Texas HB 1445, which went into effect on January 1, 2022, exempts medical billing services performed before the submission of the relevant insurance claim from state sales tax. The new legislation legally exempts medical billing services from the statutory definition of taxable “insurance services.” Practically speaking, this relieves management services companies, and ultimately physicians and patients, from bearing the burden of tax payments of up to 8.25% for the provision of certain medical billing services. The legislation is hailed by many as a meaningful step in lowering needlessly high healthcare costs, which are felt by patients and providers alike.
Historical Taxation of Medical Billing Services
Since “medical billing services” have not previously been defined or even mentioned in the Texas Limited Sales, Excise, and Use Tax Act, their tax status has traditionally been subject to the interpretation of the Texas Comptroller of Public Accounts (“Comptroller”). However, under the Comptroller’s discretion, medical billing services have not always been subject to state sales tax.It was not until 2019 that the Comptroller began taxing medical billing services once again, this time as “insurance services” pursuant to Tex. Tax Code 151.0039, citing the fact that its previous position resulted in disparate treatment between medical insurance and other types of insurance.
Reclassification of Medical Billing Services
Following the Comptroller’s inconsistent treatment of medical billing services throughout the years, which resulted in frustration from industry players, the Texas legislature finally spoke on the issue during the 2021 legislative session. The new legislation introduced by HB 1445 explicitly indicates that taxable “insurance services” do not include medical billing services performed before the submission of the relevant insurance claim.
The new legislation provides further clarification by defining a “medical or dental billing service” as “assigning codes for the preparation of a medical or dental claim, verifying medical or dental insurance eligibility, preparing a medical or dental claim form for filing, and filing a medical or dental claim.” However, this definition could end up being a pitfall for service providers, as guidance indicates that a medical billing service must fall squarely within this definition in order to be exempt from state sales tax.
The definition of medical billing service established by HB 1445 is narrower than the definition historically used by the Comptroller. Since 2019, the Comptroller has considered taxable medical billing services as “medical billing services to prepare a medical insurance claim for filing,” including “those [services] performed prior to submitting a claim to an insurance company, to provide additional information, or to adjust a submitted billing.” Therefore, the Comptroller might still tax medical billing services to the extent that such services fall outside the narrow statutory definition but still within the Comptroller’s broader definition of medical billing service. Companies should narrowly tailor medical billing operations to fit within the statutory definition in order to secure the state tax exemption.
Since the new legislation has only been in effect for two months, industry participants must wait to see whether the Comptroller will defer entirely to the statutory language and the spirit of HB 1445 or whether the office will wield its remaining discretion to continue taxing certain pre-submission medical billing services.