Now is a good time for an unclaimed property checkup

Eric J. Boggs, Ryan Hartman, and Melinda Hohler, CPA
| 1/11/2022
Now is a good time for an unclaimed property checkup

Unclaimed property remains a significant and growing risk area for today’s healthcare organizations. A rising trend in the past few years has been states pursuing unclaimed property as a potential revenue source. And with the pandemic adding to state budget strains, unclaimed property likely will remain a focus area, leaving many organizations exposed to audit risks and the financial and reputational risks of noncompliance.

To avoid costly risk exposure, organizations must stay compliant with unclaimed property regulations.

Unclaimed property: A refresher

Put simply, unclaimed property is money with a lost owner. Companies in all industries, including healthcare, are not allowed to keep money that is owed to the original owner. Common unclaimed property types seen in healthcare include payroll, accounts payable, patient refunds, and active credit balances.

Unclaimed property presents a two-pronged risk to healthcare organizations. Reporting unclaimed property is a statutory requirement, and state governments have the authority to audit organizations to make sure they are compliant. Audits, which are administered by the states, can be costly and time- and labor-intensive. In general, they can take one to five years and sometimes longer. Regardless of the outcome, the longer an audit lasts, the more organizational resources are expended. Organizations found to be noncompliant can incur substantial penalties and interest.

In addition to audit risks, organizations that do not comply with unclaimed property reporting regulations face reputational risk. A hospital that is known to be holding onto thousands of dollars of patient refunds does not lend itself to winning the trust or satisfaction of its patients or community.

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Know your risk exposure

Staying compliant can be an organization’s best defense against an audit. To be compliant, organizations need to know where their risks lie. Healthcare organizations should be aware of two of the main risk exposure areas related to unclaimed property.

Multistate exposure

Unclaimed property laws and reporting requirements are dictated on a state-by-state basis, with no current federally consolidated reporting mechanism or rule. It is easy to see, therefore, how unclaimed property can get very complex, very quickly, especially for health systems that do business in multiple states.

Reporting rules for unclaimed property are based on the state in which the payee is located, not the location of the hospital or health system. For example, an Illinois-based hospital might be required to report unclaimed property to 15 different states if the hospital’s patients come from 15 different states or if the hospital works with vendors located outside Illinois.

Unclaimed property requirements differ vastly across states. Thoroughly understanding these diverse requirements is necessary for today’s healthcare organizations to stay compliant with unclaimed property reporting rules. Examples of differences in state unclaimed property reporting requirements include:

  • Dormancy period. States vary in the length of time that must elapse before they can consider property abandoned.
  • Due diligence requirements. Timing varies for when notifications (for example, letters) need to be sent to payees, alerting them to abandoned property to which they are entitled.
  • Aggregate thresholds. Recognizing that it can be burdensome for entities to track down owners of many small refund amounts, some states allow businesses to group together properties under a certain dollar threshold (for example, 99-cent refunds). An organization can then report the bundled unclaimed property items in aggregate and not by the payees’ names. States vary in the dollar amount threshold.
  • The amount of and time frame for penalties assessed on late or past-due unclaimed property filings. Some states are more aggressive than others in assessing unclaimed property-related penalties and interest. For example, if a more aggressive state has a three-year dormancy period and an organization reports unclaimed property after four years, that state might automatically charge the organization with a penalty and interest. Another state might send a notification prior to charging the penalty or allow an automatic waiver for first-time violations.
  • Documentation and reports. Unfortunately, organizations can’t fill out an unclaimed property report for one state and send it to all the other states in which its payees reside. Keeping track of each state’s report type and requirements for completing the reports is vital. For example, some states still require hard copy reports, including compact discs or signature notarization, while others allow for online uploads with no paper forms required.
  • Voluntary disclosure programs (VDPs). Most states allow organizations holding unclaimed property to come forward in good faith if they have identified an unintentional gap in their reporting history. For example, following a merger or acquisition, an organization might find that the acquired entity has overdue or unreported unclaimed property. The acquiring organization in this case could contact the state to begin the VDP process and come into compliance with its unclaimed property reporting obligations. Each state has its own VDP rules, processes, and timelines.

Multiple variances among states regarding unclaimed property compliance create multiple risk exposure areas for health systems and hospitals. Organizations should take care to keep track of such differences and consider not only the state in which they are based but the states in which their patients and vendors are located.

Active credit balances

Another common – though often overlooked – area of risk exposure related to unclaimed property reporting is credit balances. It is estimated that approximately 70% to 80% of a health system’s total unclaimed property liability is active credit balances sitting in its patient accounting system (PAS).1

Common examples of credit balances that could be unclaimed property include:

  • Inactive credits
  • Patient credits
  • Payer credits (in some states)
  • False credits

Organizations should thoroughly examine their credit balances by conducting an aged dormancy analysis. The analysis should focus on the following:

  • Inactive credits. Such credits include inactive accounts in the PAS that have had no payment or transaction activity in the past three years.
  • Patient credits. Even credits that are not old are a big risk area in terms of patient satisfaction and publicity.
  • Payer credits. While these can be considered less of a priority for most organizations, some states require organizations to report payer credits as unclaimed property.
  • False credits. Credit balances that are not the result of an overpayment (such as an incorrect contractual adjustment) are false credits. It’s important that organizations get these off their books in order to avoid overinflating the credits population, particularly during an audit assessment.

Once credit balances are identified, the organization should aim to resolve them as quickly as possible. Because credit balances require significant time and expertise to resolve accurately, organizations should consider engaging third-party unclaimed property specialists to work through them. In addition, organizations can consider applying automation to address credit balances, whether internally or by working with a third-party vendor.

Understand you’re not alone

With so many competing priorities within a dynamic industry, it can be easy for healthcare organizations to lose focus on unclaimed property. Having clearly defined policies for managing unclaimed property can help.

For assistance unraveling the complexities of unclaimed property reporting, organizations also could consider engaging a third-party unclaimed property compliance vendor. Such a vendor can help the organization take a step back and evaluate risk areas, help allocate resources for managing unclaimed property, and help determine best solutions going forward.


1 According to data from Crowe client engagements, 2009-2021.

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Eric Boggs
Eric J. Boggs
Principal
Ryan Hartman
Ryan Hartman
people
Melinda Hohler