Maxicare Healthcare Corp v. CIR
CTA Case No. 8441(Amended Decision)
May 5, 2015
DOCTRINE: The contractual relationship is between the doctors and hospitals on one hand, and the HMO, on the other
hand. The payments made by petitioner to doctors, hospitals and for other medical utilizations do not constitute “money
in trust” [the concept of money in trust is that you’re holding money that is not yours – in this case, it was established
that earmarking/allocating of petitioner is an act of ownership] which excludes gross receipts from VAT purposes. Thus,
the gross receipts of HMOs are subject to VAT.
FACTS: Petitioner Maxicare Healthcare Corporation is a health maintenance organization. Petitioner filed a Motion for
Partial Reconsideration, insisting that it is not liable for any deficiency VAT for calendar year 2008, in the amount of
P125,726,203.58. It also insists the general definition of gross receipts under RR 16-2005 applies to all sales and
services. Allegedly, there is nothing in RR 16-2005 that states that the said general definition of gross receipts is
inapplicable to HMOs.
Gross receipts subject to VAT under the Tax Code do not include monies or receipts entrusted to the taxpayer, which
do not belong to it and do not redound to its benefit. Petitioner theorizes that since only 20% of the total enrollment fees
received from its members belongs to it and constitutes its gross income subject to VAT, it being merely an intermediary
or conduit between purchasers of health care services known as its members and health care providers. The other
amount, 80%, is earmarked for medical/hospital utilization fees. Petitioner claims since such funds are not owned by
them nor does it redound to their benefit, it should not be considered as part of its gross receipts for VAT purposes.
ISSUE: W/N petitioner is liable for deficiency VAT?
RULING: Yes. Under RR 16-2005, gross receipts refer to the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits applied as payment for its services rendered and advance payments actually and
constructively received during the taxable period for the services performed or to be former for another person,
excluding the VAT.
Section 4.108-3(k) of RR 16-2005 further defines HMOs gross receipts as the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable period for the services performed or
to be performed for another person, excluding the value-added tax. Clearly, the gross receipts of petitioner as an HMO
falls into the definition.
The CTA applied Medicard Philippines v. Commissioner of Internal Revenue. In such case, there is no contract for
administrative or management services between the HMO and its members that is distinct, independent, or
segregatable from a contract providing for the remittance of the fees payable to doctors and hospitals. The petitioner’s
members do not deal directly with the doctors, hospitals and other medical service providers on the matter of fees. It is
in the nature of their health contracts that the members are unaware or clearly without right to inquire into, much less
negotiate, the amounts of their medical bills. Thus, no portion of the moneys that go into the hands of petitioner is
delineated for “delivery” to an identified third party. In fact, all moneys are surrendered to petitioner lump sum by its
members in exchange of an obligation or service to ensure that medical services will be to provided he members without
the usual payment of protocols.
The Court also explained that the act of earmarking or allocation is by itself an act of ownership and management
over the funds, the entire disposition of which is in truth surrendered to it by the members. When the RR excludes from
gross receipts those amounts earmarked for payment to unrelated third party or received as reimbursement for advance
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payment on behalf of the payor, the requirement is that the act of payment to a 3 party, whether as reimbursement or
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advance is pursuant to an obligation between such 3 party recipient and another person not the tax payer.
In the case of HMOs, the contractual vinculum is between the hospitals and doctors on one hand, and the HMO, on
the other. In the event that a doctor refuses to treat a member, the course of action of such member is against the
petitioner, and not the doctor. The doctors cannot likewise refuse service as long as the member is in good standing.
Thus, payments made by petitioner to doctors, hospitals and for other medical utilizations do not constitute “money in
trust” that should be excluded from the computation of its gross receipts for VAT purposes.