CoA: PhilHealth faces distress: Reserves fund a liability to members

State auditors debunked the claim of Philippine Health Insurance Corp. (PhilHealth) that it is in the pink of financial health as they expressed doubt of its ability to maintain its services as a going concern.

In a meeting with legislators on Tuesday, PhilHealth CEO Emmanuel Ledesma Jr. said the agency was in a “very healthy” financial state with significant reserves and surpluses to sustain its operations.

“Despite areas that need significant work, PhilHealth is still a very healthy corporation at the moment,” Ledesma said during a Good Government and Public Accountability hearing at the House of Representatives.

In the proposed 2025 national budget, the bicameral conference committee removed the state subsidy for PhilHealth.

“This decision was based on PhilHealth’s ample reserves and investible funds, which are deemed sufficient to cover its obligations without additional government support,” the bicam said.

PhilHealth had a surplus of P150 billion and total reserves of P280 billion as of October 2024.

Ledesma said the corporation’s investment fund was nearing P490 billion as of November 2024.

But the CoA said in a 2023 review of the agency’s operations that the presumption of a going concern, which is foundational to financial reporting, may become uncertain during an economic recession.

The CoA indicated that the surplus reserves cannot be considered excess funds since it is applied to insurance contract liabilities (ICL) which is almost double the reserves.

“The negative members’ equity represents unfunded liabilities. The agency could face financial distress if this will not be properly addressed, casting doubts on PhilHealth’s ability to continue as a going concern,” CoA said.

CoA advised PhilHealth’s management to assess whether there is substantial doubt about its ability to continue as a going concern and disclose any substantial doubts that it may identify.

The continuation of an entity as a going concern is presumed to be the basis for financial reporting unless and until the entity’s liquidation becomes imminent, the CoA said.

“If and when an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting,” it added.

Doubts about going concern

CoA indicated that even if an entity’s liquidation is not imminent, there may be conditions and events considered in the aggregate that may raise substantial doubt about its ability to continue as a going concern.

CoA said in those situations, financial statements continue to be prepared under the going concern basis of accounting, but disclosure of information about the relevant conditions or events is required.

The audit revealed that the total members’ equity in PhilHealth had a negative balance of P664.315 billion.

Further investigation showed that this was due to the recognition of the provision for insurance contract liabilities (ICL) amounting to P1.128 trillion.

CoA said the provision for ICL represented estimated future liabilities and expenses, resulting in a capital deficit as of 31 December 2023. The provision is actuarially computed due to the adoption of PFRS 4 as directed by the Department of Finance.

The CoA indicated that it was not even certain about the “faithful representation in the financial statements of the Provision for Insurance Contract Liabilities (ICL) amounting to P1.15 trillion and P266.873 billion for calendar years 2023 and 2022, respectively.

These cannot be ascertained as the completeness and accuracy of the claims and premium data cannot be established, casting doubt on the reliability of the reported figures; the evaluation of the 2023 Actuarial Valuation Report, intended to assess the adequacy of the ICL, revealed inconsistencies and irregularities that affect its reliability and validity to third parties; the use of different measurement bases for the Provision for ICL diminishes the comparability of information in the FSs, hindering the users from making informed economic decisions, and the absence of reasonableness test on expense loading further undermines the reliability of the ICL account in the financial statements, “which are inconsistent with Philippine Accounting Standard 1 — Presentation of FSs, Philippine Financial Reporting Standard 4 — Insurance Contracts, and Revised Conceptual Framework for Financial Reporting.”

Reserves are liabilities

The Amended Insurance Code 1 provides that every insurance company, other than life, shall maintain a reserve for unearned premiums on its policies in force, which shall be charged as a liability in any determination of its financial condition. In addition to these liabilities and reserves, estimates of all other liabilities, taxes, expenses and other obligations due on the statement date and any special reserves should also be considered.

A comprehensive review of the financial accounting and reporting practices of various government-owned and controlled corporations (GOCCs) revealed lapses, specifically in the recording of social benefit liabilities.

“As a result, government insurance institutions such as the Social Security System, Government Service Insurance System (GSIS) and PhilHealth were directed to fully comply with the internationally accepted accounting principles.”

CoA added: “The audit team identified perennial and significant concerns on the reliability of PhilHealth’s claims and premium data in the previous years, as evidenced by the prior years’ annual audit reports, as well as during the current year under audit. Hence, these observations are reiterated.”