Is a medical billing and coding company's lump-sum fee taxable, when its services include both nontaxable coding/claim-filing work and taxable insurance-claims-appeal work?

Plain-English summary

A medical coding and billing company serves Texas physicians and providers, charging a lump-sum fee based on a percentage of the dollar amount of claims it processes. Its certified coders review and correct the medical billing codes clients' staff initially assign, convert the data into the electronic format insurers require, and submit claims. Beyond that, the company also verifies insurance eligibility before filing, works old (but not delinquent) accounts receivable, responds to insurer follow-up questions, and — importantly — appeals denied claims. It asked how all of this is taxed under one combined percentage-based fee.

The Comptroller ruled the answer is mixed, and that mix matters because of a bundling rule. Coding work, current-account collection, insurance-eligibility verification, and the initial filing of a claim (including responding to routine follow-up questions from an insurer about a pending claim) are all nontaxable — they happen before a claim is submitted or are otherwise not enumerated taxable services. But appealing a denied claim is different: the Comptroller treats that as "claims adjustment or processing," a taxable insurance service, because it's correcting an already-filed claim rather than simply completing the initial filing. Since the company charges one lump sum covering both the nontaxable and taxable pieces, Rule 3.355(i) kicks in: once the taxable (claims-appeal) portion exceeds 5% of the total charge, the entire lump sum is presumed taxable — though the company can rebut that presumption by keeping books that support a smaller taxable allocation, based on cost of providing each service or comparable standalone pricing.

What this means for you

Medical billing and coding companies

Draw a bright line at claim submission: work done to prepare and file an initial claim (coding, eligibility checks, initial submission, routine follow-up) is nontaxable, but work done to fix or contest an already-filed claim (appeals, adjustments, reprocessing) is a taxable insurance service. If you bundle both into one percentage-based fee and the taxable share is more than a sliver of your business, expect your entire fee to be presumed taxable unless you can prove otherwise.

Any business bundling taxable and nontaxable services for one price

The 5% threshold in Rule 3.355(i) is a real cliff, not a gradual phase-in: cross it, and the whole charge is presumed taxable, full stop, until you affirmatively document the actual split. If you know part of your combined service is taxable, keep books that support your true cost or market-rate allocation between the pieces — that's your only escape hatch from being taxed on 100% of the fee.

Accountants and tax professionals

The ruling threads together a consistent line of STAR guidance (200207227L, 200602595L, 200212655L, 201803004L) distinguishing pre-filing medical billing work (nontaxable) from post-filing claims adjustment (taxable insurance service under Section 151.0039 and Rule 3.355(b)), then applies the 5%-of-total-charge bundling presumption from Rule 3.355(i)(2) — useful precedent for any hybrid service arrangement that mixes an enumerated taxable service with nontaxable work under one price.

Common questions

Q: Is medical coding itself a taxable service?
A: No — creating and correcting medical billing codes before a claim is filed is nontaxable, distinguishable from taxable data processing services under prior Comptroller guidance.

Q: Is appealing a denied insurance claim always taxable?
A: Under this ruling, yes — it's treated as "claims adjustment or processing," an enumerated taxable insurance service, unlike the nontaxable work of filing the original claim.

Q: If I bundle taxable and nontaxable services into one fee, when does the whole thing become taxable?
A: Once the taxable portion is more than 5% of the total charge, the entire charge is presumed taxable — you'd need supporting books (cost-based or market-rate) to prove a smaller taxable share and avoid tax on the whole amount.

Q: Can another medical billing company rely on this ruling?
A: No. It's a private letter ruling binding on the Comptroller only for the taxpayer and facts submitted, and it cannot be relied on by any other taxpayer — your specific service mix and percentage split would need its own review.

Citations and references

Statutes, rules, and STAR guidance:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 ("Taxable Item"); § 151.0101 ("Taxable Services")
• Tex. Tax Code § 151.0039 ("Insurance Service")
• 34 Tex. Admin. Code Rule 3.354(b)(2) (Debt Collection Services — current-account collection not taxable)
• 34 Tex. Admin. Code Rule 3.355(a)(5), (b) (Insurance Services — claims adjustment/processing taxable); Rule 3.355(i)(2) (5% bundling presumption)
• STAR Accession Nos. 200207227L (July 2, 2002); 200602595L (Feb. 21, 2006); 200212655L (Dec. 3, 2002); 201803004L (Mar. 5, 2018)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201807025L

Original ruling text

July 16, 2018

RE: Private Letter Ruling No. 2017010171

*, Taxpayer No. *

Dear ****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated July 3, 2017 and the subsequent information provided on Aug. 11, 2107. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of your medical coding and billing services.

Facts Presented

**** (Taxpayer) provides medical coding and billing services to Texas licensed physicians and medical service providers (Clients). Taxpayer bills Clients a lump sum fee based upon a percentage of the dollar amount of the claims processed.

Taxpayer's Clients submit claims for payment by various Health Care Plans (Plans) administered by insurance companies for medical treatments and services.

Clients’ personnel review patient charts to identify the type of service provided and assign an initial payment level code based on methodology developed by the American Medical Association or insurance companies.

Taxpayer employs personnel who are certified to perform medical coding by the American Academy of Professional Coders or the American Health Information Management Association. These certified coding personnel analyze the initial coding provided by Clients’ staff. They may then reclassify charges or break down charges into multiple, separate codes for multiple services provided during a single patient visit. After making any corrections or expansions to the billing codes, Taxpayer converts the raw data into the electronic format desired by the Plans to generate electronic bills that Taxpayer sends to the Plans for payment.

Taxpayer states it does not bill Clients’ patients, receive payments from the Plans, adjust any Client claims, handle any refunds, or resolve any over or under billing issues between the Client and the Plans. Taxpayer also states that it does not process delinquent accounts but may work on old accounts receivable.

Taxpayer may respond to follow-up calls from the Plans on behalf of a Client, make telephone inquiries about the status of an outstanding claim, or respond to mail inquiries.

Taxpayer also provided a “Services Proposal” and additional information that indicates its services include verifying insurance eligibility, appealing denied claims, and performing follow up work with insurance companies.

Taxpayer provides weekly, monthly, and quarterly reports to Clients detailing amounts billed, billing code adjustments, payments approved, comparisons to various periods of activity, and other similar details. Taxpayer does not make a separate charge for these reports.

Question, Ruling, and Analysis

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

Question: Are Taxpayer's medical billing and coding services taxable?

Ruling: Taxpayer's charges for its services are a lump-sum charge for nontaxable medical coding services and taxable insurance services. 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 under Rule 3.355(i) (Insurance Services).

Analysis: A sales tax is imposed on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines a taxable item as tangible personal property and taxable services. Section 151.0101 (“Taxable Services”) provides a list of taxable services, which include data processing services, debt collection services, and insurance services.

The collection of current accounts, as described by Rule 3.354(b)(2) (Debt Collection Services) is not a taxable debt collection service. Taxpayer’s services related to collecting current accounts receivable are not taxable.

Taxpayer’s services involve trained personnel reviewing, correcting, expanding, and entering medical billing codes into Clients’ software systems for initial submission by Taxpayer to the Plans. Comptroller guidance determined that medical billing services provided prior to submission of a claim to an insurance company are not taxable insurance services. See STAR Accession Nos. 200207227L (July 2, 2002) and 200602595L (Feb. 21, 2006). Additionally, creating medical billing codes is distinguishable from taxable data processing services and not taxable. See STAR Accession No. 200212655L (Dec. 3, 2002).

Taxpayer’s services also include verifying insurance eligibility, filing initial insurance claims with the Plans, appealing denied claims, and performing follow up work with the Plans. Services performed by a medical billing company before submitting a claim to an insurance company, such as verifying insurance eligibility, are not taxable insurance services. See STAR Accession 200207227L. In addition, the initial filing of any part of an insurance claim is not an insurance service and is not taxable. See STAR Accession No. 200602595L and 201803004L (Mar. 5, 2018). Finally, responding to requests for additional information from an insurance company related to a submitted billing is not a taxable insurance service because it is incidental to the nontaxable claim filing service. See STAR Accession 200207227L.

Taxpayer’s activities to appeal denied claims are not merely incidental to the initial, nontaxable service of filing the claim, and are more like activities to correct previously filed claims, which prior guidance has treated as taxable insurance services. See STAR Accession No. 200602595L and 201803004L. Taxpayer’s activities related to appealing denied claims meet the definition of “insurance claims adjustment or claims processing” under Rule 3.355(a)(5). Claims adjustment and processing services are taxable insurance services. See Sections 151.0039 (“Insurance Service”); 151.0101(a)(9); and Rule 3.355(b).

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 the 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. Rule 3.355(i)(2).

The STAR documents cited can be found 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 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 No. 2017010171.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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