC of 1997
indemnification is not its sole object.
Section 185 states that DST is imposed on "all policies of
In fact, a substantial portion of petitioner’s services covers insurance… or obligations of the nature of indemnity for loss,
preventive and diagnostic medical services intended to keep damage, or liability…." In our decision dated June 12, 2008,
members from developing medical conditions or diseases.30 As we ruled that petitioner’s health care agreements are contracts
an HMO, it is its obligation to maintain the good health of its of indemnity and are therefore insurance contracts:
members. Accordingly, its health care programs are
designed to prevent or to minimize the possibility of any It is … incorrect to say that the health care agreement is not
assumption of risk on its part. Thus, its undertaking under based on loss or damage because, under the said agreement,
its agreements is not to indemnify its members against any petitioner assumes the liability and indemnifies its member for
loss or damage arising from a medical condition but, on the hospital, medical and related expenses (such as professional
contrary, to provide the health and medical services needed to fees of physicians). The term "loss or damage" is broad
prevent such loss or damage.31 enough to cover the monetary expense or liability a member
will incur in case of illness or injury.
Overall, petitioner appears to provide insurance-type benefits
to its members (with respect to its curative medical services), Under the health care agreement, the rendition of hospital,
but these are incidental to the principal activity of providing medical and professional services to the member in case of
them medical care. The "insurance-like" aspect of petitioner’s sickness, injury or emergency or his availment of so-called
business is miniscule compared to its noninsurance activities. "out-patient services" (including physical examination, x-ray
Therefore, since it substantially provides health care services and laboratory tests, medical consultations, vaccine
rather than insurance services, it cannot be considered as being administration and family planning counseling) is the
in the insurance business. contingent event which gives rise to liability on the part of the
member. In case of exposure of the member to liability, he
It is important to emphasize that, in adopting the "principal would be entitled to indemnification by petitioner.
purpose test" used in the above-quoted U.S. cases, we are not
saying that petitioner’s operations are identical in every Furthermore, the fact that petitioner must relieve its member
respect to those of the HMOs or health providers which were from liability by paying for expenses arising from the
parties to those cases. What we are stating is that, for the stipulated contingencies belies its claim that its services are
purpose of determining what "doing an insurance business" prepaid. The expenses to be incurred by each member cannot
means, we have to scrutinize the operations of the business as be predicted beforehand, if they can be predicted at all.
a whole and not its mere components. This is of course only Petitioner assumes the risk of paying for the costs of the
prudent and appropriate, taking into account the burdensome services even if they are significantly and substantially more
and strict laws, rules and regulations applicable to insurers and than what the member has "prepaid." Petitioner does not bear
other entities engaged in the insurance business. Moreover, we the costs alone but distributes or spreads them out among a
are also not unmindful that there are other American large group of persons bearing a similar risk, that is, among all
authorities who have found particular HMOs to be actually the other members of the health care program. This is
engaged in insurance activities.32 insurance.37

Lastly, it is significant that petitioner, as an HMO, is not part We reconsider. We shall quote once again the pertinent
of the insurance industry. This is evident from the fact that it is portion of Section 185:
not supervised by the Insurance Commission but by the
Department of Health.33 In fact, in a letter dated September 3,
2000, the Insurance Commissioner confirmed that petitioner is Section 185. Stamp tax on fidelity bonds and other insurance
not engaged in the insurance business. This determination of policies. – On all policies of insurance or bonds or
the commissioner must be accorded great weight. It is well- obligations of the nature of indemnity for loss, damage, or
settled that the interpretation of an administrative agency liability made or renewed by any person, association or
which is tasked to implement a statute is accorded great company or corporation transacting the business of accident,
respect and ordinarily controls the interpretation of laws by the fidelity, employer’s liability, plate, glass, steam boiler,
courts. The reason behind this rule was explained in Nestle burglar, elevator, automatic sprinkler, or other branch of
Philippines, Inc. v. Court of Appeals:34 insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)
The rationale for this rule relates not only to the emergence of
the multifarious needs of a modern or modernizing society and In construing this provision, we should be guided by the
the establishment of diverse administrative agencies for principle that tax statutes are strictly construed against the
addressing and satisfying those needs; it also relates to the taxing authority.38 This is because taxation is a destructive
accumulation of experience and growth of specialized power which interferes with the personal and property rights
capabilities by the administrative agency charged with of the people and takes from them a portion of their property
implementing a particular statute. In Asturias Sugar Central, for the support of the government.39 Hence, tax laws may not
Inc. vs. Commissioner of Customs,35 the Court stressed that be extended by implication beyond the clear import of their
executive officials are presumed to have familiarized language, nor their operation enlarged so as to embrace
themselves with all the considerations pertinent to the matters not specifically provided.40
meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion
Page 5 of 10
We are aware that, in Blue Cross and Philamcare, the Court the participating physicians and other health care providers for
pronounced that a health care agreement is in the nature of the services rendered at pre-agreed rates. The member does
non-life insurance, which is primarily a contract of indemnity. not make any such payment.
However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health In other words, there is nothing in petitioner's agreements that
service provider to a member under the terms of their health gives rise to a monetary liability on the part of the member to
care agreement. Such contracts, as contracts of adhesion, are any third party-provider of medical services which might in
liberally interpreted in favor of the member and strictly against turn necessitate indemnification from petitioner. The terms
the HMO. For this reason, we reconsider our ruling that Blue "indemnify" or "indemnity" presuppose that a liability or
Cross and Philamcare are applicable here. claim has already been incurred. There is no indemnity
precisely because the member merely avails of medical
Section 2 (1) of the Insurance Code defines a contract of services to be paid or already paid in advance at a pre-agreed
insurance as an agreement whereby one undertakes for a price under the agreements.
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An Third. According to the agreement, a member can take
insurance contract exists where the following elements concur: advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and
1. The insured has an insurable interest; consultations, vaccine administration as well as family
planning counseling, even in the absence of any peril, loss or
2. The insured is subject to a risk of loss by damage on his or her part.
the happening of the designed peril;
Fourth. In case of emergency, petitioner is obliged to
3. The insurer assumes the risk; reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a
4. Such assumption of risk is part of a very minor part of the list of services available. The
general scheme to distribute actual losses assumption of the expense by petitioner is not confined to the
among a large group of persons bearing a happening of a contingency but includes incidents even in the
similar risk and absence of illness or injury.

5. In consideration of the insurer’s promise, In Michigan Podiatric Medical Association v. National Foot
the insured pays a premium.41 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
Do the agreements between petitioner and its members make defendant an insurer. Citing Jordan, the Court
possess all these elements? They do not. determined that "the primary activity of the defendant (was)
the provision of podiatric services to subscribers in
First. In our jurisdiction, a commentator of our insurance laws consideration of prepayment for such services."44 Since
has pointed out that, even if a contract contains all the indemnity of the insured was not the focal point of the
elements of an insurance contract, if its primary purpose is the agreement but the extension of medical services to the
rendering of service, it is not a contract of insurance: member at an affordable cost, it did not partake of the nature
of a contract of insurance.
It does not necessarily follow however, that a contract
containing all the four elements mentioned above would be an Fifth. Although risk is a primary element of an insurance
insurance contract. The primary purpose of the parties in contract, it is not necessarily true that risk alone is sufficient to
making the contract may negate the existence of an establish it. Almost anyone who undertakes a contractual
insurance contract. For example, a law firm which enters obligation always bears a certain degree of financial risk.
into contracts with clients whereby in consideration of Consequently, there is a need to distinguish prepaid service
periodical payments, it promises to represent such clients in all contracts (like those of petitioner) from the usual insurance
suits for or against them, is not engaged in the insurance contracts.
business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a Indeed, petitioner, as an HMO, undertakes a business risk
corporation, in consideration of a stipulated amount, agrees at when it offers to provide health services: the risk that it might
its own expense to defend a physician against all suits for fail to earn a reasonable return on its investment. But it is not
damages for malpractice is one of insurance, and the the risk of the type peculiar only to insurance companies.
corporation will be deemed as engaged in the business of Insurance risk, also known as actuarial risk, is the risk that the
insurance. Unlike the lawyer’s retainer contract, the essential cost of insurance claims might be higher than the premiums
purpose of such a contract is not to render personal services, paid. The amount of premium is calculated on the basis of
but to indemnify against loss and damage resulting from the assumptions made relative to the insured.45
defense of actions for malpractice.42 (Emphasis supplied)
However, assuming that petitioner’s commitment to provide
Second. Not all the necessary elements of a contract of medical services to its members can be construed as an
insurance are present in petitioner’s agreements. To begin acceptance of the risk that it will shell out more than the
with, there is no loss, damage or liability on the part of the prepaid fees, it still will not qualify as an insurance contract
member that should be indemnified by petitioner as an HMO. because petitioner’s objective is to provide medical services at
Under the agreement, the member pays petitioner a reduced cost, not to distribute risk like an insurer.
predetermined consideration in exchange for the hospital,
medical and professional services rendered by the petitioner’s
physician or affiliated physician to him. In case of availment In sum, an examination of petitioner’s agreements with its
by a member of the benefits under the agreement, petitioner members leads us to conclude that it is not an insurance
does not reimburse or indemnify the member as the latter does contract within the context of our Insurance Code.
not pay any third party. Instead, it is the petitioner who pays
Page 6 of 10
 1. Whether as an in-patient or out-patient, FortuneCare shall
reimburse the total hospitalization cost including the
G.R. No. 195872               March 12, 2014 professional fee (based on the total approved charges) to a
member who receives emergency care in a non-accredited
FORTUNE MEDICARE, INC., Petitioner, vs. DAVID hospital. The above coverage applies only to Emergency
ROBERT U. AMORIN, Respondent. confinement within Philippine Territory. However, if the
emergency confinement occurs in a foreign territory, Fortune
Care will be obligated to reimburse or pay eighty (80%)
DECISION percent of the approved standard charges which shall cover the
hospitalization costs and professional fees. x x x6
REYES, J.:
Still, Fortune Care denied Amorin’s request, prompting the
This is a petition for review on certiorari1 under Rule 45 of latter to file a complaint7 for breach of contract with damages
the Rules of Court, which challenges the Decision2 dated with the Regional Trial Court (RTC) of Makati City.
September 27, 2010 and Resolution3 dated February 24, 2011
of the Court of Appeals (CA) in CA-G.R. CV No. 87255. For its part, Fortune Care argued that the Health Care Contract
did not cover hospitalization costs and professional fees
The Facts incurred in foreign countries, as the contract’s operation was
confined to Philippine territory.8 Further, it argued that its
David Robert U. Amorin (Amorin) was a cardholder/member liability to Amorin was extinguished upon the latter’s
of Fortune Medicare, Inc. (Fortune Care), a corporation acceptance from the company of the amount of ₱12,151.36.
engaged in providing health maintenance services to its
members. The terms of Amorin's medical coverage were The RTC Ruling
provided in a Corporate Health Program Contract4 (Health
Care Contract) which was executed on January 6, 2000 by On May 8, 2006, the RTC of Makati, Branch 66 rendered its
Fortune Care and the House of Representatives, where Amorin Decision9 dismissing Amorin’s complaint. Citing Section 3,
was a permanent employee. Article V of the Health Care Contract, the RTC explained:

While on vacation in Honolulu, Hawaii, United States of Taking the contract as a whole, the Court is convinced that the
America (U.S.A.) in May 1999, Amorin underwent an parties intended to use the Philippine standard as basis.
emergency surgery, specifically appendectomy, at the St. Section 3 of the Corporate Health Care Program Contract
Francis Medical Center, causing him to incur professional and provides that:
hospitalization expenses of US$7,242.35 and US$1,777.79,
respectively. He attempted to recover from Fortune Care the
full amount thereof upon his return to Manila, but the xxxx
company merely approved a reimbursement of ₱12,151.36, an
amount that was based on the average cost of appendectomy, On the basis of the clause providing for reimbursement
net of medicare deduction, if the procedure were performed in equivalent to 80% of the professional fee which should have
an accredited hospital in Metro Manila.5 Amorin received been paid, had the member been treated by an affiliated
under protest the approved amount, but asked for its physician, the Court concludes that the basis for
adjustment to cover the total amount of professional fees reimbursement shall be Philippine rates. That provision, taken
which he had paid, and eighty percent (80%) of the approved with Article V of the health program contract, which identifies
standard charges based on "American standard", considering affiliated hospitals as only those accredited clinics, hospitals
that the emergency procedure occurred in the U.S.A. To and medical centers located "nationwide" only point to the
support his claim, Amorin cited Section 3, Article V on Philippine standard as basis for reimbursement.
Benefits and Coverages of the Health Care Contract, to wit:
The clause providing for reimbursement in case of emergency
A. EMERGENCY CARE IN operation in a foreign territory equivalent to 80% of the
ACCREDITED HOSPITAL. Whether as an approved standard charges which shall cover hospitalization
in-patient or out-patient, the member shall costs and professional fees, can only be reasonably construed
be entitled to full coverage under the in connection with the preceding clause on professional fees to
benefits provisions of the Contract at any give meaning to a somewhat vague clause. A particular clause
FortuneCare accredited hospitals subject should not be studied as a detached and isolated expression,
only to the pertinent provision of Article VII but the whole and every part of the contract must be
(Exclusions/Limitations) hereof. For considered in fixing the meaning of its parts.10
emergency care attended by non affiliated
physician (MSU), the member shall be In the absence of evidence to the contrary, the trial court
reimbursed 80% of the professional fee considered the amount of ₱12,151.36 already paid by Fortune
which should have been paid, had the Care to Amorin as equivalent to 80% of the hospitalization
member been treated by an affiliated and professional fees payable to the latter had he been treated
physician. The availment of emergency care in an affiliated hospital.11
from an unaffiliated physician shall not
invalidate or diminish any claim if it shall be Dissatisfied, Amorin appealed the RTC decision to the CA.
shown to have been reasonably impossible
to obtain such emergency care from an The CA Ruling
affiliated physician.
On September 27, 2010, the CA rendered its Decision12
B. EMERGENCY CARE IN NON- granting the appeal. Thus, the dispositive portion of its
ACCREDITED HOSPITAL decision reads:

Page 7 of 10
WHEREFORE, all the foregoing premises considered, the To aid in the interpretation of health care agreements, the
instant appeal is hereby GRANTED. The May 8, 2006 Court laid down the following guidelines in Philamcare Health
assailed Decision of the Regional Trial Court (RTC) of Makati Systems v. CA19:
City, Branch 66 is hereby REVERSED and SET ASIDE, and
a new one entered ordering Fortune Medicare, Inc. to When the terms of insurance contract contain limitations on
reimburse [Amorin] 80% of the total amount of the actual liability, courts should construe them in such a way as to
hospitalization expenses of $7,242.35 and professional fee of preclude the insurer from non-compliance with his obligation.
$1,777.79 paid by him to St. Francis Medical Center pursuant Being a contract of adhesion, the terms of an insurance
to Section 3, Article V of the Corporate Health Care Program contract are to be construed strictly against the party which
Contract, or their peso equivalent at the time the amounts prepared the contract – the insurer. By reason of the exclusive
became due, less the [P]12,151.36 already paid by control of the insurance company over the terms and
Fortunecare. phraseology of the insurance contract, ambiguity must be
strictly interpreted against the insurer and liberally in favor of
SO ORDERED.13 the insured, especially to avoid forfeiture. This is equally
applicable to Health Care Agreements. The phraseology used
In so ruling, the appellate court pointed out that, first, health in medical or hospital service contracts, such as the one at bar,
care agreements such as the subject Health Care Contract, must be liberally construed in favor of the subscriber, and if
being like insurance contracts, must be liberally construed in doubtful or reasonably susceptible of two interpretations the
favor of the subscriber. In case its provisions are doubtful or construction conferring coverage is to be adopted, and
reasonably susceptible of two interpretations, the construction exclusionary clauses of doubtful import should be strictly
conferring coverage is to be adopted and exclusionary clauses construed against the provider.20 (Citations omitted and
of doubtful import should be strictly construed against the emphasis ours)
provider.14 Second, the CA explained that there was nothing
under Article V of the Health Care Contract which provided Consistent with the foregoing, we reiterated in Blue Cross
that the Philippine standard should be used even in the event Health Care, Inc. v. Spouses Olivares21:
of an emergency confinement in a foreign territory.15
In Philamcare Health Systems, Inc. v. CA, we ruled that a
Fortune Care’s motion for reconsideration was denied in a health care agreement is in the nature of a non-life insurance.
Resolution16 dated February 24, 2011. Hence, the filing of the It is an established rule in insurance contracts that when their
present petition for review on certiorari. terms contain limitations on liability, they should be construed
strictly against the insurer. These are contracts of adhesion the
The Present Petition terms of which must be interpreted and enforced stringently
against the insurer which prepared the contract. This doctrine
Fortune Care cites the following grounds to support its is equally applicable to health care agreements.
petition:
xxxx
I. The CA gravely erred in concluding that
the phrase "approved standard charges" is x x x [L]imitations of liability on the part of the insurer or
subject to interpretation, and that it did not health care provider must be construed in such a way as to
automatically mean "Philippine Standard"; preclude it from evading its obligations. Accordingly, they
and should be scrutinized by the courts with "extreme jealousy"
and "care" and with a "jaundiced eye." x x x.22 (Citations
II. The CA gravely erred in denying Fortune omitted and emphasis supplied)
Care’s motion for reconsideration, which in
effect affirmed its decision that the In the instant case, the extent of Fortune Care’s liability to
American Standard Cost shall be applied in Amorin under the attendant circumstances was governed by
the payment of medical and hospitalization Section 3(B), Article V of the subject Health Care Contract,
expenses and professional fees incurred by considering that the appendectomy which the member had to
the respondent.17 undergo qualified as an emergency care, but the treatment was
performed at St. Francis Medical Center in Honolulu, Hawaii,
The Court’s Ruling U.S.A., a non-accredited hospital. We restate the pertinent
portions of Section 3(B):
The petition is bereft of merit.
B. EMERGENCY CARE IN NON-ACCREDITED
HOSPITAL
The Court finds no cogent reason to disturb the CA’s finding
that Fortune Care’s liability to Amorin under the subject
Health Care Contract should be based on the expenses for 1. Whether as an in-patient or out-patient, FortuneCare shall
hospital and professional fees which he actually incurred, and reimburse the total hospitalization cost including the
should not be limited by the amount that he would have professional fee (based on the total approved charges) to a
incurred had his emergency treatment been performed in an member who receives emergency care in a non-accredited
accredited hospital in the Philippines. hospital. The above coverage applies only to Emergency
confinement within Philippine Territory. However, if the
emergency confinement occurs in foreign territory, Fortune
We emphasize that for purposes of determining the liability of Care will be obligated to reimburse or pay eighty (80%)
a health care provider to its members, jurisprudence holds that percent of the approved standard charges which shall cover the
a health care agreement is in the nature of non-life insurance, hospitalization costs and professional fees. x x x23 (Emphasis
which is primarily a contract of indemnity. Once the member supplied)
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 The point of dispute now concerns the proper interpretation of
under the contract.18 the phrase "approved standard charges", which shall be the
Page 8 of 10
base for the allowable 80% benefit. The trial court ruled that voluntarily assumed. This was what Fortune Care found
the phrase should be interpreted in light of the provisions of appropriate when in its new health care agreement with the
Section 3(A), i.e., to the extent that may be allowed for House of Representatives, particularly in their 2006
treatments performed by accredited physicians in accredited agreement, the provision on emergency care in non-accredited
hospitals. As the appellate court however held, this must be hospitals was modified to read as follows:
interpreted in its literal sense, guided by the rule that any
ambiguity shall be strictly construed against Fortune Care, and However, if the emergency confinement occurs in a foreign
liberally in favor of Amorin. territory, Fortunecare will be obligated to reimburse or pay
one hundred (100%) percent under approved Philippine
The Court agrees with the CA. As may be gleaned from the Standard covered charges for hospitalization costs and
Health Care Contract, the parties thereto contemplated the professional fees but not to exceed maximum allowable
possibility of emergency care in a foreign country. As the coverage, payable in pesos at prevailing currency exchange
contract recognized Fortune Care’s liability for emergency rate at the time of availment in said territory where he/she is
treatments even in foreign territories, it expressly limited its confined. x x x24
liability only insofar as the percentage of hospitalization and
professional fees that must be paid or reimbursed was Settled is the rule that ambiguities in a contract are interpreted
concerned, pegged at a mere 80% of the approved standard against the party that caused the ambiguity. "Any ambiguity in
charges. a contract whose terms are susceptible of different
interpretations must be read against the party who drafted
The word "standard" as used in the cited stipulation was vague it."25
and ambiguous, as it could be susceptible of different
meanings. Plainly, the term "standard charges" could be read WHEREFORE, the petition is DENIED. The Decision dated
as referring to the "hospitalization costs and professional fees" September 27, 2010 and Resolution dated February 24, 2011
which were specifically cited as compensable even when of the Court of Appeals in CA-G.R. CV No. 87255 are
incurred in a foreign country. Contrary to Fortune Care’s AFFIRMED.
argument, from nowhere in the Health Care Contract could it
be reasonably deduced that these "standard charges" referred SO ORDERED.
to the "Philippine standard", or that cost which would have
been incurred if the medical services were performed in an
accredited hospital situated in the Philippines. The RTC ruling
FACTS:
that the use of the "Philippine standard" could be inferred from
the provisions of Section 3(A), which covered emergency care
in an accredited hospital, was misplaced. Evidently, the parties
While Amorin was on vacation in Hawaii, he underwent an e
to the Health Care Contract made a clear distinction between
emergency care in an accredited hospital, and that obtained mergency surgery, specifically appendectomy, causing him to 
from a non-accredited hospital.1âwphi1 The limitation on
payment based on "Philippine standard" for services of incur professional and hospitalization expenses of US$7,242.3
accredited physicians was expressly made applicable only in
the case of an emergency care in an accredited hospital. 5 and US$1,777.79, respectively. Being a cardholder/member 

The proper interpretation of the phrase "standard charges" of Fortune Medicare, Inc. (Fortune Care), a corporation engag

could instead be correlated with and reasonably inferred from
ed in providing health maintenance services to its members, he 
the other provisions of Section 3(B), considering that
Amorin’s case fell under the second case, i.e., emergency care attempted to recover the full amount upon his return to Manila
in a non-accredited hospital. Rather than a determination of
Philippine or American standards, the first part of the . However, the company merely approved a reimbursement of 
provision speaks of the full reimbursement of "the total
hospitalization cost including the professional fee (based on P12,151.36, an amount that was based on the average cost of a
the total approved charges) to a member who receives
emergency care in a non-accredited hospital" within the ppendectomy, net of medicare deduction, if the procedure wer
Philippines. Thus, for emergency care in non-accredited
e performed in an accredited hospital in Metro Manila. Amori
hospitals, this cited clause declared the standard in the
determination of the amount to be paid, without any reference n received under protest the approved amount, but asked for it
to and regardless of the amounts that would have been payable
if the treatment was done by an affiliated physician or in an s adjustment to cover the total amount of professional fees whi
affiliated hospital. For treatments in foreign territories, the
only qualification was only as to the percentage, or 80% of ch he had paid, and eighty percent (80%) of the approved stan
that payable for treatments performed in non-accredited
hospital. dard charges based on “American standard”, considering that t

he emergency procedure occurred in the U.S.A., citing provisi
All told, in the absence of any qualifying word that clearly
limited Fortune Care's liability to costs that are applicable in ons of the contract.
the Philippines, the amount payable by Fortune Care should
not be limited to the cost of treatment in the Philippines, as to
do so would result in the clear disadvantage of its member. If, He then filed a complaint for breach of contract with damages 
as Fortune Care argued, the premium and other charges in the
Health Care Contract were merely computed on assumption but this was dismissed by the RTC. It said that the parties inte
and risk under Philippine cost and, that the American cost
standard or any foreign country's cost was never considered, nded to use the Philippine standard as basis. However, this wa
such limitations should have been distinctly specified and
clearly reflected in the extent of coverage which the company s reversed by the CA. The appellate court pointed out that, firs

Page 9 of 10
t, health care agreements such as the subject Health Care Cont

ract, being like insurance contracts, must be liberally construe

d in favor of the subscriber. In case its provisions are doubtful 

or reasonably susceptible of two interpretations, the constructi

on conferring coverage is to be adopted and exclusionary claus

es of doubtful import should be strictly construed against the p

rovider. Second, the CA explained that there was nothing unde

r the Health Care Contract which provided that the Philippine 

standard should be used even in the event of an emergency co

nfinement in a foreign territory.

ISSUE:

 Whether or not a member of a health care provider ca

n recover to the extent agreed in the contract.

 Whether or not ambiguities should be taken in favor 

of the member.

HELD:

1.)Yes. In the case at bar, the Supreme Court said that for purp

oses of determining the liability of a health care provider to its 

members, jurisprudence holds that a health care agreement is i

n the nature of non-life insurance, which is primarily a contrac

t of indemnity. Once the member incurs hospital, medical or a

ny other expense arising from sickness, injury or other stipulat

ed contingent, the health care provider must pay for the same t

o the extent agreed upon under the contract.

2.) Yes. With regard the ambiguities in the contract, settled is t

he rule that they should be interpreted against the party that ca

used the ambiguity. “Any ambiguity in a contract whose terms 

are susceptible of different interpretations must be read against 

the party who drafted it.” Furthermore, it affirmed the CA’s fi

nding that Fortune Care’s liability to Amorin under the subject 

Health Care Contract should be based on the expenses for hos

pital and professional fees which he actually incurred, and sho

uld not be limited by the amount that he would have incurred 

had his emergency treatment been performed in an accredited 

hospital in the Philippine.

Page 10 of 10