At a Glance
- Unclaimed property audits are on the rise at hospitals and health systems.
- Healthcare organizations often have unclaimed property in the form of accounts payable, payroll, accounts receivable credit balances, unpaid credit balances, and more.
- Hospitals and health systems should consolidate unclaimed property analysis and reporting to reduce compliance risk and generate savings.
With state government budgets across the country still suffering the effects of the recession, many states are turning to their unclaimed property laws to look for ways to cut deficits. Most states retain outside auditors on a contingent-fee basis, providing them with incentives to pursue the most lucrative industries—and health care is among the industries that are in the crosshairs.
For a variety of reasons, healthcare organizations are highly vulnerable to compliance issues related to unclaimed property. By consolidating their unclaimed property analysis and reporting functions, however, they can both cut their compliance risk and realize substantial savings.
The Risks for Healthcare Organizations
The term “unclaimed property” refers to the transfer of abandoned property to the state custodian when owners cannot be located after a certain period of time. All states, plus the District of Columbia, the U.S. Virgin Islands, Puerto Rico, and Guam, have unclaimed property laws. Unclaimed property audits at healthcare organizations—particularly multihospital systems in which the unclaimed property function is decentralized—are on the rise.
Third-party auditors know that these organizations often have unclaimed property in the form of accounts payable, payroll, accounts receivable (A/R) credit balances, open payables, unapplied cash, rebates, patient refunds, write-offs, benefits, and, especially, unpaid credit balances. Although numerous compliance rules apply to healthcare organizations, few, if any, affect all of the areas that might harbor unclaimed property—which means the property in those areas can escape notice.
Frequently, a healthcare facility’s unclaimed property function will consider only payroll and accounts payable, overlooking active credit balances, unapplied cash, and small write-offs. The consequences can be costly. For example, a 400-bed hospital was recently audited by a third-party firm that focused on A/R credit balances, accounts payable, wages, unapplied payments, and benefits. The auditor found numerous reporting omissions, and the hospital ultimately settled with the state for $2.2 million. Seventy-five percent of its liability was related to A/R credit balances.
With the federal government slashing funding, healthcare organizations are under increasing pressure to strengthen their bottom lines. Not surprisingly, they are more likely to focus resources on collecting unpaid bills than working unpaid credit balances. As a result, the balances can remain on the books so long that, under the applicable state laws, they become unclaimed property that the state is entitled to collect as custodian—even if there has never been an attempt to refund these amounts.
Finally, unclaimed property rules are based on the presumption of abandonment. Unless an organization can prove that property is not unclaimed, the state will assume it is. Piecing together the necessary evidence can be challenging for healthcare organizations due to physician practice integration, patient accounting system conversions, and third-party billing. Often, the unclaimed amounts presumed abandoned are significantly larger than the provider had imagined, because they might involve entire account balances, unposted cash, or other areas that had been overlooked for some time.
The Key to Compliance
All unclaimed property laws define the parameters for a dormancy, or abandonment, period during which the property’s rightful owner takes no action on the property, and after which unclaimed property becomes reportable to the state. The length of the period varies by state and by type of property (for example, wages, accounts payable, or A/R credits), but always begins on the date of the last contact with the owner.
Every covered organization, healthcare or otherwise, should determine whether its unclaimed property has aged out of the relevant dormancy periods. The organization should consider not only the dormancy period defined by the state in which the organization is located, but also the applicable law and dormancy period for the state in which the property owner was last known to reside.
The aging question is a thornier issue for healthcare organizations, however, because of the healthcare payment model. For example, a patient might make an up-front payment of $20 on March 1, and two different insurers might make subsequent payments in April and September. After applying the contractual discount, the organization determines that the initial $20 payment was an overpayment, and a credit balance is created. For unclaimed property law purposes, however, the aging is not based on the date of most recent payment activity; rather, it begins on the date of the initial payment, back in March.
Accounting errors also can present problems for healthcare organizations. Most of these organizations operate in silos, with a business office dealing with incoming payments and accounts payable dealing with refunds. If a refund check issued to an insurer isn’t cashed because the insurer instead simply processed a take-back for the account, the check will nonetheless appear to be outstanding. Because of silos, the business office probably will not learn that it needs to process the take-back, and accounts payable will not know to cancel the check.
Or, suppose a patient incurs $100 in charges, for which the organization expects to receive $40 in payment after contractual adjustments. The organization, after unsuccessful collection attempts, writes off the $40 as bad debt, resulting in a zero balance. Eventually, for a variety of reasons, the patient makes a $40 payment. Now, the organization should make an administrative adjustment to eliminate the $40 bad debt, but this adjustment can easily slip through the cracks. In fact, about 40 percent of unpaid credit balances in healthcare organizations aren’t actually unpaid credit balances; they are accounting errors such as this.
A healthcare organization therefore should engage in comprehensive unclaimed property analysis to examine its A/R credit balances, determine which patients are owed balances, and establish whether the account has aged past dormancy. When an account has passed the dormancy period, the organization must send a due diligence letter to the owner of the balance in an attempt to reunite the owner with the funds. If the funds cannot be reunited, the organization must pay the state.
The Savings Factor
Comprehensive analysis can have significant financial benefits in addition to achieving compliance. The exemptions available for unclaimed property laws represent particularly fruitful grounds for savings.
Although every unclaimed property law provides exemptions for certain types of property, many healthcare organizations fail to take advantage of them because they either aren’t aware of or don’t know how to properly apply the exemptions. Even when hospitals do report all of their aged unclaimed property, they report it only to their own states, bypassing exemptions in the states where the property is actually due.
Exemptions vary by state, but unclaimed property laws might include exemptions for:
- Tax-exempt hospitals
- Business-to-business transactions (the reasoning being that businesses should stay on top of their own unpaid credits)
- Managed care contracts
- De minimis amounts (for example, amounts under $50)
Some statutes also limit the amount of time a third-party payer, such as an insurer, has to collect its credit balances. Administrative exemptions are granted when it turns out the organization does not owe anyone a credit.
The Case for Consolidation
States and their auditors are well aware of the disconnection among accounting functions in many healthcare organizations—a problem prevalent in healthcare organizations with multiple facilities that employ different procedures and practices by facility or even within each facility.
Consider a hospital that receives a $2 million payment from an insurer for multiple patients whose claims were submitted the previous week. It is up to patient accounting department staff to apply those funds, but if the funds cannot all be matched to the correct accounts, the balance is parked in an unposted cash account in the general ledger. Alternatively, the balance might sit in a dummy patient account in the business office. Regardless, there it sits, unclaimed and aging every day. In ideal circumstances, the account is worked and reconciled; however, all too often, a balance is left to sit until it has aged and becomes reportable property.
Individual hospitals such as this one seldom have employees with expertise in unclaimed property laws, including the laws in all of the relevant states. Frequently, they miss unclaimed property—and thus underreport—and perform little to no exemption analysis
Health systems can benefit greatly from consolidating their analysis, compliance, and reporting functions with a single system-level “unclaimed property advocate” who is well versed in all states’ unclaimed property laws and can conduct detailed analysis to identify accounting errors and statutory exemptions. One mid-size for-profit national system saved $1.5 million in 2011 after consolidating its analysis, while one of the largest not-for-profit systems saved a whopping $8 million thanks to consolidation.
Capella Healthcare, based in Franklin, Tenn., offers another success story. Although facilities for the system had a good handle on certain components of the unclaimed property game, little exemption analysis was done, and not every facility reported each type of unclaimed property. An organization cannot invest the time in understanding all of the exemptions, nuances, and required reporting related to unclaimed property when such analysis and reporting is performed only once or twice a year. Leaders for this national health system knew the organization needed to get a handle on problems related to unclaimed property analysis and reporting before they snowballed.
The organization determined that consolidating Capella’s unclaimed property analysis and reporting functions made more sense than trying to place experts in all areas in every hospital. Capella opted to outsource the work. In doing so, the health system reaped liability savings that more than covered the expense.
A Win-Win Proposition
Consolidated and comprehensive unclaimed property analysis and reporting can help healthcare organizations reduce their compliance risk and generate significant savings. The majority of states and territories set their annual reporting deadlines for the fall, so summer is the best time to take the necessary steps to achieve compliance while simultaneously improving the hospital or health system’s balance sheet, reducing administrative costs, and decreasing the risk of penalties and interest.
Eric J. Boggs is senior manager, Crowe Horwath LLP, Brentwood, Tenn., and a member of HFMA’s Tennessee Chapter (firstname.lastname@example.org).
Cory M. Herendeen is principal, Crowe Horwath LLP, Indianapolis, and a member of HFMA’s Indiana Pressler Memorial Chapter (email@example.com).
Jim Wiseman, CPA, is vice president of tax, Capella Healthcare, Franklin, Tenn. (firstname.lastname@example.org).
Publication Date: Friday, February 01, 2013