State governments are under severe financial pressure. In the last few years, many of them have stepped up their efforts to collect unclaimed property held by private entities such as medical practices. Every state has an “escheat” or unclaimed property statute that places the burden on those holding such property to deliver it to the treasury or commerce department if the owner cannot be found. Escheatment is the general rule that abandoned or unclaimed property (of all kinds) becomes the property of the state.
Several questions about our clients’ escheat policies and procedures have come up recently, suggesting that it is time for all to review their compliance with the applicable laws. This subject is governed by state statutes that vary in their requirements regarding attempts to notify the owner of the property, e.g., the patient; time limits for delivering the property to the authorities, and other financial procedures. Forty-two states (including California, New York, Texas, and Florida) and the District of Columbia have enacted some version of the Uniform Disposition of Unclaimed Property Act, under which every business entity must file annual unclaimed property reports with the state and make a good-faith effort to find the owners of their dormant accounts.
Dealing with 20, 30 or more different sets of state requirements is such a complex proposition for large national businesses that many of them outsource this function to specialists. Most physician practices do not need to concern themselves with more than one or two states and can handle the legal mandates in the usual course of their operations—but they must keep an eye on compliance in this as in so many areas.
Below is a brief refresher course in the basic principles and the types of statutory requirements that will affect most anesthesia and pain practices. We will use Ohio’s escheatment statute (Ohio Revised Code, Section 169) as an example. In Ohio, for the 11 months through May 2012, the state agency paid 55,338 claims totaling $55.5 million. Unless 2011-2012 was an unusually high payout year, this figure should give some idea of the magnitude of the transfers to and from the state agency.
1. Unclaimed Property
First, what is “unclaimed property,” and how do anesthesiology and pain medicine practices come to hold it? Overpayments, either by health insurance plans or by the rare patients who have paid upfront are the usual source—except in Ohio and eight other states that recognize a business-to-business exception, under which outstanding balances between business entities may be deemed a duplicate payment. In these states—the others are Illinois, Iowa, Kansas, Maryland, Massachusetts, North Carolina, Virginia and Wisconsin—insurance overpayments for which the patient’s health plan has not requested a refund are not considered “unclaimed property” within the meaning of the statute and do not need to be reported or turned over to the Department of Commerce. (Payer participation agreements, however, may require that all overpayments be refunded.)
Most of the state statutes specifically list “insurance refunds” as one type of property that they cover. They also cover refund checks that the practice has sent to a patient, but that the patient has not cashed, and other forms of credit balances.
When can a practice consider patient funds officially “unclaimed?” A presumption of abandonment attaches to unclaimed property after a certain period of “dormancy” time that varies for different types of property (although the rightful owner can seek to regain possession even after that time in most cases). A dormancy period is a specified period during which the property owner does not take action on his or her property. The dormancy period, also known as "escheat period," commences on the date of last activity by the owner.
Under the Ohio statute, an insurance refund held by the practice for the patient is considered unclaimed after three years (ORC Sec. 169.01(L), “Amounts payable pursuant to the terms of any policy of insurance, other than life insurance, or any refund available under such a policy, held or owed by any holder, unclaimed for three years from the date payable or distributable.”) Uncashed bank checks, e.g. refund checks sent to the patient that are returned marked “not at this address” are “unclaimed” after five years. (ORC Sec. 169.01(F)).
2. Reporting and Transferring the Property to the State
All businesses that are located and/or operate in the particular state or that hold funds belonging to state residents are required to file an Annual Report of Unclaimed Funds and send the funds to the state agency. Business entities including medical groups are required to review their records each year to determine if they hold any funds that have remained unclaimed for the required dormancy period. Once property has remained unclaimed for the dormancy period, it becomes reportable.
The Ohio law states, in ORC Sec. 169.03 Report of unclaimed funds, “(A)(1) Every holder of unclaimed funds and, when requested, every person that could be the holder of unclaimed funds, under this chapter shall report to the director of commerce with respect to the unclaimed funds as provided in this section. The report shall be verified.” The Ohio Director of Commerce has published a very helpful set of Frequently Asked Questions on unclaimed property; most states have similar consumer guides. See, e.g., the California Controller’s web site.
Each state has its own reporting forms and systems, but the majority have adopted the National Association of Unclaimed Property Administrators (NAUPA) system for electronic reporting. Many states require a “negative report” that says that the reporting business has no unclaimed property outstanding.
November 1st of every year is the reporting date for many states, including Ohio; March 1st is the second most common due date. Other states have reporting deadlines in April, May or June. Certain types of firms and items can have different dates depending on the state. Section 169.11 of the Ohio Revised Code allows for the early reporting of unclaimed funds for businesses that wish to clear their accounts.
There is typically no minimum amount that must be reported and transferred, but unclaimed funds totaling less than $50 may be aggregated, as is permitted in Ohio. (ORC Sec.169.07 Holder of unclaimed funds held harmless.)
According to ORC Sec. 169.07(A), “Upon the payment of unclaimed funds to the director of commerce . . . the holder will be relieved of further responsibility for the safekeeping thereof and will be held harmless by the state from any and all liabilities for any claim arising out of the transfer of such funds to the state.”
3. Notice to Patients
Holders of unclaimed funds are required to notify owners that their property is in danger of being transferred to the appropriate government agency. To meet this statutory due diligence requirement, the holder shall send notice to the owner's address of record, typically not less than 60 days nor more than 120 days, before the time the account becomes reportable. In some states, due diligence means a search letter. In others, the act of sending the check to a recorded address satisfies the requirement. View a Sample Due Diligence letter posted on the California web site.
4. Preventing Liability
Compliance with escheat laws requires systems that are properly designed, used and, of course, documented. Concerned readers should familiarize themselves with the dormancy periods and procedural requirements of their own states and set up protocols to ensure reporting and turning over unclaimed funds on time. Then they should review their own policies and procedures and update them where necessary.
nesthesia and pain practices should make sure to “check on the check” within one year of sending it to a patient. If it has not been cashed, they should contact the patient to make sure it was received.
Overpayments from insurance carriers represent special risks now that the Supreme Court has upheld the Affordable Care Act, which includes the provision that requires overpayments to be refunded to Medicare within 60 days. Participants in the Billing Office Issues discussion group on the Medical Group Management Association web site agree that the best policy is to refund all overpayments promptly, or at least to communicate with the insurance company to resolve the credit. One of the members writes: “When we receive an overpayment from insurance company, we call them and ask them to fax or mail a refund request. We then promptly refund the money .... Keeps our books clean, and then when they come back later on, we have the proof that it was already refunded.” ABC sends a letter to all non-governmental payers.
If your practice is not necessarily on top of its obligations in this area, your accountant would probably agree that an internal audit would be a good idea. Note also that almost all the states still offer an informal amnesty program for voluntary disclosure and compliance. According to the Escheatment Primer on the Accounts Payable Network web site,
“Voluntary compliance may result in a waiver of interest and penalties,” according to Cathleen Bucholtz, a former tax auditor for California. “It also reduces the look back/audit period. Filing an unclaimed property report triggers the statute of limitations, often limiting an audit to 10 years, rather than 15 to 20.”
In fact, she says voluntary compliance reduces your chances of being audited, because the states want to spend their limited budgets on those who don’t voluntarily comply.
ABC will be happy to work with our clients’ accountants to provide the information needed for compliance with the applicable statutes. We encourage all readers to review the status of their own efforts, if they have not done so within the last few years. We hope that this reminder has been helpful.