Is a company's service of reviewing and approving or denying medical pre-authorization requests for an insurer, using proprietary software staffed by medical professionals, a taxable insurance, data processing, or information service in Texas?

Plain-English summary

A company contracts with a health insurer to handle pre-authorization requests — deciding whether a proposed medical procedure is covered before a doctor or hospital performs it. Its licensed medical staff (doctors, nurses) use a proprietary internal software tool to process each request; about 90% get automatically approved and generate a standard "care path," while denials get a manual review by staff comparing the request to the patient's plan. The company asked whether this service is taxable, worried it might count as a taxable "insurance service." The Comptroller ruled it isn't taxable at all — under any of three possible categories.

Not an insurance service: Texas taxes specific insurance-related services (claims adjustment, loss appraisal, actuarial work, etc.), but the law explicitly excludes anything that amounts to medical billing work performed before an insurance claim is even submitted. Pre-authorization happens before a claim is filed, so it falls outside the taxable insurance-service category entirely.

Not a data processing service: Even though the company uses software and a database to process requests, the software here is a tool that supports trained medical/insurance judgment — the outcome (approve or deny) depends on the specialized skill of the staff reviewing the request, not on the computer just storing/retrieving/manipulating data on its own. Texas has previously distinguished between a service that's genuinely computerized data manipulation versus one where the computer is merely a tool used alongside professional expertise, and this falls in the latter, non-taxable camp.

Not an information service either: The company isn't gathering, compiling, or furnishing general news, financial data, or industry-wide information to anyone — it's making individualized coverage decisions for specific patients, which doesn't fit that taxable category's definition.

What this means for you

Health insurance and utilization-review companies

Pre-authorization/utilization-review services performed before a claim is filed are not automatically taxable insurance services in Texas — the timing (pre-claim vs. post-claim) is the key statutory dividing line under § 151.0039(b)(5)(A). If your service shifts to reviewing or processing claims after they're submitted, that could land you back in the taxable insurance-service category.

Software-assisted professional services generally

When software is a tool that supports a licensed professional's judgment (medical, legal, financial) rather than the actual product being sold, that weighs against data-processing tax treatment — the analysis turns on whether the service's real value is specialized human judgment or computerized data manipulation itself.

Accountants and tax professionals

Note this ruling clears three separate taxable-service categories (insurance, data processing, information services) in one pass — useful as a template for analyzing hybrid software/professional-judgment services in the healthcare and insurance space. The STAR 200502776L citation is the controlling precedent on the "computer as a tool requiring specialized skill" distinction.

Common questions

Q: Would this service become taxable if the review happened after a claim was filed?
A: Potentially — the pre-claim medical billing exclusion in § 151.0039(b)(5)(A) is what keeps this out of the taxable insurance-service bucket, and that exclusion is specifically tied to work done before the original claim submission.

Q: Why doesn't using proprietary software make this "data processing"?
A: Because the software supports staff exercising specialized medical/insurance judgment to approve or deny requests, rather than the service being fundamentally about computerized storage, retrieval, or manipulation of data on its own.

Q: Does this ruling apply to my utilization-review or pre-authorization business?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. A service structured differently (e.g., automated with no specialized human review, or performed post-claim) could be analyzed differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(9) (insurance services as a taxable service)
• Tex. Tax Code § 151.0039(a), (b)(5)(A) (insurance service definition; pre-claim medical billing exclusion)
• Tex. Tax Code § 151.0035(a) (Data Processing Service)
• Tex. Tax Code § 151.0038 (Information Service)
• STAR Accession No. 200502776L (Feb. 17, 2005)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202408013L

Original ruling text

August 30, 2024

RE: Private Letter Ruling No. 20230615102809

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 June 15, 2023, and subsequent documentation received by email on Oct. 29, 2023. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of processing pre-authorization requests, using proprietary software, submitted by medical service providers in relation to patients covered by an insurance provider’s healthcare plans.

Facts Presented

** (Taxpayer) contracts with a healthcare plan provider, COMPANY A (Insurer). Taxpayer provides health insurance pre-authorization approvals or denials to medical service providers (Providers) such as hospitals, clinics, and doctors whose patients have healthcare plans administered by Insurer. Taxpayer is compensated on a monthly rate, multiplied by the number of Providers that treat patients covered by Insurer.

Taxpayer employs medical doctors, nurses, and similarly licensed healthcare professionals (Staff) to provide its services to Insurer, who utilize Taxpayer’s Fully Delegated Solution (the Solution). The Solution is an internal database and software program made up of preset rules used for pre-authorization requests from Providers. The Solution is proprietary and developed only for Taxpayer’s use. The Solution is maintained by Taxpayer; it is not sold, downloaded, or used by Insurer, Providers, or patients. Taxpayer does not grant licenses to use the Solution, as it is designed for use only by Staff.

Pre-Authorization Process

The pre-authorization process starts when Taxpayer receives a request from Providers; requests are received by phone, fax, or through Taxpayer’s online portal. Staff enters all requests into the Solution to determine if a procedure is covered by Insurer. Approximately 90% of pre-authorization requests are automatically approved.

If a request is approved, the Solution will generate a “care path,” which is a plan for patient care based on standard industry best practices. If a request is denied, Staff will conduct a manual review, which includes reviewing the request against the patient’s healthcare plan to determine coverage. There is no additional charge to Insurer when Staff manually reviews pre-authorization requests.

Question, Ruling, and Analysis

Our restatement of Taxpayer’s requested ruling is shown below, followed by our ruling and analysis.

Question: Are Taxpayer’s pre-authorization services for insurance eligibility in relation to healthcare plans taxable as an insurance service?

Ruling: No, pre-authorization services for insurance eligibility performed by Taxpayer prior to the submission of an insurance claim are not taxable insurance services.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Insurance services are included in the list of services subject to Texas sales and use tax. Section 151.0101(a)(9) (Taxable Services).

Section 151.0039(a) (Insurance Services) defines an insurance service as “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.” The term does not include a medical billing service performed before the original submission of a medical insurance claim related to health coverage. Section 151.0039(b)(5)(A).

Taxpayer receives pre-authorization requests from Providers via fax, phone, or online. Staff enters the requests into the Solution to determine whether certain medical services are covered by a patient’s healthcare plan administered by Insurer. This pre-authorization service is performed before the actual medical billing service and is specifically excluded from the definition of an insurance service by Section 151.0039(b)(5)(A). Therefore, Taxpayer’s pre-authorization service is not an insurance service subject to Texas sales or use tax.

Taxpayer’s pre-authorization service using the Solution is not a data processing service as defined in Section 151.0035(a) (Data Processing Service). As part of its service, Taxpayer performs activities that may meet the definition of a data processing service. However, these activities are performed to facilitate the pre-authorization service. Taxpayer’s use of a computer to facilitate its service requires a trained individual’s understanding and skill to either approve or deny pre-authorization requests (e.g., the use of the computer as a tool in providing the service requiring specialized knowledge or interpretive skills). STAR Accession No. 200502776L (Feb. 17, 2005). Staff uses their specialized knowledge when manually reviewing requests to determine insurance coverage. Therefore, Taxpayer’s pre- authorization service is not a taxable data processing service.

Taxpayer is also not providing a taxable information service, as it is not furnishing general or specialized news or other current information, or financial information; nor is it gathering, maintaining, or compiling information that is available to the public or to a specific segment of industry. Section 151.0038 (Information Service).

Comptroller’s Decisions and 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. 20230615102809.

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.