What is unclaimed property?
States’ unclaimed property laws are largely concerned with intangible property such as uncashed payroll and vendor checks, uncashed dividend checks and, of particular interest to the healthcare industry, credit balances such as those recorded in a company’s accounts receivable. Generally speaking, unclaimed property is property held or owed by a business to someone else, for which the actual owner of that property has not, during a certain period specified by law, taken some action that indicates an awareness of an ownership interest in the property. When this “abandonment” occurs, it becomes the obligation of the party holding the property to report and pay over such property to the state. The rationale behind unclaimed property laws is that the state can best protect the interest of the owner by becoming the custodian of the property and stepping into the shoes of the owner.
Enforcement of unclaimed property laws
While unclaimed property statutes have been a part of state laws for decades, enforcement of the laws via audit is of a more recent vintage. Unclaimed property laws do not represent a tax; the laws protect existing property rights — something the people of the United States hold in deep reverence. Therefore, enforcement of unclaimed property laws is quite different from enforcement of tax statutes. The most significant difference is the lack of a statute of limitations. As a result, an unclaimed property audit period may start from the date on which the holder was incorporated or the date the state unclaimed property statute was enacted. Generally speaking, most unclaimed property audits cover a period of 10 to 20 years.
Unclaimed property compliance is typically administered from a state’s department of revenue or treasurer’s office, and most state unclaimed property departments are severely understaffed. As a result, third-party contract auditors conduct most audits on behalf of the states. These third-party auditors typically have contracts with multiple states and are usually paid on a contingency basis of 10-12 percent of the final liability.
Unclaimed property and healthcare providers
Healthcare-related companies have always been highly visible and lucrative unclaimed-property audit targets. All institutions across the healthcare industry spectrum are potentially good subjects for an audit — hospitals, emergency medical facilities, dialysis centers, etc. — because participants in this industry typically generate significant credit balances as part of normal business operations. These credits are a result of issues unique to the healthcare industry such as insurance company overpayments, duplicate payments, insurance reimbursement rule changes and billing system upgrades.
Scenarios
Following are two typical scenarios which generate credit balances that may be picked up by an auditor as unclaimed property owed to a state.
- A patient visits a medical center for a wellness exam and pays a $25 co-payment. However, the wellness exam is actually covered under the patient’s insurance policy at 100 percent and the $25 should not have been collected. This $25 is a duplicate payment and, if the medical center is unable to reimburse the patient, becomes unclaimed property.
- Based on old contract rates with an insurance provider, a hospital’s billing system is set up to record a receivable of $600 for a certain procedure. The insurance company pays under the new contract rates and correctly makes a payment of $700. On the hospital’s billing records, it appears that the hospital received an overpayment of $100. Here, although it may look like there is an unclaimed property issue, there is not. Instead, there is a billing system issue.
The problem is that these scenarios occur hundreds of times and equate to hundreds of thousands of dollars. As the transactions continue to multiply it becomes increasingly difficult for the medical center to unwind individual transactions. Enter the unclaimed property auditor. The matter is simple — every credit balance is unclaimed property owed to a state. The burden of unwinding these complex transactions and showing the amount that should have been collected is on the healthcare provider.
The unclaimed property audit
If you ask most unclaimed property professionals “What are my chances of getting audited?”, the answer is always: “It’s not a question of if… but when.” Billions of dollars have been turned over to states as a result of unclaimed property audits. For example, the California State Controller reported California is currently holding over 6 billion dollars in unclaimed property funds. So, what are some key things you can do the day “when” turns into “now”?
1. Take the notice of audit seriously. Unclaimed property liabilities can quickly escalate into millions of dollars. So when an audit notice is received, it is important to realize the potential risk the organization may be facing.
2. Where there is one, more will follow. The majority of unclaimed property audits are multistate audits. Most contingent fee auditors have contracts with approximately 25-45 states. What starts out as a five-state audit may soon balloon into a 45-state audit.
- Confidentiality agreement: Requesting a confidentiality agreement from the auditor will mitigate the number of states that are added to the audit. The sooner the confidentiality agreement is in place, the better.
3. Bring in professionals. Unclaimed property expertise is a unique niche. The number of individuals identifiable as true unclaimed property experts representing holders is probably less than 100. It is strongly recommended that if your organization is under audit, you retain the services of an unclaimed property expert immediately.
- Attorney-client privilege. Unclaimed property audits deal not only with sensitive data but also sensitive information related to the healthcare organization. In some instances, a liability may be exposed that is substantially larger than anyone within the organization anticipated. For numerous reasons, serious consideration should be given to engaging outside counsel to ensure that sensitive communication and data is protected under the attorney-client privilege.
4. Have a plan. Unclaimed property audits can be long and painful ordeals. It is not unusual for an unclaimed property audit to last 3-5 years. A common complaint from companies is that these audits lack organization. To avoid this, request an audit plan from the auditors at the initial meeting. As the audit progresses continue to ask for plan updates broken down into specific segments. For example, if the auditors are examining credit balances the audit plan should break down each step in the process and outline the time-frame required.
5. Know what you don’t know. Someone once said that unclaimed property is not a tax, but if it were, it would be a tax on the disorganized. It is highly advised that companies perform an assessment of potential liability before the auditors commence review. It is important for senior management to know if the potential liability is $100,000 dollars or $10 million dollars.
6. Don’t wait until the end to unwind the damage. It is important to be aware of what is occurring during the audit in real time. For example, once the auditors have chosen a sample it is a good idea to begin work on remediating the items in the sample. This will put you ahead of the auditor and give you ample time to prepare your back-up documentation.
7. Assign a gatekeeper. Unclaimed property audits can quickly become unwieldy. It is a good idea to assign a project manager. This individual will coordinate all document requests, communicate with the auditors and/or unclaimed property consultants and facilitate all aspects of the audit. It is essential to have one line of communication with the auditors and your organization.
Before the auditors come knocking
Most states provide the opportunity for non-compliant companies to voluntarily disclosure compliance problems. Although getting into compliance requires a great deal of effort and commitment it is less painful than an audit. Most states will waive penalties and interest on a voluntary disclosures but require a look-back period of approximately 10 years. Before coming forward and “just filing,” careful consideration should be given to performing an internal exam or self audit.
State budget deficits will not be cured overnight. Almost everyday there is new legislation permitting the “borrowing” of funds from the state unclaimed property account for use by the general fund. Healthcare companies should prepare for the inevitable.
