If you're a for-profit healthcare provider and looking to save some money, check the ingredients in the zinc oxide you've been using.
In some states, zinc oxide's active ingredients-because they have medicinal properties or are prescribed by a physician-allow the product to be exempted from sales taxes, says Tony Gilburt, senior consultant at Bethesda, Md.-based Gilburt, Kasenetz & Associates tax consulting firm.
But in finding ways to save on tax overpayments in for-profit healthcare companies, that example is just "the tip of the iceberg," Gilburt says. Not-for-profits don't pay taxes on purchases.
Gilburt's company, which specializes in finding sales tax errors, is one of several nationwide that are poring over healthcare companies' books to find mistakes and often a nice chunk of change.
The process is called reverse or recovery auditing. Companies like Gilburt's examine clients' invoices to find errors such as tax payment and pricing mistakes. Gilburt's client base is 55% nursing homes, 20% hospitals, 10% assisted-living centers, 10% physician practices and 5% surgery centers. All are for-profit.
Healthcare companies don't seem to use the process a lot. Rachel Roper, a spokeswoman for Nashville-based LifeTrust America, an assisted-living company, says her company watches its sales tax payments, but it takes an internal, in-depth look at those taxes only when making large purchases. But LifeTrust discussed the issue with outside consultants and determined it's not a major issue.
Lauren Maddox, vice president of communications for the Washington-based Federation of American Health Systems, said such tax recoveries weren't a big issue for the federation's membership, some of the largest for-profit hospital systems in the nation.
Although recoveries are small in relation to a healthcare company's net revenues-about $2,000 in overcharges per $1 million in revenues for one Tennessee hospital, Gilburt says-healthcare providers desperately need money from any available source these days.
"Clearly the profit squeeze and the squeeze to become more efficient are driving (healthcare companies) to find opportunities," says Mac Martirossian, senior vice president for business development for Dallas-based Howard Schultz & Associates, another company specializing in recovery auditing.
Gilburt wouldn't say how many clients he is now serving, nor would he say how much he has saved his clients overall. But he did give examples of savings: Gilburt's company collected a $55,000 refund for a number of medical items and identified $15,000 to $20,000 in prospective annual tax savings for one un-named New York state hospital with annual revenues of about $40 million.
On the tax side, Gilburt says, there are two flaws in the system. First, most hospitals, nursing homes and other for-profit healthcare companies rely on vendors to set the sales tax rates on the items purchased. Vendors often overcharge sales tax, because undercharging might trigger an audit.
"Vendors have an incentive to overcharge to protect themselves," Gilburt says.
Second, healthcare companies often don't have the expertise to analyze a bill and determine whether the appropriate sales tax has been applied. Many states carry broad tax rules that might exempt certain items-such as zinc oxide-from taxation. Such states include Florida, Maryland, Massachusetts, New York, South Carolina and Tennessee, Gilburt says.
As another example, many states have an exemption for prosthetic aids, but it's up to the healthcare provider to determine what the state allows to be defined as a prosthetic aid. In several states, big-ticket dialysis machines are considered prosthetic aids and could be considered exempt from sales taxes.
Depending on the state, Gilburt says he can go back as far as five years in looking at invoices. Typically he and Howard Schultz's Martirossian say their firms charge 35% to 50% of whatever is recovered, depending on the amount found and the time involved in reviewing invoices. Neither firm collects its payment until the client is reimbursed.
Martirossian says his firm encourages clients to go back through at least three years of records, because most states allow them to recover any money from tax mistakes during that window. Reviewing the books can also help identify established patterns of invoice problems, he says.
But taxes aren't the only area in which mistakes are made, Martirossian says. His company also finds clerical errors resulting in overpayments to vendors.
In 1997, Martirossian says, his firm saved its 1,500 worldwide clients about $560 million, of which only about $2 million came from healthcare. He says about 10% of his firm's clients are healthcare organizations, all of which are hospitals with 200 to 400 beds.
Martirossian says his company finds frequent errors in duplicate payments in healthcare. In one case, a large for-profit hospital he declined to name inadvertently doubled-to $80,000-its payment to a physician to buy his practice. The facility sent one check for $40,000 to the physician in charge of the practice and another check for $40,000 to the practice.
In other cases, hospitals forget to take large discounts with vendors, pay credits instead of taking them or don't follow up on payments made for estimated costs.
Martirossian says healthcare providers need to make major investments in systems that prevent overpayments and other mistakes that can cause significant financial losses.
"The healthcare industry has made significant strides in improving information systems, but they're not the leading edge in investing in information systems," Martirossian says.