The most common surprise my clients experience when transitioning their dental practice concerns the accounts receivable. Every dentist knows that they have accounts receivable, but very few are aware that those receivables also include patient credits. These credits are both a financial and legal liability for the practice and can build up to astounding sums over the span of a career. When you sell or close your practice, these liabilities need to be satisfied. No matter what stage of your career, addressing patient credits regularly is essential.
First, identify the extent of your problem. All practice management software packages have a ledger that tracks billing and payments and can generate an accounts receivable aging report. You can usually filter these reports by account balance or check a box in the menu for a credit balance report. (In Dentrix, go to Office Manager> Reports>Ledger>Aging Report and check the “Credit balances” box). Alternatively, you can generate a standard A/R aging report and just look for negative numbers, which indicate a credit balance. If you need help with this, call me and I can set up a time to walk you through it.
Patient credit balances are usually from three sources (i) funds paid by patients in advance of treatment, (ii) funds from overpayments by the patient or insurance claim payments which exceeded the estimated amount, and (iii) bookkeeping errors or employee fraud. To address credits, first compare the practice ledger to the patient charts to make sure the credit is not an accounting error. Before refunding any money, you should audit the account. Clerical errors or malicious errors and fraud from past employees may result in false positive balances on your books. You should track down the actual payment that caused the positive balance to make sure it was not a clerical error. Your computer will show the payments in the patient’s ledger and should also show a copy of that payment on the computer deposit slip for that day. If it is an accounting error, document the error before adjusting it off the practice ledger.
If the credit is legitimate, try to contact the patient and schedule them for treatment. You would rather work off the credits than refund them, and your staff can use the credit as an incentive for the patient (“It’s time for your cleaning and you have a credit on the account, so it will only cost X”). If the patient does not wish to return to your office, you should refund the patient’s money.
If the credit is old and the patient cannot be located, the situation gets more complicated. Unlike old receivables, which dentists can decide to write off as uncollectable, credit balances never expire. In Louisiana and many other states, there are laws concerning how long a business can hold unclaimed property before it is obligated to refund those amounts or send them to the state. The holding period for different types of property varies. For patient credits and other retail business transactions, the period is 36 months. Consequently, if a patient has not been seen and the money remains on your ledger for three years without activity, it should either be refunded or sent to the State Treasurer if the patient cannot be located. More information on reporting unclaimed property can be found at https://louisiana.findyourunclaimedproperty.com
Though the law on unclaimed property is clear, very few dentists ever file a report and write a check to the State Treasurer. Most dentists are ignorant about even having credits, there is little enforcement against small businesses, and no one likes to send the government money. However, ignorance is not an excuse, and our state’s unclaimed property law provides that holders who fail to comply with the law may be audited, and the holder may be required to pay the costs of the examination. Additionally, all holders are required to pay interest at the annual rate as provided in Louisiana Civil Code Article 2924 on all property not reported or delivered when due as required by law.
Because there is almost no enforcement against dentists, many practitioners let the credit balance problem fester for their entire career. Many of my clients are amazed to find they have $20,000 or more in credit balances on their books when they get ready to sell their practice. Like a bank loan or any other practice liability, credit balances must be satisfied in order to sell an unencumbered asset to the buyer. How this is addressed can be negotiated between the parties, but usually the buyer is either given proof the credits have been satisfied (directly to patients or to the state treasurer) or is given a reduction in the price paid in return for assuming responsibility for refunding or treating patients with credits.
Start working on your accounts receivable today. Write off or send to collection any unpaid accounts over 2 years old, and then have your staff start working through the credit balances. By discounting services based on what you already owe them, you may get some of your reluctant patients back into your office to complete their work. Bite the bullet and send old credits to the State Treasurer before they become unmanageable, and educate your staff on handling positive balances in order to avoid the problem in the future. Doing so will also provide you with a healthier practice when it is time to retire and a little larger check from the sale of your practice.
Preston Lovelace, JD, MS is the president of ADS Lovelace and Associates, Inc., which has been endorsed by the LDA for practice transition services. He has been evaluating and transitioning dental practices in Louisiana for 17 years. He is an attorney admitted to practice in Louisiana. All LDA members are eligible for a free consultation lasting up to two hours as well as discounts on transition and valuation services. He may be reached at 225-614-7700 or PLovelace@gmail.com
