Although often ignored or left to the accounting department, the failure to comply with state unclaimed property laws can result in significant liability for your organization.
No stranger to government scrutiny, hospitals and other healthcare providers are increasingly being asked to open their books to an unfamiliar probe at the behest of state governments: an unclaimed property audit. In years past, attorneys providing counsel to the healthcare industry might have viewed unclaimed property as a foreign and purely accounting matter falling strictly within the province of the finance or treasury department. But unclaimed property is a legal matter and the audit is essentially an examination of a company’s compliance with unclaimed property laws (also known as “escheat” laws), the result of which can be a multimillion-dollar liability for the company. In-house attorneys within the hospital industry would be well advised to familiarize themselves with the basics of unclaimed property laws, including the ways in which they may apply to the healthcare industry.
The intent of unclaimed property laws is to ensure that property is preserved for and returned to its rightful owner. The laws in all 50 states and the District of Columbia mandate that companies holding abandoned or unclaimed funds—such as uncashed payroll checks, uncashed vendor checks, overpayments, and gift certificates or gift cards—must report those funds to the appropriate state after a statutory “dormancy period” that is typically three to five years, depending on the state and specific property type. The theory is that the relevant state is in the best position to hold the property in custody and return the property to its true owner, and that any remaining funds not so returned should be used for the public good.
States enforce escheat laws through statutory audit provisions, which allow states to review the books and records of holders to determine compliance. States often delegate their authority to examine holders’ books and records to third-party auditors, many of whom work on a contingency fee or other incentivized basis. State laws also allow imposition of penalties and fees, which can give rise to additional liability. States may further use “estimation” to calculate liability for periods of time for which the company has no records, often going back more than two decades. Thus, these laws have developed into a powerful revenue-generating tool for states. For example, the revenue generated from unclaimed property registered as Delaware’s third largest revenue source in 2016. States have leveraged the threat of significant unclaimed property liabilities to extract substantial settlements from defendants. Companies subject to unclaimed property audits routinely resolve the audits by reaching multimillion-dollar settlements and have been embroiled in significant litigation about unclaimed property issues.
In the healthcare industry, funds subject to unclaimed property laws can arise in any number of ways. In addition to the classic examples of payroll and accounts payable, the complicated payment and reimbursement processes in the healthcare industry, in particular, can give rise to unique and significant unclaimed property liability, such as from credit balances arising from insurance overpayments. Credit balances may occur where a patient pays a deductible or co-pay for an amount also paid by the insurance company, or where multiple insurers are involved and more than one pays. In these circumstances, it may be difficult to reconcile and true-up the relevant accounts, and it is not uncommon for healthcare providers to accumulate large credit balances that will ultimately constitute unclaimed property and be targeted in an unclaimed property audit. Although defenses may exist under preemption doctrines, state laws regarding insurance payment recoupment, and a business-to-business exemption, these defenses are not always clearly established and vary by state and jurisdiction.
Given the stakes, it is important for in-house healthcare attorneys to consider their company’s compliance with unclaimed property laws, including the ways in which the company’s processes can be organized and structured to avoid accruing unclaimed property in the first place. For instance, payer agreements and overpayment letters to payers can be drafted in a way that supports the conclusion that unclaimed funds will revert back to the provider. For credit balances that are already due and outstanding, a careful read of the applicable law may show that an escheat exemption is available, but each state is unique and requires its own analysis.