Are a company's utilization review, peer review, and independent medical exam services — sold to insurers to evaluate whether an injured patient's treatment is appropriate — taxable insurance services in Texas?

Plain-English summary

A company sells insurance companies three tiers of medical-claim review services to determine whether an injured or ill patient's treatment is medically appropriate: utilization review (a licensed physician checks a proposed treatment against evidence-based guidelines, often before treatment begins, sometimes required by the Texas workers'-compensation system), peer review (a more in-depth records review used when a utilization review can't authorize payment or treatment seems to deviate from guidelines), and independent medical examination (the most thorough tier — an independent physician with no prior involvement in the case reviews records AND physically examines the patient). The company asked whether these services are taxable as "insurance services" in Texas.

⚠️ Note on superseded guidance: STAR's own records flag this 2020 ruling as partially superseded as of September 15, 2023. In 2023, the Legislature passed Senate Bill 1122, which specifically excluded from the taxable insurance-services category any medical exam or test required or authorized under the Labor Code's workers'-compensation chapter for the purpose of setting benefit levels — commonly known as Designated Doctor exams. So while this ruling's general reasoning still applies to utilization review, peer review, and independent medical exams generally, that one specific category (Designated Doctor exams performed to determine workers'-comp benefit levels) is no longer taxed as described below.

The original 2020 holding: All three service tiers were ruled taxable insurance services, specifically falling under the "insurance claims adjustment or claims processing" category — defined broadly to include any activity to supervise, handle, investigate, pay, settle, or adjust claims or losses. The Comptroller reasoned that all three services exist to help an insurer decide whether and how much to pay for a patient's treatment, which is squarely claims-adjustment work performed on behalf of an insurance carrier — even though a licensed physician is doing the actual reviewing, and even though the review touches on genuinely medical questions (appropriateness of treatment, deviation from clinical guidelines). The ruling contrasted this with nontaxable medical insurance services, which are medical services provided to the patient for the patient's own health and benefit — not services provided to an insurer to evaluate a claim.

What this means for you

Medical review, utilization review, and independent medical exam companies

Providing medical expertise to an insurer for claims-evaluation purposes is generally treated as a taxable insurance service in Texas, even though the work is performed by licensed physicians and involves substantive medical judgment — the deciding factor is who you're serving and why (an insurer deciding a claim) rather than who's doing the reviewing (a doctor). But if your work is specifically a Designated Doctor exam performed under the workers'-compensation system to determine benefit levels, that narrow slice has been excluded from taxable insurance services since June 2023 — confirm which of your services fall into that carve-out.

Workers' compensation insurers and claims administrators

Since 2023, Designated Doctor exams for benefit-level determination are no longer taxed as insurance services, which may lower costs on that specific line item — but general utilization review, peer review, and independent medical exams for other purposes remain taxable insurance services under this ruling's original analysis.

Accountants and tax professionals

This is a good example of a service straddling the line between "medical" and "insurance" — the deciding test (per Comptroller's Decision No. 27,950) is whether the medical service is for the patient's own health and benefit (nontaxable) versus for an insurer's claims-evaluation purposes (taxable insurance service). Track the 2023 S.B. 1122 carve-out separately for any client doing workers'-comp-specific Designated Doctor work.

Common questions

Q: What's the difference between a nontaxable medical service and a taxable insurance service here?
A: The test is who the service is for and why. A medical service provided to a patient for that patient's own health and benefit is nontaxable; the same kind of medical review provided to an insurer specifically to evaluate or adjust a claim is a taxable insurance service, per Rule 3.355(c)(2) and Comptroller's Decision No. 27,950.

Q: Are Designated Doctor exams for workers' compensation taxable today?
A: No, not for the purpose of determining benefit levels under Labor Code Chapter 408 — Senate Bill 1122 excluded those specifically from the taxable insurance-services definition, effective June 18, 2023.

Q: Does this ruling apply to other types of medical claims review services?
A: Not automatically, and be especially careful with anything touching workers' compensation given the 2023 statutory change. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts; confirm current law with a Texas tax professional.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101 (insurance services as a taxable service); § 151.0039(a) (Insurance Service definition)
• 34 Tex. Admin. Code § 3.355(a)(8), (b), (c)(2) (claims adjustment/processing; taxable when performed for a carrier; nontaxable patient-benefit medical services)
• Tex. Labor Code ch. 408 (Workers' Compensation Benefits), incl. Designated Doctor exam exclusion added by S.B. 1122 (88th Legislature, 2023, eff. 6/18/2023)
• Comptroller's Decision No. 27,950 (1991); STAR Accession No. 9110T1139A12 (1991)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202005027L

Original ruling text

STAR Superseded Information

Supersede type: partial

Document superseded on: 9/15/2023

Issue(s) that caused the document to be superseded: Designated Doctor’s Exams for Workers’ Compensation

Reason(s): Senate Bill 1122 (88th Leg. Session, 2023) excluded from the definition of taxable insurance services a medical service, examination or test required or authorized under Chapter 408 of the Texas Labor Code (Workers’ Compensation Benefits) for the purpose of determining the appropriate level of benefits under that chapter. Effective 06/18/2023.

May 15, 2020

RE: Private Letter Ruling No. 20190613133913

*, 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 requests dated June 13, 2018, June 3, 2019 and subsequent information provided on July 24, 2018 and March 5, 2019, via e- mail. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of medical review services provided to the insurance industry.

Facts Presented

COMPANY (Taxpayer) provides the insurance industry with services to review insured patients’ requests for payment of medical treatments. Taxpayer's services include utilization review, peer review, and an independent medical examination service.

An insurance company (insurer) hires Taxpayer to provide its utilization review service. Taxpayer provides a medical professional to review an insured’s (patient) medical treatment. The medical professional is a state-licensed utilization review agent, typically a licensed physician. The insurer could have several different reasons for requesting a utilization review including (1) the utilization review is mandated by the Texas Department of Insurance if the medical claim is made under the Texas workers’ compensation system; (2) an insurer may independently request a utilization review for reducing overutilization (i.e., reducing inappropriate costs); or (3) the utilization review is requested by an insurer as a mechanism to ensure the most appropriate and necessary medical treatment is given to the patient.

The records examined include the patient diagnoses, patient complaints, plan of medical care, progression and completed medical care. Taxpayer’s medical professional applies evidence-based guidelines to the information they gather and documents the overall findings to ensure the medical services provided comply with the appropriate medical guidelines. The Taxpayer’s medical professional will document the extent from which the provided services differ from the appropriate guidelines, the treatment required, the patient’s response to the treatment and diagnostic abnormalities.

Taxpayer provides insurers a peer review service which is a more extensive version of the utilization review service. The peer review service involves the examination of medical records and clinical information by a Texas licensed physician. The physician reviews the claim and medical records to determine if a treatment or progression of treatment is appropriate and compares it to evidence-based guidelines in doing so. Taxpayer provides the peer review service when an insurer cannot authorize payment of certain medical treatments as a result of a utilization review or when medical services do not comply with established evidence-based guidelines as required by the Texas Department of Insurance.

The independent medical exam service is Taxpayer’s most extensive review service. Like Taxpayer’s other services, Taxpayer provides this service to insurers to determine the appropriateness of medical treatments provided to a patient. An insurance adjuster, employed by the insurer, may request an independent medical exam when the adjuster believes a patient's standard of care deviates from evidence-based guidelines. An independent physician with no prior knowledge of a patient’s case performs a comprehensive review of the patient’s records and conducts a physical examination of the patient. The physician determines the appropriateness or necessity of treatments, any deviations from evidence-based guidelines, and the reasons for the deviations, based on information gathered during the independent medical examination process.

Question, Ruling, and Analysis

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

Question: Are Taxpayer's medical review services taxable insurance services?

Ruling: Taxpayer's utilization review, peer review, and independent medical review services are taxable insurance services. See Rule 3.355 (Insurance Services).

Analysis: Texas imposes a sales tax 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 to include tangible personal property and taxable services. Section 151.0101 (“Taxable Services”) provides a list of taxable services that includes insurance services.

Section 151.0039(a) (“Insurance Service”) defines an insurance service as insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or processing, or insurance loss prevention service. Rule 3.355(a)(8) further defines “insurance claims adjustment or claims processing” as any activity to supervise, handle, investigate, pay, settle, or adjust claims or losses. Rule 3.355(b) states insurance services performed on behalf of an insurance carrier are taxable.

In Taxpayer’s utilization review service, a physician reviews a claim to determine if a treatment is the appropriate medical treatment the patient needs to receive. While the utilization review service may be provided at any point in the treatment process, in most cases it is performed before treatment begins. Taxpayer’s utilization review service meets the definition of an insurance claims adjustment or claims processing service, which is an insurance service under Rule 3.355(a)(8). In STAR Accession No. 9110T1139A12 (Oct. 9, 1991) the Comptroller concluded that a similar utilization review service was an insurance claims adjustment or claims processing service under Rule 3.355(a)(8).

Taxpayer's peer review and independent medical exam services are performed by licensed physicians. Taxpayer’s peer review involves the examination of an insurance claim and medical records. Taxpayer's independent medical review service includes an in-depth review of the patient’s records, and a physical examination of the patient, to determine if a treatment is appropriate. Taxpayer’s peer review and independent medical review services are performed on behalf of an insurance agency to determine the appropriateness of services provided to the patient. In Comptroller’s Decision No. 27,950 (1991) the ALJ concluded that a service provided to an insurer for the purpose of evaluating the validity and scope of an insured client's claim were taxable insurance services. Taxpayer’s peer review and independent medical review services are insurance claims adjustment or claims processing services subject to Texas sales and use tax. Rule 3.355(b).

Nontaxable medical insurance services described in Rule 3.355(c)(2) are medical services provided to the patient for the patient’s health and benefit. See Comptroller’s Decision No. 27,950. STAR Accession No. 200511408L (Nov. 1, 2005) does not accurately represent current comptroller policy regarding nontaxable medical insurance services under Rule 3.355(c)(2) and will be superseded.

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. 20190613133913.

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.