Which of a health-care management company's many services -- managed care advice, credentialing, quality assurance, claims processing, member services, contract, pre-certification, and utilization review -- are taxable in Connecticut, and under which service category?

Plain-English summary

Connecticut taxes "business analysis, business management, business management consulting and business public relations services" under Conn. Gen. Stat. § 12-407(2)(i)(J) — but only when they relate to the customer's "core business activities" or its human resource management. This ruling is a detailed, service-by-service application of that rule to a company selling a big menu of services to health care providers (physicians, hospitals, and integrated groups) under managed-care and capitated-fee arrangements. Because the customers' core business is providing health care, services directly related to that are taxable unless a specific exclusion applies. DRS walked through each service:

• Managed care advice (fee-for-service vs. capitation, fee soundness, referral protocols, structure/staffing): taxable business management consulting. But separately stated actuarial charges are excluded as professional services.
• Credentialing: taxable as HR-management consulting when evaluating potential employees; not taxable when evaluating potential partners or referral providers (they won't be employees).
• Quality assurance (practice guidelines, outcome studies): taxable business management consulting (relates to core patient-care business).
• Claims processing: not taxable under (J) — it isn't directly related to the core health-care business (following Ruling No. 93-6) — and not computer and data processing, because the true object is having claims processed, not buying data processing. However: furnishing computer hardware/canned software so the provider processes its own claims is a taxable sale/lease of tangible personal property; supplying employees for vacation coverage is a taxable personnel service (§ 12-407(2)(i)(C)); and training the provider's staff is taxable HR-management consulting.
• Member services: the 800-number patient-support line is taxable business management service; participating in the claims-appeal process is not taxable; patient-satisfaction surveys are an excluded marketing service.
• Contract services: separately stated accounting/actuarial work is excluded (professional services); consulting on negotiating/managing payer contracts is taxable business management consulting.
• Pre-certification review by nurses/nurse practitioners (pre-approving referrals/hospitalizations, developing clinical protocols): excluded professional services.
• Utilization review reports (usage, referral profiling): taxable business analysis service; not computer and data processing (computers are incidental to the true object).

DRS also addressed the company's staff physicians: their work touched the financial side of the practices, not treating patients, so it was not an excluded professional service (contrast Ruling No. 94-12 — pharmacists — and Ruling No. 94-21 — chemists — where genuine professional services were excluded). This Ruling is later relied on in Ruling No. 98-2 (named in prose, not linked).

What this means for you

Health-care management and MSO/administrative companies

If your customers are health care providers, their core business is delivering care — so your advice and management services about how they deliver and get paid for that care (capitation structuring, quality programs, payer-contract consulting, member support lines, utilization analysis) are generally taxable under § 12-407(2)(i)(J). Services that sit outside the core business — processing claims, appealing denials, market research — often aren't. Invoice each service separately; DRS taxed this company line by line, and separate statement is what preserves the exclusions.

Watch the professional-services and marketing exclusions

Actuarial, accounting, and genuine clinical work (nurse-performed pre-certification) can be excluded as professional services under Regs. § 12-407(2)(i)(J)-1(c)(3) — but only if separately stated and truly performed in a professional capacity. Note the trap DRS flagged: staff physicians doing financial/administrative work are not acting as physicians, so that work isn't excluded. Marketing (developing and analyzing patient-satisfaction surveys) is excluded under subsection (g).

Claims processing, hardware, and staffing are three different answers

For the same "claims" function DRS reached three results: the processing service isn't taxable (true object test, Ruling No. 93-6); hardware/canned software you provide is taxable tangible personal property; and lending employees for vacation coverage is a taxable personnel service. Training the customer's staff is taxable HR-management consulting. Break these apart on the invoice.

Accountants and tax professionals

The analytical spine is Regs. § 12-407(2)(i)(J)-1: is the service directed at the customer's core business activities (h) or human-resource management (i)? Then check the exclusions — professional services (c)(3), marketing (g), and the (h) carve-outs (note DRS held the insurance-claims (h)(7) and self-insured-claims (h)(8) exclusions did not fit these facts). Use the "true object" test to keep genuine claims/report services out of the computer-and-data-processing category.

Common questions

Q: Why are so many of these services taxable?
A: Because the customers are health care providers whose core business is providing health care, and § 12-407(2)(i)(J) taxes business analysis/management/consulting/PR services directed at a customer's core business (or its HR management), unless an exclusion applies.

Q: Is claims processing taxable?
A: The processing service itself is not taxable — it isn't directly related to the core health-care business, and its true object isn't data processing. But providing hardware/canned software is a taxable tangible-personal-property transaction, and supplying vacation-coverage staff is a taxable personnel service.

Q: When is credentialing taxable?
A: When it evaluates potential employees of a provider group (HR-management consulting). It's not taxable when it evaluates potential partners or referral providers, who won't be employees.

Q: Do professional services escape tax?
A: Yes, if separately stated and genuinely professional — actuarial, accounting, and nurse-performed pre-certification were excluded. But work by staff physicians on the financial side of a practice isn't a professional service, because it isn't done in the capacity of a physician.

Q: Why does "separately stated" keep coming up?
A: Because exclusions (actuarial, accounting, marketing) apply to separately stated charges. Bundling taxable and exempt services into one charge can pull the whole charge into tax.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(i)(J) (business analysis, business management, business management consulting, and business public relations services)
• Conn. Gen. Stat. § 12-407(2)(i)(A) (computer and data processing services)
• Conn. Gen. Stat. § 12-407(2)(i)(C) (personnel services)

Regulations:

• Conn. Agencies Regs. § 12-407(2)(i)(J)-1 (definitions of business analysis (d), business management (e), business management consulting (f); marketing exclusion (g); core business activities (h), including the (h)(7) insurer and (h)(8) self-insured-claims carve-outs; human resource management activities (i); professional services exclusion (c)(3))
• Conn. Agencies Regs. § 12-426-27(b)(3)(c) (personnel agency services)

Administrative guidance and related rulings:

• Policy Statement 93(3.1) (two-element personnel-agency-service test); Policy Statement 92(2.1) (training as HR-management consulting)
• Ruling No. 93-6 (claims-processing services not directly related to a health-care provider's core business; not computer and data processing under the true-object test)
• Ruling No. 94-12 (pharmacists' clinical services excluded as professional services); Ruling No. 94-21 (chemists' consulting excluded as professional services)
• Ruling No. 98-2 (later ruling that cites this one)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 97-1

Original ruling text

Ruling 97-1, Sales and Use Taxes / Business Management Services / Business Management Consulting Services

Ruling 97-1

Sales and Use Taxes

Business Management Services

Business Management Consulting Services

This Ruling is cited in  Ruling 98-2

FACTS:

A company (the "Company") is engaged in the business of providing a number of services, described below, to health care providers, including physicians, hospitals, and organizations in which physicians have integrated their practices with other physicians and hospitals. The Company provides its services to health care providers operating under a "capitated fee structure" (under which the primary care giver is paid a certain amount per individual "covered life" for a set period, and the primary care giver bears the risk that the individual will need services from the care giver or other health care providers that cost in excess of the capitated fee) and to health care providers operating under any other managed care compensation arrangements (including a straight fee-for-service basis).

The Company provides some or all of the following services, each of which is invoiced separately:

"Managed care" services. The Company provides advice to a health care provider on such matters as: (i) whether to enter into a fee-for-service or capitation arrangement (analyzing the benefits and burdens associated with a fee-for-service arrangement in comparison with a capitation arrangement); (ii) the appropriateness of terms in, the actuarial soundness of fees to be charged in, and services to be provided as part of, a fee-for-service arrangement; (iii) the appropriateness of terms, and the actuarial soundness of fees to be charged, in a capitation arrangement; (iv) the establishment of protocols for determining when a referral to a specialist, hospital or other health care provider will be given; (v) the terms of referral arrangements with specialists, hospitals and other third party health care providers; (vi) the structure, staffing and operation of a capitated fee health care provider or of a fee-for-service health care provider; and (vii) the review and evaluation of tracking reports on all of the above, including such information as the services provided, referrals, fee usage, and comparison to fee-for-service arrangements (or capitated fee arrangements).

"Credentialling" services. The Company may provide assistance to a health care provider in establishing credentialling criteria for use by the health care provider in evaluating potential employees or partners or for use in selecting participants for referral arrangements. The Company may also provide assistance to a health care provider by helping to evaluate potential employees or partners of the health care provider or by helping to select potential participants for referral arrangements.

"Quality assurance" services. The Company may provide advice to a health care provider on the development of quality assurance programs, including the structuring of quality management committees to develop practice guidelines for employees or partners of the health care provider and to perform studies on patients to determine whether and the extent to which those practice guidelines might have affected, if at all, the quality of the health care that the patients received from the health care provider ("outcome studies").

"Claims processing" services. The Company may process claims that a health care provider has against others (e.g., insurers or governmental payers for services rendered by the health care provider) either by providing the health care provider with computer hardware and software that links the health care provider's office to the Company's office, where the Company's staff processes and manages the claims on behalf of the health care provider, or by receiving claims on paper or electronically and processing them at the Company's office. The Company may also process claims that others make against the health care provider either by training the health care provider's staff to handle such processing requirements on their own using prewritten, or "canned," claims processing software licensed to the health care provider by the Company, which developed the software, or by the Company itself handling all activities related to claims that others make against the health care provider (including claim review, payment and/or denial, appeals, etc.) at the Company's office with computer hardware and software that links the health care provider's office to the Company's office (or with all relevant information mailed to the Company's office by the health care provider). If the Company trains the health care provider's staff, it also performs ongoing audit and review of the service recipient's claims processing procedures, as well as providing new hire training and vacation coverage by furnishing its own employees to the health care provider specifically to handle claims processing.

" Member services." The Company may provide managed care plan member service functions to a health care provider including: (i) the staffing of an 800-number member services telephone line to respond to questions or issues from the members concerning eligibility for benefits, how to file claims or who the participating physicians are; (ii) managing for a health care provider a formal claims appeal process for members who wish to appeal denials of their claims; and (iii) the development, distribution, compilation and analysis of membership satisfaction surveys.

" Contract services." The Company may provide accounting, consulting and actuarial services to a health care provider in connection with the negotiation and management of the health care provider's agreements with third-party payers and with other health care providers.

"Pre-certification review" services. The Company may pre-approve ("pre-certify") referrals of patients by a health care provider to specialists or pre-certify hospitalization of patients by a health care provider. The Company employs nurses or nurse practitioners to provide these services. Such pre-certification typically involves a conference between the Company's employee and the referring physician to review whether the proposed procedure is an appropriate action to be taken in light of the patient's diagnosed condition, or whether the number of days of hospitalization suggested by the physician is appropriate, and whether the procedure or hospitalization is covered by the plan, before a letter approving the referral or hospitalization is sent to the patient. The Company also may assist in the development of the internal guidelines to be used by a health care provider in deciding when such referrals or hospitalizations should be made and in identifying the appropriate specialist or hospital.

"Utilization review" services. The Company may prepare reports for a health care provider regarding member utilization of health care services, capitated fee usage (with a comparison to fee-for-service), and referral and hospitalization usage. These reports are used by the Company and/or the health care provider in evaluating the capitation fee arrangement and its management by the health care provider. The Company also prepares reports regarding physician profiling, involving a comparison of the number of referrals made by a physician to a benchmark number determined by the Company, to analyze how individual health care providers are managing their delivery of care.

ISSUES:

Whether any of the services provided by the Company are taxable as business analysis, business management, business management consulting or business public relations services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

Whether any portion of the claims processing services or utilization review services provided by the Company are taxable either as computer and data processing services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(A) or as personnel services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(C).

DISCUSSION:

Business analysis, business management, business management consulting or business public relations services are enumerated as taxable in Conn. Gen. Stat. § 12-407(2)(i)(J). Conn. Agencies Regs. § 12-407(2)(i)(J)-1 describes such services as being taxable only when they relate to the core business activities or human resource management activities of the service recipient. Subsection (h) of the regulation defines "core business activities" as "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others, its capital structure, its budgeting and its short-range, long-range or strategic planning."

The core business of the Company's service recipients is to offer health care services to patients. Therefore, to the extent that the Company's services are directly related to the provision of health care by its service recipients, they are taxable as business analysis, business management, business management consulting or business public relations services under Conn. Gen. Stat. § 12-407(2)(i)(J), unless one of the exclusions in Conn. Agencies Regs. § 12-407(2)(i)(J)-1 applies.

Subsection (h) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 specifically excludes a number of activities from the scope of core business activities, two of which require discussion in this ruling: (i) the administration of, and record keeping related to, insurance claims against a service recipient in its capacity as an insurer (Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)(7)), and (ii) the administration of, and record keeping related to, self-insured claims, regardless of the nature of the business of the service recipient (Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)(8)). The first exclusion is intended to apply only to insurance companies regulated under Title 38a of the Connecticut General Statutes, and therefore cannot be applied to the Company's service recipients as they are described in this ruling. The second exclusion is intended to apply to services rendered with respect to claims made against a business that has set aside a fund to meet losses instead of acquiring an insurance policy for such losses. The services rendered by the Company are not related to such self-insured funds or claims made against them and so are not excluded from the definition of "core business" under subdivision (h)(8) of the regulation.

The services of professional service providers are excluded from the scope of the services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J) by Conn. Agencies Regs. § 12-407(2)(i)(J)-1(c)(3) "where the services rendered are professional services that are rendered by a member of a profession, acting in such member's professional capacity, and that are commonly associated with such profession." Therefore, separately stated charges for any actuarial services rendered by the Company as part of its managed care services may be excluded from the measure of tax. On the other hand, while there is no question that a licensed physician is a member of a profession, the services of the physicians on the Company's staff relate to the financial side of the service recipients' medical practices rather than to the treatment of their patients' diseases or injuries, and therefore the services rendered by the Company's staff physicians are neither rendered in the capacity of a physician nor are they commonly associated with the medical profession. (Contrast with Ruling No. 94-12, where the services of pharmacists who reviewed patient prescriptions, monitored patients' conditions and trained nursing home personnel in administering the pharmaceutical program of a long-term care facility were held to be excludible from tax as professional services described in Conn. Agencies Regs. § 12-407(2)(i)(J)-1(c)(3), and Ruling No. 94-21, in which consulting services rendered by chemists regarding the chemical properties of hair color were held to be excludible as professional services.)

It is now necessary to review the specific services offered by the Company in conjunction with the remainder of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 to determine which of the Company's services are taxable as business analysis, business management, business management consulting or business public relations services.

Managed care services. Subsection (f) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 defines "business management consulting services" as "the furnishing of advice and assistance on matters pertaining to the management of core business activities." The managed care services rendered by the Company consist of advising the service recipients about the desirability of entering capitated fee or other managed care compensation arrangements and the details of such arrangements. Such issues are integral to the rendering of services by health care providers and the compensation for such services. Therefore, the Company's managed care services are directly related to the core business of the service recipients. The definition of "business management consulting services" excludes "specialized consulting services such as insurance and investment banking services." The exclusion from the definition of "business management consulting services" for "insurance services" is intended to exclude advice rendered by an insurance company to a business advising about the most appropriate insurance coverage to be purchased for the business. Therefore, this exclusion does not apply to the Company, and so its charges for its managed care services, excluding separately stated charges for actuarial services (see discussion above), are taxable.

Credentialling services. The development of criteria for the evaluation, as well as the actual review, of health care providers as candidates for employment by a health care provider group is taxable as business management consulting services relating to the human resource management activities of the service recipients. "Human resource management activities" are defined in pertinent part by Conn. Agencies Regs. § 12-407(2)(i)(J)-1(i) as activities relating to "the hiring, development, job-related training, compensation and management of personnel." However, the evaluation and selection of health care providers who will become partners of a health care provider group or who will be used for patient referrals are not services directly related to the human resource management activities of the Company's service recipients and are not taxable as business management consulting services, because the health care providers will not be employees of the health care provider group.

Quality assurance. Providing advice on the development of quality assurance programs, including structuring quality management committees to develop practice guidelines and perform outcome studies, is directly related to the core business of providing patient care and is taxable as a business management consulting service.

Claims processing. In Ruling No. 93-6, services involving the processing, management and collection of unpaid claims made by health care providers upon insurance carriers or governmental payers were held not to be taxable services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J) because such services were deemed not to be directly related to the core business of the service recipients, which was the provision of health care. The services were also held not to be taxable as computer and data processing services, because the true object of the services was to have unpaid insurance claims processed and paid as quickly as possible. Where the Company handles claims processing on behalf of its service recipients, whether such claims are made by the service recipients against insurers or governmental payers or the claims are being made against the service recipients by third party providers, the purpose of the service recipients in purchasing such services is to have the Company handle the processing of the claims, including the review, payment or denial and appeal of claims, and not to purchase computer and data processing services. Therefore, this service is not a taxable service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(A). However, where the Company furnishes computer hardware and/or prewritten software to service recipients to allow them to process their own claims, any charges made for such hardware and software are taxable as the sale or lease of tangible personal property. Personnel agency services, which are enumerated as taxable services in Conn. Gen. Stat. § 12-407(2)(i)(C), are described in Conn. Agencies Regs. § 12-426-27(b)(3)(c) as "furnishing temporary or part-time help to others by means of employing such temporary and part-time help directly." Policy Statement 93(3.1) explains that two elements are necessary before a service is taxable as a personnel agency service: (i) an employer must directly employ employees who will furnish temporary or part-time help to a service recipient, and (ii) while the employee is with the service recipient, the service recipient must have control over the work which the employee is to do as well as how the work is to be done within the general parameters of the type of personnel service contracted for. Policy Statement 93(3.1), p. 2. The Company's service recipients have direction and control over the work to be performed by the Company's personnel, and so the vacation coverage offered by the Company is a personnel agency service and is taxable. Personnel training services are taxable under Conn. Gen. Stat. § 12-407(2)(i)(J) as business management consulting services rendered with regard to human resource management activities. (See Conn. Agencies Regs. § 12-407(2)(i)(J)-1(i); Policy Statement 92(2.1).) Therefore, the Company's training of the staff of its service recipients in claims processing is taxable.

Member services. The 800-number telephone support service provided by the Company, in which questions of patients are answered about benefits, claims, physicians, etc., under the capitated fee arrangements of the service recipients is directly related to the core business of the service recipients of providing health care and is taxable as a business management service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J). The Company's participation in the claims appeal process, in which it represents its service recipient and adjudicates disputes between the latter and patients whose claims have been denied, does not involve the Company furnishing advice and assistance on matters pertaining to the provision of health care services by its service recipient. It therefore is not taxable as a business management consulting service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J). Marketing services, which are defined as involving "the performance of testing, research or analysis of existing or potential consumer markets in connection with the development of particular products, property, goods or services for sale to others by the service recipient," are excluded from the definition of taxable business management consulting services in subsection (g) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1. The Company's service of developing and distributing patient satisfaction surveys and compiling and analyzing the results is such a marketing service and therefore is not taxable.

Contract services. In general, accounting and actuarial services are considered to be professional services under subdivision (c)(3) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1; therefore, separately stated charges for such services are not subject to tax as business analysis, business management, business management consulting or business public relations services. However, consulting services rendered by the Company in the negotiation and management of contracts with insurers and other payers are taxable as business management consulting services because they relate to the determination of when health care services will be rendered by the Company's service recipients and the compensation therefore, as well as to the budgeting and short-range, long-range or strategic planning of the service recipients.

Pre-certification review. The pre-certification review performed by nurses and nurse practitioners requires the application of professional medical expertise by the Company's employees in order to determine whether a patient should be referred to a specialist or hospitalized. Similarly, the development of the internal protocols used by service recipients also requires the exercise of professional medical judgment to develop the guidelines to be used by medical practitioners and the Company in a managed care system. Therefore, both aspects of the pre-certification review service offered by the Company that are performed by nurses and nurse practitioners are professional services that are excluded from the scope of business management or business management consulting services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

Utilization review. The Company's service of preparing reports for a service recipient regarding various aspects of that service recipient's experience with patient activity and physician referrals under a capitated fee arrangement is taxable as a business analysis service, defined in subsection (d) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 as "the examination of data relating to core business activities . . . of a service recipient . . . and the formulation of conclusions, and the making of recommendations, based on such examination and relating to such core business activities. . . ." (The utilization review services are not considered computer and data processing services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(A) because, like the claims processing services discussed above, the use of computers is incidental to the true object of such services, which is to have patient usage and physician referral reports generated.)

RULING:

The Company's managed care services are taxable as business management consulting services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

The credentialling services are taxable services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J) as business management consulting services relating to the human resource management activities of the service recipients when rendered with respect to evaluating potential employees of a provider group. Separately stated charges for actuarial services are excludible from the Company's gross receipts.

Providing advice on the development of quality assurance programs is a taxable service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J) as a business management consulting service.

Where the Company handles the processing of claims on behalf of its service recipients, the Company's services are not taxable as computer and data processing services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(A). However, any charges for furnishing computer hardware and licensing prewritten software to service recipients to allow them to process claims on their own are taxable as the sale or lease of tangible personal property.

The processing of claims by the Company on behalf of the service recipients, whether such claims are made by or against the service recipients, is not directly related to the core business of the service recipients, which is the delivery of health care services, and is not taxable as a business management service under Conn. Gen. Stat. § 12-407(2)(i)(J).

The provision by the Company of claims processing employees for vacation coverage is taxable as a personnel service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(C).

The Company's training of the staff of its service recipients in claims processing is a taxable service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J) as a business management consulting service rendered with regard to human resource management activities.

The 800-number telephone support service provided by the Company to respond to patient questions about benefits, claims, physicians, etc., under the capitated fee arrangements of the service recipients is taxable as a business management service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

The Company's participation in the claims appeal process is not related to the service recipients' core business of providing health care services and is not taxable as a business management consulting service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

The Company's services with regard to patient satisfaction surveys constitute a marketing service which is excluded from the definition of taxable business management consulting services in Conn. Agencies Regs. § 12-407(2)(i)(J)-1(g).

Accounting and actuarial services rendered in connection with the Company's contract services are professional services under Conn. Agencies Regs. § 12-407(2)(i)(J)-1(c)(3); therefore, separately stated charges for such services are not subject to tax as business analysis, business management, business management consulting or business public relations services. However, the Company's consulting services rendered in connection with the negotiation and management of contracts with insurers and other payers are directly related to the core business of the service recipients and so are taxable as business management consulting services.

The Company's pre-certification review services performed by nurses and nurse practitioners, involving pre-approving patient referrals and hospitalizations and assisting in the development of service recipients' internal referral protocols, are professional services which are excluded from the definition of taxable business management or business management consulting services enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

The preparation of reports in the Company's utilization review for its service recipients regarding various aspects of the service recipients' experience under capitated fee arrangements is taxable as a business analysis service enumerated in Conn. Gen. Stat. § 12-407(2)(i)(J).

LEGAL DIVISION

Issued February 4, 1997