Tax and Accounting

Gross Receipts of a Health Maintenance Organization (HMO) for Value-Added Tax

MediCard Philippines, Inc. versus Commissioner of Internal Revenue; G.R. NO. 222743

The Business of MEDICARD – A Health Maintenance Organization

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.

Gross Receipts According to the Commissioner of Internal Revenue

According to the Commissioner of Internal Revenue (CIR), the taxable base of an HMO (like MEDICARD) for VAT purposes is its gross receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005, that is, including the amount earmarked for medical utilization of its members. Moreover, the CIR, citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,  argued that since MEDICARD does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.

Gross Receipts According to the Supreme Court

An HMO like MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) of the Tax Code, as amended.

The term gross receipts as elsewhere mentioned as the tax base under the NIRC does not contain any specific definition. Therefore, absent a statutory definition, the term has been construed in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any deduction.

Under Section 108,  however, the scope of the term gross receipts for VAT purposes is limited only to the amount that the taxpayer received for the services it performed or to the amount it received as advance payment for the services it will render in the future for another person.

For VAT purposes, the gross receipts of an HMO do not include the amounts earmarked and actually spent for medical utilization of its members…

The CIR’s argument that the act of earmarking or allocation is by itself an act of ownership and management over the funds is not correct. On the contrary, the act of earmarking or allocating a certain percentage of the membership fee at the time of payment  weakens the ownership imputed to MEDICARD. The act of earmarking or allocating indicates the unequivocal recognition by MEDICARD that its possession of the funds is not in the concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD’s  right in relation to these amounts is a mere inchoate owner which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated as an administrator once its members avail of the medical services of its healthcare providers.

Hence, for purposes of determining the VAT liability of an HMO, like MEDICARD, the amounts earmarked and actually spent for medical utilization of its members should not be included in the computation of its gross receipts.