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It’s state money you shouldn’t have kept anyway
You have until the end of this month to return those state funds you shouldn’t have kept. Return them by then and no one gets hurt. Miss the deadline and you could face a hefty fine.
Thirty-nine states have agreed to an amnesty program that ends Oct. 31, 1999, encouraging health care providers to turn over money that rightly belongs to the state. The funds come from patient credit balances, uncashed payroll checks, and other sources within the health care institution. Hospital officials often think they are free to keep these unclaimed funds and just apply them to the institution’s bottom line, but that is not so, says Patricia Barganier, a senior manager in Ernst & Young’s National Tax Department in Atlanta.
Unclaimed funds often rolled into capital
Most health care organizations accumulate a certain amount of "bonus capital" over time, in the form of unclaimed funds. Paychecks, stock dividends, credit balances, refunds, insurance reimbursements, customer overpayments, and vendor payments all can be left in the hospital’s hands for one reason or another. After awhile, most organizations just decide that the funds have been unclaimed and roll them over into the hospital’s operating capital, Barganier says.
"The problem is that the money isn’t theirs to keep," she says. "Under the law, it belongs to the state, and failure to turn it over can be a costly mistake."
Even if you don’t actually convert the funds to your own use, you still may be liable for not turning them over to the state, she says. The laws are structured in such a way that an organization that has never pocketed a single unclaimed dime may nevertheless find itself liable for hundreds of thousands of dollars. States are becoming increasingly aggressive in enforcing property reporting requirements, she says.
All 50 states require companies to file unclaimed property reports and to retain records substantiating these reports. And, unlike many tax laws, most states do not make any exemption for nonprofit companies.
To enforce compliance with unclaimed property laws, many states have contracted with third-party auditors to audit health care providers. Under these agreements, states typically compensate third-party auditors based on the amount of unclaimed property recovered, along with interest and penalties assessed. Many states’ unclaimed property laws have long statutory limitation periods or may not have any statutory limitation at all, Barganier says. As a result, the audits typically involve a 10-year audit period.
The legal principle involved is "escheat," which means the reversion of property to the state in the absence of legal heirs or claimants. Though all states, the District of Columbia, Puerto Rico, and the Virgin Islands require that unclaimed funds be turned over, compliance and enforcement of the laws has been spotty at best.
A small number of companies, such as the Fortune 500, electric utilities, financial institutions, and insurance companies, report and turn over unclaimed funds regularly because their noncompliance might be recognized easily. Most other companies, including health care providers, rarely report abandoned funds, Barganier says.
In the early 1990s, states did not bother to go after them, either. But now states are recognizing that these funds are a rich untapped source of revenue.
"While all types of organizations are fair game, health care institutions have a special vulnerability," she says. "The reason has to do with the health care industry’s unique financial model. Since medical services are likely to be paid for by multiple parties — the patient himself, one or more insurers, Medicare, or Medicaid — overpayment is not uncommon."
In other industries, corporations routinely apply credit balances to the customer’s account, she notes. Hospitals, however, don’t seek or depend on repeat business, so that means it is uncommon to keep a running account for the patient. If all went well, the patient will not be back at the hospital any time soon.
"As a result, most hospitals simply keep the money, unaware that they are building up sizable potential liabilities over time," she says.
Barganier also cautions that poor record keeping can increase your liability or even result in liability when you actually did not keep any unclaimed money. When auditors look over your records, your organization may be required to document fully that certain funds were provided to their rightful owners. If you made the payment but can no longer show that the transaction actually took place, the state’s auditors may consider the transaction unproven and require you to pay that money to the state. Without proper documentation, you can be forced to pay even when you appropriately disbursed the funds years earlier, she says.
The best strategy for reducing the potential liability is to know your state’s law and make sure your organization has systems in place to comply on an ongoing basis, she says. You should investigate how your state defines unclaimed property and what exclusions, if any, may be provided for your type of organization. Also, familiarize yourself with the record-keeping requirements and reporting deadlines.
Thirty-eight states and the District of Columbia have agreed to participate in the amnesty program ending Oct. 31. Health care providers in those states may turn over any unclaimed funds by that date without suffering any penalties or interest. These are the 39 participants in the amnesty program: Alabama, Alaska, Arizona, Arkansas, Con necticut, Delaware, District of Columbia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisi ana, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
For more information, contact: Patricia Barganier, Senior Manager, Ernst & Young, 600 Peachtree St., Suite 2800, Atlanta, GA 30308-2215. Telephone: (404) 817-8761.