Unclaimed Property Concerns – Part One

April 2016

By Joseph Carr, Patrick Pilch and Steven Shill

A version of this post originally ran in State Tax Notes on March 7, 2016.

Accounting professionals in the healthcare industry spend significant time reviewing contracts to determine the amount of receivables to record for a given service, pursuing reimbursement for claims, and determining whether any “overpayments” received are the result of “over-contractualization” or a true overpayment. Because of those day-to-day tasks, it is easy to overlook the impact of unclaimed property as it relates to real or perceived credits created. That makes healthcare companies prime targets for an unclaimed property audit , the defense of which can significantly drain a company’s financial and other resources.

Unclaimed Property Basics
All states have laws regulating the reporting and remittance of unclaimed property. Also referred to as abandoned property or escheat, unclaimed property concerns the requirement that a company holding such property (the holder) report the property to the appropriate state after the time prescribed by the state has passed (the dormancy period). The purpose is to ensure property is returned to its rightful owner. The thought is that the state is in a better position to hold the property and return it to the rightful owner, and, in the interim, any property held and derivative funds earned on such property may be used for the public good. Because the state with jurisdiction over unclaimed property depends first on the address of the rightful owner—and if none, then the state of incorporation/formation—even healthcare organizations that operate in only one state can face unclaimed property issues from multiple states.

Unclaimed property may include various types of intangible property, as well as some tangible personal property, depending on state law. Common types include uncashed payroll or commission checks; uncashed vendor checks; unredeemed gift certificates and gift cards; customer credits, layaways, deposits, refunds, and rebates; overpayments and unidentified remittances; and accounts receivable credits, including credits that have been written off and recorded as income or expense (for example, bad debt, miscellaneous income, and so forth).

States enforce their unclaimed property laws through audits conducted by either state representatives, or, more commonly, through third-party auditors. Making matters worse, the audit period may be for as many as 20-plus years, and, as discussed below, the amount assessed will be partly based on what a holder cannot prove is not owed by providing sufficient documentation. The combination of the length of the audit period, a lack of available records, and a lack of what an auditor may deem “sufficient support” often leads to an assessment well in excess of what a company believes it owes and has reserved for accounting purposes. For the healthcare industry, that issue may be exacerbated because of the nature of the business and some accounting policies and methods commonly used.

Healthcare Accounts Receivable Challenges
Companies in general face multiple challenges when it comes to tracking, documenting, and supporting transactions that may give rise to unclaimed property. One transaction that holders often overlook are checks voided over 90 days past the original issue date. Many states will deem that transaction to be abandoned property unless the holder can provide support that the transaction was resolved with the owner (for example, voided and reissued or the amount on the check otherwise no longer due to the payee).

Accounts receivable, yet another transaction type that may give rise to unclaimed property, are even more complicated. They are often the most material property type in an unclaimed property examination, and healthcare companies are particularly susceptible to such liability. In addition to having to meet the burden of proof applied to all companies, healthcare organizations contend with multiple payers, which may make the true owner of a refund or credit unclear, and deal with credits that may represent accounting adjustments based on estimated receivables rather than true amounts owed to customers.

Patient/Insurance Company Refunds and Credits
Unclaimed property issues may arise when multiple parties are involved with the payment for services. For example, if a patient treated for a broken leg has insurance, there will be a deductible or co-pay amount and an amount covered by the insurance company. If there is an overpayment relative to the patient’s responsibility or misinterpretation by the provider or payer, there may be a double payment that results in a credit balance for the patient or the insurance company. Other examples that can result in overpayment include when multiple insurers are involved and more than one pays; when the patient does not initially present insurance information and pays out of pocket, and the insurance company pays less than it should, causing the patient to overpay; and when both parties pay the full amount. Those types of overpayments would generally represent an unclaimed property liability if they were not timely resolved with the rightful owner.

Revenue Recognition Based on Contract
Another issue that may arise relates to receivables recorded based on an expired contract. Typically, a contract between a healthcare provider and an insurance company dictates the amount the insurance company will pay for a specific procedure, and the healthcare provider uses that contract to estimate and record a receivable. But such contracts are often revised; if the version used is out of date, the incorrect receivable amount could be recorded. For example, based on an outdated contract, a healthcare provider may record a receivable of $1,000 for a procedure with a contractual allowance of $600 with the expectation of receiving $400 from the insurance company. But because of a revision made to the contract, the insurance company reimburses the healthcare provider the correct amount of $500. In that case, the perceived write off of a $100 “credit” may be reflected in an allowance account.

Additionally, ASC Topic 606 Revenue from Contracts with Customers, a new revenue recognition accounting standard taking effect for public companies in 2018 and private ones in 2019, could further complicate revenue recognition based on contract for healthcare entities. ASC 606 will require healthcare entities to determine revenue recognition based on five steps:
  • identifying the contract;
  • identifying separate performance obligations;
  • determining the transaction price;
  • allocating the transaction price to separate performance obligations; and
  • recognizing revenue when the entity fulfills performance obligations.

The third step of ASC 606—determining the transaction price—could prove especially challenging for healthcare entities as the shift to value-based care continues, as it will require providers to have visibility into the costs and quality of other providers within their own supply chain to make a reasonable assessment. (Read more about the healthcare-specific implications of ASC 606 here, and for timely information on transitioning to ASC 606 and applying it to your organization, visit BDO’s Revenue Recognition Resource Center here.)

Healthcare providers that deal with complicated contractual allowance accounting and dealings with multiple payers that give rise to voluminous credits are at most risk for escheatment issues.  Accounting professionals dealing with these issues should seek guidance on how to mitigate the top risks relating to escheatment.

For more information on unclaimed property concerns, contact Joseph Carr, Partner & National Unclaimed Property Practice Leader at (312) 616-3946 or [email protected], and read the latest Unclaimed Property Alert.

Stay tuned for Part Two of our series on unclaimed property concerns in the healthcare industry, in which we will discuss complications around third-party settlement audits and the proactive measures that can be taken if your company has not addressed unclaimed property.