8 Best Practices for Mitigating Liability of Unclaimed Property
May 16, 2017
By Eric J. Boggs, Marc T. Grossman, and Omar A. Ruiz
A substantial number of healthcare organizations may not be compliant with their unclaimed property reporting obligations. Because of this, they open themselves to substantial risks.
Healthcare companies are prime targets for unclaimed property audits by state governments, and as states attempt to balance their budgets, these audits are increasing in volume and sophistication. Most states hire third-party audit firms, which are paid on a contingency fee basis. When factoring in interest and penalties, unclaimed property can be a large financial liability for healthcare organizations, while at the same time a revenue driver for state governments. According to the National Association of Unclaimed Property Administrators, billions of dollars have been turned over to states as a result of unclaimed property audits.1
Fortunately, healthcare organizations can take steps to mitigate liabilities. Unclaimed property is not a tax, but one could say that if it were, it would be a tax on the disorganized. Minimizing liability from unclaimed property involves defining it in an organization, fulfilling reporting requirements, understanding risk areas, and establishing best practices.
What Is Unclaimed Property in the Healthcare Arena?
Also referred to as abandoned property, unclaimed property is property owed by a business to someone else who has not taken some action to indicate awareness of ownership interest in the property (for example, the amount of a patient’s overpayment of a bill, which has not been returned to the patient in a given amount of time). When the property is unclaimed for a certain amount of time, the party holding that property is obligated to report and turn it over to the appropriate state after the dormancy period has expired.
Common types of unclaimed property in the healthcare setting can include:
- Accounts payable
- Accounts receivable
- Unapplied cash
- Patient refunds
- Small credit balance write-offs
Accounts receivable (residing in a hospital’s patient accounting system) pose an especially high risk for healthcare providers due to the complexity and high volume of transactions. With multiple payers on an account, including patients, insurance companies, and government entities, it can be difficult to determine which party is owed the refund. Auditors realize this area often is high risk and tap accounts receivable as prime culprits when investigating unclaimed property.
Reporting Requirements and Audits
Unclaimed property is not a tax. States still enforce unclaimed property laws through audits, but important differences exist.
First, while the state holds it, the property still belongs to the payee. Priority rules dictate that unclaimed property is first owed to the state associated with the payee’s last known address. In absence of address information, unclaimed property is reportable to the hospital’s state of incorporation. All 50 states plus the District of Columbia, Puerto Rico, Guam, and the Virgin Islands have unclaimed property reporting laws.
One significant difference between tax and unclaimed property audits is the look-back period. Audit look-back periods for unclaimed property can be 10 years or longer. When taking into account a potential five-year dormancy period (set by property type and state), an audit with a 10-year look-back period could require 15 years of record retention and research.
Audits, often done by third parties on a contingency basis, can be long and costly, involving staff time, legal and consultant fees, and a voluminous request for records.
Risk Areas for Healthcare Organizations
In assessing unclaimed property, an organization should consider the following common high-risk areas:
- A sunset patient accounting system
- Acquisitions and divestitures
- Write-off and refund policies
Credit balances in patient accounting systems typically can be the largest portion of a hospital system’s unclaimed property liability but often are overlooked. In closing down patient accounting systems, companies commonly write off credit balance accounts as they near deadlines; however, this is not recommended. Organizations should research credit details and move them into an escheatable liability account or a separate patient accounting system.
For acquisitions and divestitures, all parties always should review terms associated with unclaimed property. For example, even if a system sells one or more hospitals, it is not necessarily free from escheatable liabilities from those sales. Generally, if it’s a stock acquisition, the buying facility will assume the liabilities. If it’s an asset transaction, most liabilities remain with the selling entity.
Write-off and refund policies should be examined closely. Each state has an aggregate threshold limit for reporting, above which the entity must provide the payee’s name and address when reporting funds to the state as unclaimed property. States also have due diligence thresholds, above which organizations must not only have the payee’s name and address but also must send a letter to the payee before sending funds to the state as unclaimed property. However, best practice dictates avoiding write-offs even for lower amounts.
With a high likelihood of noncompliance and a high possibility for audits, healthcare organizations should assess and take action on unclaimed property in their system. In addition to tapping the advice of specialists, organizations should follow these eight best practices:
- Take a top-sided approach to reporting: Consolidate all liabilities at a corporate level, and report for the entire organization. Have one team responsible for the entire process rather than having individual entities handle the reporting.
- Understand which properties are escheatable liabilities, and then either review or create, if needed, unclaimed property policies and procedures.
- Follow all policies and procedures. It is not enough simply to be aware of them.
- Create an escheat liability account. Checks and credit balances aged for a specified period of time (e.g., 120 to 180 days) should be moved to the escheat account.
- File annual reports and know priority rules, which specify how to determine the appropriate state to receive unclaimed property.
- Be proactive about due diligence. The more outreach is conducted, the more payees can be reached, and the less unclaimed property liability will exist.
- Be prepared for an audit, and understand that unclaimed property laws are constantly changing.
- Confirm internal resource expertise, and reach out to a third party for assistance when necessary.
A successful unclaimed property team in a healthcare organization will streamline the process, reveal exposure and policy gaps, and identify exemption opportunities while providing an overall framework to mitigate risk from unclaimed property in the system.
1 NAUPA, “What Is Unclaimed Property,” https://www.unclaimed.org/what/