Is a hospital payment-review service that re-examines already-filed and already-reimbursed insurance claims a taxable insurance service or a nontaxable medical billing service?

Plain-English summary

The Texas Comptroller ruled that a consulting firm's hospital payment-review service is a taxable insurance service, not a nontaxable medical billing service, because the firm reviews claims that insurers have already reimbursed and looks for errors to recover additional payment — activity that falls squarely within Texas's definition of "insurance claims adjustment or claims processing."

The firm only reviews "zero-balance" hospital accounts: claims already submitted, negotiated, and paid by an insurer, where the hospital has stopped working the account. It re-prices claims against the insurer contract, flags underpayments or overpayments, and either recommends refunds/credits or works with the hospital to pursue additional reimbursement, earning a cut of any recovered money. Texas taxes "insurance services," defined to include "insurance claims adjustment or claims processing" — by rule, "any activities to supervise, handle, investigate, pay, settle, or adjust claims or losses" — and this taxable category applies whether or not the provider is a licensed insurance adjuster. The firm argued its work was really nontaxable medical billing (citing older Comptroller guidance on that category), but the Comptroller distinguished medical billing (helping file a NEW claim) from what this firm does: investigating and correcting claims that were already filed and paid. That's claims adjustment, and it's taxable. The one carve-out: if the firm identifies a charge for services that were provided but never billed at all, preparing that brand-new claim for initial filing stays nontaxable — but since the firm doesn't separately bill for that sliver of work, the bundling rule in 34 Tex. Admin. Code § 3.355(i) presumes the whole charge taxable once the taxable portion exceeds 5% of the total, unless the firm's books can support an apportionment.

What this means for you

Medical billing, revenue-cycle, and claims-recovery companies

Reviewing and correcting claims that have already been filed and paid is taxable insurance-services work in Texas, even if you brand it as "billing" or "revenue cycle" consulting. Only work on brand-new, never-before-filed claims is nontaxable — and if you bundle both types of work into one charge without separately pricing the nontaxable portion, the whole charge is presumptively taxable once the taxable share exceeds 5%.

Hospitals and physician groups hiring payment-review firms

Expect sales tax to apply to fees for reviewing already-paid claims for reimbursement errors — factor that into vendor contract costs, and ask vendors whether any portion of their fee is separately priced for genuinely new, never-filed claims (which would be nontaxable).

Accountants and tax professionals

The controlling authority is 34 Tex. Admin. Code § 3.355(a)(5) (claims adjustment/processing definition) and § 3.355(b) (taxability doesn't require a licensed-adjuster credential), distinguished from the nontaxable medical-billing precedent in STAR Accession Nos. 200602595L (2006) and 200207227L (2002), which cover filing NEW claims rather than correcting paid ones. Watch the 5%-rule bundling trap in § 3.355(i) for any provider that doesn't separately state its nontaxable new-claim-filing work.

Common questions

Q: Is reviewing hospital insurance claims for billing errors always a taxable service in Texas?
A: It depends on timing. Reviewing and correcting claims that an insurer has ALREADY paid is taxable insurance claims-adjustment work. Preparing and filing a brand-new claim that was never submitted at all is nontaxable medical billing.

Q: Does the provider need to be a licensed insurance adjuster for this tax to apply?
A: No. Texas taxes insurance claims-adjustment activity regardless of whether the person performing it holds an adjuster's license.

Q: What happens if a firm bundles taxable claims-correction work with nontaxable new-claim-filing work into one fee?
A: If the taxable portion is more than 5% of the total charge and it's not separately priced, the whole charge is presumed taxable — the provider can rebut that presumption only with books that support a reasonable cost-based or comparable-pricing apportionment.

Q: Can another payment-review company rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0039 (Insurance Service, definition)
• Tex. Tax Code §§ 151.010, 151.051, 151.0101 (taxable item; imposition; taxable services list)
• 34 Tex. Admin. Code § 3.355(a)(5) (insurance claims adjustment/claims processing, definition)
• 34 Tex. Admin. Code § 3.355(b) (no adjuster-license requirement for taxability)
• 34 Tex. Admin. Code § 3.355(i) (5%-rule bundling presumption)
• Tex. Ins. Code § 4101.001 (adjuster definition, held not controlling for tax purposes)
• STAR Accession No. 200602595L (Feb. 21, 2006); STAR Accession No. 200207227L (July 2, 2002) (nontaxable new-claim medical billing, distinguished)
• STAR Accession No. 8803L0870A01 (Mar. 21, 1988) (no license requirement)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201803004L

Original ruling text

March 5, 2018

COMPANY

CITY, TX

Re: Private Letter Ruling No. 2017010117

*, Taxpayer No. ***

Dear * :

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated March 31, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of payment review services performed for Texas hospitals.

Facts Presented

* (Taxpayer) is a California-based consulting firm that offers payment review services for hospitals. Taxpayer reviews reimbursements received from patients' insurers, including private insurers and government plans like Medicare, to identify errors and counsel clients on how to avoid future errors. Taxpayer customizes each review it performs based on its client’s health plan contracts.

Taxpayer only reviews zero-balance accounts for reimbursements by the insurer. Zero- balance accounts are those for which a hospital submitted a bill to the insurer, negotiated over the services provided and the patient's contractual allowance, received reimbursement from the insurer, and ceased work on the account.

Although Taxpayer may evaluate accounts that contain a credit balance, bad debt balance, or patient liability for co-pay, Taxpayer’s services are limited to the zero-balance aspect of the account for the insurer and relate only to the insurer’s reimbursement amount.

Taxpayer’s typical payment reviews consist of three phases:

1. Data download – Taxpayer downloads the records of a client's patient encounters for an agreed-upon period of time. Taxpayer ensures that the data is accurate and in a format Taxpayer can review. Taxpayer also obtains access to the client's accounting systems and acquires copies of active contracts with insurers.

2. Account review – Taxpayer reviews the provisions of client contracts with insurers that may affect reimbursement and independently prices claims to identify errors. Taxpayer then researches relevant accounts to determine whether errors exist.

After identifying an error, Taxpayer recommends issuing refunds or credits for any over-reimbursements from insurance companies or patient overbillings. In the case of an under-reimbursement resulting from a missing charge for services provided but not billed, Taxpayer states that it works with the client to issue a corrected bill to the third party payer. If the under-reimbursement is the result of a contractually inappropriate application of an improper rate, Taxpayer may forward supporting information to the insurer and request an updated application of the rate. Periodically, Taxpayer may contact the insurer by phone to follow up or to clarify the issue.

Insurers pay any additional reimbursements directly to Taxpayer’s clients. The client subsequently pays Taxpayer a percentage of the total increased reimbursements.

3. Reporting and consulting services – Taxpayer creates reports on the sources of any under-reimbursements and where they occur in the client's revenue cycle. Taxpayer also makes recommendations on policies and procedures to help reduce future billing mistakes.

Taxpayer receives a percentage of the total increased reimbursements collected by its clients.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Is Taxpayer’s payment review service a nontaxable service?

Ruling: Taxpayer is providing a taxable insurance service because its payment review activities fall within the definition of “insurance claims adjustment or claims processing.” Rule 3.355(a)(5) (Insurance Services).

Analysis:

Section 151.051 (Sales Tax Imposed) imposes sales tax on each sale of a taxable item in Texas. The Tax Code defines a taxable item as “tangible personal property and taxable services.” Section 151.010 (Taxable Item). Taxable services include insurance services. Section 151.0101 (“Taxable Services”).

Insurance service means “insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service.” Section 151.0039 (“Insurance Service”). By rule, the Comptroller has defined “insurance claims adjustment or claim processing” to mean “[a]ny activities to supervise, handle, investigate, pay, settle, or adjust claims or losses.” Rule 3.355(a)(5).

Prior Comptroller guidance does not limit “insurance claims adjustment” to services provided by persons described by the definition of “adjuster” in Texas Insurance Code, Section 4101.001 (Definitions). Rather, insurance services are taxable when performed on behalf of an insurance carrier, its insured, its policyholders, or others pertaining to a policy or policies of insurance. Rule 3.355(b); see also Star Accession No. 8803L0870A01 (Mar. 21, 1988) (“The statute or rule does not require the person performing [insurance claims adjustment or claim processing] services to be licensed as an adjustor or private investigator.”).

Taxpayer works with hospitals to review the reimbursements that the hospitals received from their patients' insurers. These reviews involve an account for which a hospital has already filed an insurance claim and received a reimbursement. Taxpayer investigates the previously-submitted claims in order to recover additional reimbursements. For example, Taxpayer investigates whether the insurer reimbursed the claims in accordance with the contractual agreements. Taxpayer also identifies any errors the hospital may have made with filing of the initial claim.

Taxpayer contends its service is a nontaxable medical billing service as described by STAR Accession Nos. 200602595L (February 21, 2006) and 200207227L (July 2, 2002). However, Taxpayer is reviewing and identifying errors with previously filed claims. Services that involve correcting previously filed claims are considered taxable insurance services. STAR Accession No. 200602595L. Additional Comptroller guidance determined medical bill review services constitute taxable insurance services. See STAR Accession Nos. 9406L1328B02 (June 23, 1994) and 9502L1334G07 (February 16, 1995).

Taxpayer’s activities involve investigating, settling, and often adjusting a claim. These are all activities included in the definition of “insurance claims adjustment or claims processing” in Rule 3.355(a)(5). Consequently, Taxpayer is providing a taxable insurance service.

As part of its services, Taxpayer may identify under-reimbursements resulting from a missing charge for services provided but not billed. Filing new claims resulting from missing charges is not taxable. STAR Accession No. 200602595L. However, Taxpayer’s service is not taxable only to the extent it is preparing a new claim for initial filing with an insurance company.

Taxpayer does not separately bill for any nontaxable services it may provide when identifying charges for services that have not been billed. Under Rule 3.355(i), when nontaxable services and taxable insurance services are sold for a single charge and the portion relating to taxable services represents more than five percent of the total charge, the total charge is presumed to be taxable. The service provider may later establish percentage of the total charge that relates to nontaxable services. The insurance service provider's books must support the apportionment between taxable and nontaxable services based on the cost of providing the service or on a comparison to the normal charge for each service if provided alone.

The STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have any questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling # 2017010117.

Sincerely,

Tax Policy Division - Indirect Taxes

Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise noted, all references herein to “Section” are to the Texas Tax Code and all references to “Rule” are to Title 34 of the Texas Administrative Code.