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Unclaimed Property Laws and the Health Industry: Square Peg, Round Hole

The healthcare industry has recently become the target of increased scrutiny from multistate unclaimed property audits, likely due to the high volume of mergers, acquisitions, and private equity deals. These audits have shed light on the many complexities and challenges within the sector. Healthcare industry holders are often pressured by state auditors and administrators to fit a square peg in a round hole – something both they and their advocates should continue to actively push back against.

Identifying whether any “property” needs to be reported can be a significant challenge in an industry where a single patient transaction involves multiple parties and is governed by intricate business agreements, which are continuously updated and managed. Unclaimed property audits, however, are typically conducted with a narrow focus on a single holder and use standardized document requests designed for a broad range of businesses. This approach often leads to unrealistic expectations for record retention and management, which rarely align with the specific laws and practices of the healthcare industry.

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Best Practices for State Engagement of Private Unclaimed Property Auditors

The U.S. Chamber Institute for Legal Reform has released a report detailing current problems with states using private companies for unclaimed property audits and paying those auditors based on the amount recovered.  The report begins with an example of what can go wrong when private auditors are paid on a contingent basis.  The nightmare story of what many life insurance companies recently experienced is well worth the read by anyone who thinks that because their company has been diligently complying with unclaimed property laws, there can’t be any risk from an audit.

After reviewing the issues, the U.S. Chamber suggests several, eminently achievable, reforms.  These reforms include:

  • Prohibiting contingency fees;
  • Requiring all state contracts for private audit services to be subject to an open, competitive bidding process;
  • Requiring all such contracts to be posted on the unclaimed property administrator’s website; and
  • No delegation of state authority to private contractor on substantive decision-making, such as legal theories.

The report also offers suggestions that states provide voluntary disclosure programs with certain protections for participating holders.

Practice Note: Over a decade ago, several attorneys with McDermott’s SALT practice, while working at the Counsel On State Taxation (COST), drafted a Holder’s Bill of Rights.  While Delaware was one of the main proponents of the concept, it did not get any traction in other states.  The current negative impression many holders have regarding third-party contingency fee unclaimed property auditors could have been limited, and perhaps prevented, if states had embraced this idea.  It is probably time to consider this concept.  If third-party auditors offered such a pledge to holders, audits would be far less adversarial and be completed much faster.




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