Unclaimed Property Audits

By Marlys A. Bergstrom	December 01, 2011
States are looking at health care organizations as a source of revenue from unclaimed property.

In their search for revenue, states are discovering an archaic but effective money-raising weapon that long has been in their arsenal: unclaimed property laws. Under these antiquated laws, organizations holding intangible property must turn it over to the state if the property has not been paid to or otherwise claimed by the rightful owner within a certain period of time.

Unclaimed property is intangible property held by another for which the owner has not taken action to indicate an ownership interest during a specified period of time. When this failure to act or "abandonment" occurs, it becomes the obligation of the party holding the property to report and pay over the property to the state. Unclaimed property laws in most states primarily pertain to intangible property (funds) rather than tangible property (such items as clothing or electronic devices).

Health Care as a Frequent Target

Health care organizations need to be concerned about unclaimed property because they generate significant credit balances. These credit balances result from issues unique to the health care industry, like insurance company overpayments, duplicate payments, insurance reimbursement rule changes and billing system upgrades.

Below are four common situations that generate credit balances in the health care industry. These balances may create property subject to remittance under state unclaimed property laws, and they definitely fall within the sights of an auditor.

• A patient comes into a medical center and pays a $25 co-payment for a wellness exam. The provider bills the patient's insurance company, but the wellness exam is fully covered under the patient's insurance policy. The $25 collected from the patient is a duplicate payment and is property that should be returned to the patient or, if the patient cannot be found, is unclaimed property subject to remittance to the state.

• Based on old contract rates with an insurance provider, the hospital billing system is set to record a receivable for $600 for Procedure X. The insurance company pays the hospital $700, because under the new contract, the rate for Procedure X is $700. From a review of the books, it appears that the hospital received an overpayment of $100; however, the hospital was paid the correct amount and an error with the billing system created the appearance of an incorrect payment.

• The organization implements a new billing system. Not all of the credit balances are transferred to the new system. The organization writes off and takes into income the credit balances that were not transferred to the new system. These credit balances are still owed to another party despite the write-off. A simple review of the general ledger can signal to the auditors that there was a write-off. Without adequate documentation providing that the balances were not owed, there is an unclaimed property exposure.

• It is the organization's policy to write off all credit balances under a certain dollar threshold. Unfortunately, in the world of unclaimed property, most states require the remittance of 1 cent.

These and other scenarios are everyday operations that generate an unclaimed property liability. In some cases, unclaimed property audits reflect the old world of paper documentation, while modern health care has moved on to the electronic age. Unfortunately, when the two worlds collide, health care pays the cost.

The cost can be significant. The California controller recently audited a nonprofit hospital owned by the Catholic Church. The auditors spent close to a year combing through old ledgers, check registers, suspense accounts and aged credit balances. The result was an initial assessment in excess of $2 million. The hospital fought the assessment, digging through mountains of old records, contacting vendors and reconciling credit balances. Finally, after investing hundreds of thousands of dollars in consultants' and lawyers' fees, the hospital reduced its liability to approximately $275,000.

Preparing for the Audit

Health care organization leaders should not wait until an auditor arrives to determine their unclaimed property liability. Instead, the companies initially should answer these few simple questions:

• Before reading this article, did anyone in the organization know what "unclaimed property" is?

• Has the organization ever filed an unclaimed property report?

• Assuming the organization has filed an unclaimed property report, did it ever report credit balances?

• Do outstanding credit balances remain on an aging report longer than 120 days?

If you responded "no" to any of these questions, there is a strong likelihood that your organization has an unclaimed property issue.

Although there is no quick fix when it comes to curing an unclaimed property liability, there are opportunities to mitigate exposure. The first step is determining where the organization's compliance problems lie. Then, the organization should take action to become compliant with the various state unclaimed property laws, even though this may require significant effort and commitment.
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The states are generally forgiving when holders of unremitted unclaimed property come forward voluntarily. In this case, most states will waive penalties and interest. The state will require a look-back period of approximately 10 years to determine the property liability. Health care leaders seriously should consider performing an internal exam or self-audit before they come forward and file. Given the potentially large liability and other important considerations, a conversation with an attorney is a good starting point.
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The health care industry must prepare for the inevitable. Current budget deficits will not be cured overnight. Raising taxes is unfavorable politically, but increased unclaimed property compliance often flies under the political radar. In raising the much-needed revenue by more aggressive unclaimed property enforcement, states inevitably turn to those industries with large amounts of unidentifiable funds. Health care is an easy target.

Marlys Bergstrom is an attorney in Sutherland Asbill & Brennan LLP's Tax Practice Group in Atlanta.

The opinions expressed by authors do not necessarily reflect the policy of Health Forum Inc. or the American Hospital Association.

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