Q&A: Top questions about reporting unclaimed property

Noncompliance with statutory requirements for reporting unclaimed property can expose organizations to costly financial and reputational risks as well as audits. Compliance efforts, therefore, are crucial.

All states require businesses to report unclaimed property. However, reporting requirements vary widely across the country. In healthcare, some of the most common types of unclaimed property include active credit balances, payroll, accounts payable, and patient refunds.

Unclaimed property is due back to owners at their last known address. It’s important for organizations to note, therefore, that unclaimed property reporting rules are determined by the state in which the payee is located, not the state in which the hospital or health system is based. If a large health system treats patients in several states, or if the organization conducts business with vendors in multiple states, that health system might be required to report unclaimed property to all those states.

Credit balances. It is estimated that well over three-quarters of a health system’s total unclaimed property liability is active credit balances in its patient accounting system (PAS).¹ Examples of credit balances that could be unclaimed property include inactive credits, patient credits, payer credits, and false credits (credit balances that are the result not of an overpayment but, rather, of a contractual adjustment error).

The various statutory requirements regarding how to handle credit balances include rules about when overpayments must be returned to patients. Healthcare provider organizations also should consider other factors, including specific rules for governmental payers and commercial payers regarding overpayments.

Organizations should consider all the factors involved with handling government payer dollars, including requirements within the Social Security Act about how these dollars need to be returned. It is wise to have mechanisms in place to make sure these accounts are addressed and not aging. Recently, an uptick in False Claims Act cases brought by whistleblowers has led to healthcare entities getting caught in the middle between the states, which claim those dollars need to be escheated to them as unclaimed property, and federal regulators. Again, thoughtful, thorough documentation is critical for avoiding risk.

Unposted cash and write-offs. A large unposted cash account, with dollars that have not been cleared out and distributed appropriately within the PAS, can be a huge risk. An organization should perform an annual review of its use of clearing accounts and its processes for reconciling cash inflows and outflows. Having a process in place for resolving those accounts and posting them appropriately will go a long way toward mitigating risk.

Regarding write-offs, even if the organization has decided internally to not write off balances of a certain amount, these still need to be identified, as the states will consider them unclaimed property, and the amounts will need to be included in unclaimed property reports and escheated as such. Good recordkeeping and thorough documentation are essential.

M&A activity. When organizations engage in mergers, acquisitions, consolidations, or other such transactions, as part of the due diligence process they need to gain full visibility into a potential business partner’s unclaimed property liability. Likewise, the organization should make its own unclaimed property reporting status and processes known to potential partners.

Unclaimed property audits are evolving. For example, self-audit programs are becoming more popular in several states. Some states, including Illinois and Washington, are sending “invitations” to entities to participate in a self-audit of their unclaimed property. These self-audits, however, often are still administered by third-party auditors (the organization controls the audit, but the third-party audit firm collects the audit fee).

An organization should not ignore an invitation to conduct a self-audit. Rather, it should approach the audit with caution and follow the recommended time frame. In some cases, the self-audit might be benign in that the organization fills out the information, submits it to the state, and never hears anything about it again.

Other times, however, a self-audit invitation might seem benign but can turn into a full-blown audit. If the organization has a vendor partner with whom it works to review and escheat unclaimed property, it should turn to that third party for guidance on the appropriate way to handle a self-audit. Doing so can prevent potential overexposure of information to the state and is good practice in general for managing unclaimed property and avoiding risk.