Crowe HC Webinar Consolidating Unclaimed Property Analysis and Reporting Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP
What is Unclaimed Property? The concept of unclaimed property and the term escheat originated in feudal England in the 12 th century Today, escheat refers to the statutory obligation to transfer abandoned property to the state, who then acts as a custodian for the rightful owners 54 U.S. jurisdictions Texas v. New Jersey (1965) nexus does not apply Common types of unclaimed property: Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 2
What is Unclaimed Property? The concept of unclaimed property and the term escheat originated in feudal England in the 12 th century Today, escheat refers to the statutory obligation to transfer abandoned property to the state, who then acts as a custodian for the rightful owners 54 U.S. jurisdictions Texas v. New Jersey (1965) nexus does not apply Common types of unclaimed property: Accounts Payable Payroll or P-Cards Accounts Receivables Open Payables Unapplied Cash Rebates / Gift Cards Patient Refunds Write-Offs Bank Accounts Benefits (Non-ERISA) Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 3
Unclaimed Property More Common Than You May Think Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 4
State Property Id Name Last Known Address Property Type Reported By Amount 6433008 IU HEALTH 1001 WEST 10TH STREET M200 ESKENAZI HEALTH FORMALLY VENDOR CHECK WISHA INDIANAPOLIS, IN, 46202 Over $100 State Property Id Name Last Known Address Property Type Reported By Amount PO BOX 1063 INDIVIDUAL POLICY BENEFITS 545326 FLETCHER ALLEN HEALTHCARE OR BURLINGTON, VT, 05402 LIFETIME HEALTHCARE INC. Over $100 State Property Id Name Last Known Address Property Type Reported By Amount 898856 LIFEPOINT HOSPITAL INC ATT LEIGH ANN LUTHER NASHVILLE, TN, 37205 UTILITY DEPOSIT Not Disclosed Over $100 State Property Id Name Last Known Address Property Type Reported By Amount 10528705 SCL HEALTH SYS EXEMPLA HLTHCAR ENT Not Disclosed DENVER, CO, 80211 ACCOUNTS PAYABLE REICHERT INC Over $100 Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 5
Question 1 How many hospitals are currently under an unclaimed property audit? A. 10 B. 100 C. 500 D. 1,000 Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 6
Question 1 How many hospitals are currently under an unclaimed property audit? ~ 500 (large health systems, long-term care facilities, and stand-alone hospitals) Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 7
State Intent Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 8
State Reality - Audit Contracts Many states across the country engage multiple 3rd party auditors to work on a contingent fee arrangement Fees may be substantial Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 9
Standard Operating Procedure for Providers Patient Accounting System Accounts Payable Payroll Patient Refund Requests Stale A/P Checks Stale Payroll Checks Active A/R credits Unapplied Cash Small Write-offs Unclaimed Property Compliance Processing Due Diligence Letters UCP State Report(s) Letters required to be mailed during particular timeframes and for specific dollar thresholds per each state Reports required to be filed to state of payee. Instead, often incorrectly filed ONLY to state of incorporation Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 10
Standard Operating Procedure for Providers Patient Accounting System Accounts Payable Payroll Patient Refund Requests Stale A/P Checks Stale Payroll Checks 70-80% Active A/R credits Unapplied Cash Small Write-offs Unclaimed Property Compliance Processing Due Diligence Letters UCP State Report(s) Letters required to be mailed during particular timeframes and for specific dollar thresholds per each state Reports required to be filed to state of payee. Instead, often incorrectly filed ONLY to state of incorporation Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 11
Causes of Credit Balances Payment / Cash Posting Insurance Overpayments Upfront Collections Change in Charges Payor won t accept Uncashed Refunds Boomerang Checks Bad Remittance Advice Unapplied Cash Mispostings Adjustments / Contractual COB Late Payments Incorrect Billing Time of Billing Contractual Incorrect Rates in Billing System Retroactive Adjustments Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 12
Sample Kelmar Audit Data Request Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 13
Question 2 It is acceptable to establish a small balance write-off policy in the business office as long as the same policy is followed on debit and credit balances. A. True B. False Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 14
Question 2 It is acceptable to establish a small balance write-off policy in the business office as long as the same policy is followed on debit and credit balances. False Although about half of hospitals have a similar policy, the credit balances are considered unclaimed property Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 15
Question 3 What Jurisdiction Collects the Most Unclaimed Property Funds? A. California B. Washington, D.C. C. Delaware D. New York Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 16
Question 3 What Jurisdiction Collects the Most Unclaimed Property Funds? Delaware The state collected $670.6M in 2013, representing 15% of its budget $4,300,000,000+ over the last decade (BILLIONS) Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 17
Additional Insight Regarding Audits Temple-Inland, Inc. v. Thomas Cook, Kelmar, et al Federal judge to rule on Delaware extrapolation techniques Auditors move to first priority states Challenge for healthcare providers since extrapolation used in first priority states Auditors have exhausted large DE entities Seeking new industries with significant unclaimed property to pursue Credit balances provide ample opportunity for extrapolation Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 18
Aggressive States Delaware New Jersey New York California Ohio Texas Florida Michigan Louisiana Massachusetts Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 19
Last Activity Date vs. Date of Service Number of Accounts Date of Service Last Activity Date Year 2013 2012 2011 2010 2009 2008 2007 2006 No Txs No DOS 10 2006 6 14 14 16 17 16 25 3 3 2007 29 22 33 23 68 30 4 2 2008 69 70 100 91 119 7 5 2009 140 157 187 146 35 34 2010 311 246 466 36 73 2011 473 338 73 76 2012 1372 478 172 2013 4155 5 802 2014 1 Sum of Account Balances Date of Service Last Activity Date Year 2013 2012 2011 2010 2009 2008 2007 2006 No Txs No DOS ($13,028.98) 2006 ($3,477.05) ($1,340.69) ($7,320.36) ($1,331.33) ($4,060.12) ($2,916.68) ($3,497.85) ($1,318.81) ($200.74) 2007 ($13,286.50) ($20,613.59) ($16,415.74) ($3,165.08) ($15,680.22) ($7,894.51) ($804.39) ($191.22) 2008 ($40,295.18) ($34,395.81) ($56,396.03) ($12,391.82) ($24,140.90) ($855.26) ($1,350.89) 2009 ($98,115.13) ($134,118.88) ($84,953.44) ($25,907.45) ($6,191.25) ($41,660.89) 2010 ($236,360.77) ($159,863.10) ($212,938.78) ($5,099.16) ($35,231.73) 2011 ($452,160.19) ($402,036.01) ($32,449.78) ($35,786.59) 2012 ($1,329,655.04) ($194,550.51) ($119,747.20) 2013 ($3,495,270.19) ($874.16) ($565,193.11) 2014 ($351.00) Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 20
Sample Extrapolation How to turn $9K into $109K Accounts Receivable Issue Year Report Year Revenue 2009 2014 72,155,110 O/S Unclaimed Property- IL Total O/S Unclaimed- All States Error Ratio Estimated Total Due 2008 2013 80,505,952 7,963.01 13,480.94 0.000167 2007 2012 71,471,382 1,077.74 17,385.15 0.000243 2006 2011 62,272,164 151.87 9,187.95 0.000148 2005 2010 60,955,068 0.000186 $11,337.64 2004 2009 61,813,919 $11,497.39 2003 2008 63,605,515 $11,830.63 2002 2007 62,015,897 $11,534.96 2001 2006 60,466,007 $11,246.68 2000 2005 58,954,851 $10,965.60 1999 2004 57,481,462 $10,691.55 1998 2003 56,044,896 $10,424.35 1997 2002 54,608,465 $10,157.17 1996 2001 54,401,242 $10,118.63 9,192.62 Total Estimate $109,804.60 Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 21
Property Types Dormancy Analysis Unclaimed Property Tool Unclaimed Property Client Crowe Horwath Compliance Regulations Various Exemptions Outstanding, Stale-dated Items Legal Support State Laws Statutory Definition Value-add Opportunity Required Compliance Identified Exemptions Unclaimed Property Exempt Accounts ADP Due Diligence UCP State Reports Detailed report of specific accounts meeting statutory exemption requirements Supporting Audit Defense Packet documentation for statutory exemptions Due diligence letters required to be mailed and collected as part of the unclaimed property process Final escheat reports prepared for all reporting jurisdictions Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 22
Aged Liability Risk and Opportunity Typical Liability Breakdown 1 To 2 days A/R Active A/R Exempt AP/PR/OL Exempt Reported No Action Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 23
Unclaimed Property Exemptions K.R.S. 393.010 2(a) (a) This chapter does not apply to money, funds, or any other property held by or owing to any nonprofit, Internal Revenue Code Section 501(c)(3), tax-exempt hospital Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 24
Unclaimed Property Exemptions Exempt K.R.S. 393.010 2(a) (a) This chapter does not apply to money, funds, or any other property held by or owing to any nonprofit, Internal Revenue Code Section 501(c)(3), tax-exempt hospital Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 25
Question 4 A tax exempt hospital located in Kentucky should escheat a payroll check due to an employee across the river in Indiana? A. Yes B. No Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 26
Question 4 A tax exempt hospital located in Kentucky should escheat a payroll check due to an employee across the river in Indiana? Yes, escheat. The property is not exempt - Unclaimed Property based on the payee state Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 27
Exempt or Not-exempt? A hospital with a credit balance owed to a commercial payor located in Michigan that has a last payment date of 2/10/2009? Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 28
Exempt or Not-exempt? A hospital with a credit balance owed to a commercial payor located in Michigan that has a last payment date of 2/10/2009? Not Exempt Michigan s business-to-business exemption does apply to credit balances owed to another business association; however, could not be considered dormant as of the date of enactment. The b2b exemption would only apply to property dated after 3/31/2009 based upon the new reporting period Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 29
Reporting Jurisdiction All healthcare providers are subject to escheat Unclaimed property is reportable to the state of the owner s last known address In the absence of an address, property is due to the state of incorporation of the holder Reciprocity agreements typically will only cover incidental property (10 items or fewer) Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 30
Various States Dormancy Periods State Wages AR Credits A/P CA 1 3 3 DE 5 5 5 FL 1 5 5 IL 5 5 5 IN 1 3 5 KY 3* 3 3 MD 3 3 3 MI 1 3 3 MN 1 3 3 NY 1 3* 3 TN 1 5* 5 * There are exemptions and/or alternative periods based upon certain criteria designated by the state. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 31
Typical Provider Process Provider State Report State Health System Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 32
Typical Provider Process Continued Provider State Report State Health System Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 33
Typical Provider Process Continued Health System Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 34
Best Practice Provider Process Provider State Report States Health System Top Side Consolidation Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 35
Risks / Benefits Risks: Unclaimed Property Audit Often Very Costly Third Party Auditors (Contingency Fee) Extrapolation Benefits: Exemption Analysis Don t Over-escheat Policies and Procedures and Consolidation Decreased Admin Costs Recoveries Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 36
Question 5 Unclaimed Property rules requires a provider to make an attempt to refund a credit balance before sending to the state? A. True B. False Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 37
Question 5 Unclaimed Property rules requires a provider to make an attempt to refund a credit balance before sending to the state? False Unclaimed Property rules only require a last contact letter notification Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 38
Benefits of Consolidated Reporting Uniform data collection process Uniform dormancy, due diligence, and exemption analysis Eliminates the need for state-specific unclaimed property reporting knowledge at each facility Standardization of financial records storage Prepare and send a single report to each state Reduced the cost of generating reports, cutting checks, and obtaining executive signature Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 39
Being Proactive Good Questions to Ask What happens to unapplied cash that is not applied or refunded? What is your policy for treatment of outstanding checks? What is your process for sun setting a patient accounting system? What is your policy for treatment of aged credits within accounts receivables? Is there a small balance write-off policy in place in accounts receivables? How do you handle any undischarged obligations from during acquisition? Is unclaimed property in your third party billing company agreements? Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 40
Questions and Answers Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 41
Tactical Strategies 1. Taking Advantage of Unclaimed Property Exemptions 2. Applying Credit Balance Statutes 3. Identifying Accounting Errors 4. Indemnification Language 5. Consolidated Reporting 6. Voluntary Disclosure Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 42
Benefits of Strategic Approach Improved balance sheet Decreased administrative costs Decreased risk of penalties and interest Ensure adherence to all due diligence and reporting requirements Guidance relative to all legal and administrative changes Pays for itself Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 43
For more information, contact: Eric Boggs Direct 615.360.5522 Mobile 317.514.4276 Eric.Boggs@crowehorwath.com Ryan Hartman Direct 615.360.5511 Mobile 602.561.7926 Ryan.Hartman@crowehorwath.com Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. 2014 Crowe Horwath LLP Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 44
Fall Unclaimed Property Cycle Corporate 9 Sign reports and remit to appropriate states 2 5 11 Legal entity / department Provide requested data including payee details Review and confirm list of reportable items Record requested journal entries using summary exhibits End 3 Crowe UCP Coordinator 1 Request necessary data using collection template Start 4 Verify items not previously escheated or exempt Perform exemption and dormancy analysis Exempt? No 6 Send applicable due diligence letters 7 Track due diligence responses 8 Create final state reports No Due diligence response? Yes 10 Create final summary exhibits Yes Jul Aug Sep Oct Nov Dec Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 45
Spring Unclaimed Property Cycle Corporate 9 Sign reports and remit to appropriate states at various spring filing deadlines 2 5 11 Legal entity / department Provide requested data including payee details Review and confirm list of reportable items Record requested journal entries using summary exhibits End 3 Crowe UCP Coordinator 1 Request necessary data using collection template Start 4 Verify items not previously escheated or exempt Perform exemption and dormancy analysis Exempt? No 6 Send applicable due diligence letters 7 Track due diligence responses 8 Create final state reports No Due diligence response? Yes 10 Create final summary exhibits Yes Dec Jan Feb Mar Apr May Jun Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 46
Brief Case Study Medium sized hospital of 400 beds recently audited by third party audit firm Hospital settled in 2010 for $2.2M 75% of the liability related to accounts receivable credit balances Property types included in audit scope: Accounts Receivable Credit Balances Accounts Payable Wages Unapplied Payments Benefits Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 47