No More 'Unapplied Funds'

January 1, 2004

How to use your unapplied account for the best collections

When meeting with your billing staff to review financials, how often have you heard, "The production report is not really accurate because of the money in the unapplied account," or, "The accounts receivable is not really what the report states. We need to subtract the amount in the unapplied account." Worse, have you had patients call and complain that they keep getting billed for visits they already have paid for? That "unapplied account" can cause a multitude of billing problems.

While the original intent of an unapplied account may seem the appropriate solution for some situations, what usually happens is that the account becomes a monster. Many practices use these special accounts to temporarily "hold" money until it can be applied to the correct patient account. The problem is that, despite the best intentions of "getting to it later," billing personnel often never get around to putting that money in its proper place. I've seen practices where unapplied accounts contain over $250,000, with transactions more than a year-and-a-half old. At one practice, the billers created a new database to "start fresh." Within six months, the unapplied account in the new database had a balance of over $60,000.

Here's how to make sure that doesn't happen to you.

Where the problem starts

Some billing software vendors train staff to use unapplied accounts. But staff need to be trained to avoid using the unapplied account as a quick way to resolve problems that require time and research.

For example, say the data entry clerk receives a payment that she cannot immediately identify. Perhaps there are several patients with the same name as the one on the payment and the clerk doesn't know which account to apply the payment to. She puts the money in the unapplied account, intending to reconcile it later. Perhaps an insurance carrier voucher contains one or more incorrect payments -- the carrier may pay a claim twice, send payment for a physician who is not in the practice, or send a payment for a patient who is not one of yours. Again, with all good intentions to follow up later, the staff member puts the payment in the unapplied account.

The problem may also be with the equipment staff has to work with. Some computer billing systems are not set up to accept payments until charges are entered. An ophthalmology practice may post an advance payment for laser vision correction to the unapplied account, intending to make the adjustments when the procedure is actually performed. A dermatology practice might do the same for a cosmetic procedure, intending to make the adjustments when the procedure is done.

Adverse effects

Quite simply, all the money posted to the unapplied account is money not properly posted to patient accounts. This means that many patient accounts are incorrect. Patients receive incorrect statements, requesting payment that has already been made. Claims are sent to government entities and private payers that have already paid the claim. (And remember, Medicare considers double-billing to be fraud -- a criminal offense.)

Too often, patients, government agencies, and payers will mistakenly pay the practice a second time. Now the practice has added to its workload by having to manage and process refunds. Again, it spells trouble with the law: Medicare considers failure to send refunds in a timely manner to be fraud, and failure to send refunds in a timely manner to private carriers is a breach of contract.

Meanwhile, the billing department is flooded with calls and mail responding to inaccurate billing. The staff wastes time investigating accounts where there is really no issue. And practices lose patients who discover billing problems. Who can blame them for wondering, if the administration is sloppy, whether the medical standards are up to par?

Finally, unapplied accounts generally mean your financial reports are inaccurate. Accounts receivable, accounts receivable aging, and physician productivity reports are just a few of the reports distorted by the amount of money in the unapplied account. The practice is losing money it should be billing. When payments from primary carriers are not applied to patient accounts, claims to secondary carriers are not even submitted, and patients usually don't get billed for the balance.

Reconciling the account

The reconciliation effort, though time-consuming, brings no money into the practice. That is why many practices look for ways to avoid reconciliation or look for quick fixes. But avoiding or delaying reconciliation is costly and potentially dangerous. A practice cannot simply draw a line in time and make one simple adjustment to "start fresh"; this would leave many patient accounts with incorrect balances and mean a substantial loss of funds to the practice.

Reconciling the unapplied account is a simple matter of credits and debits. Make an adjustment to the unapplied account by reducing the amount in the account and applying exactly the same amount to the patient account, decreasing the amount the patient owes the practice. Be aware that reconciling the account becomes exponentially more complex as transactions age. Practices often need to pull records from storage and even attempt to contact patients who have moved to determine the correct application of money.


During the account reconciliation process, stop creating more problems by continuing to add to the unapplied account, and discontinue using the unapplied account to compensate for computer billing system or billing process shortcomings.

Try to set up your billing system to allow the proper application of money. Contact your practice's computer support organization for help. If the system you are using does not have the functionality to properly manage payments and patient accounts, replace it with a good system. No matter what a new billing system costs, it has to be far less than the labor and lost revenue generated by one that doesn't meet your needs.

Don't let the purchase and installation of a new computer system keep you from resolving problems related to the unapplied account. Establish a policy and specific procedures to reconcile every entry to the account within a short period of time -- say, 24 or 48 hours. Once a proper computer billing system is in place, have a consultant or accountant train the staff in the basics of debits and credits -- not in a classroom, but on the computer.

Conduct regular audits to ensure that the practice's billing policies and procedures are being followed consistently on a daily basis. Always audit the process shortly after a new staff member is added to the billing office. They learn on the job and are often poorly trained or not fully trained. In a few months, a poorly trained new staff member can corrupt hundreds of patient accounts.

For a large account

Here are some steps to take toward reconciliation if your unapplied account is particularly large.

o Develop goals for the project and monitor them. For example, reconcile 50 accounts per day or $2,000 per day. Have the staff produce a report of the balance and all adjustments made to the account. Review the reports daily with the staff to ensure that they are making proper adjustments.

o Establish policies relating to time and dollars. For example, write off patient balances of $50 or less when the transaction is over nine months old and $10 or less when the transaction is less than nine months old. Process refunds twice weekly with the signature of the office manager and/or a physician.

o Protect the practice from accusations of fraud or breach of contract by documenting policies, procedures, and the reconciliation process. If the government or a private payer questions any transactions as illegal or in breach of contract, you need to be able to exhibit a good-faith effort by demonstrating the magnitude of the situation, the logic used to reconcile accounts, and the commitment to avoid future problems.

o Process secondary claims that were never submitted because of primary claim payments that were put into the unapplied account.

o Negotiate with payers on claims that are out of timely filing. Explain your situation and plans to fix the problem. Some payers will agree to process a single batch of old claims.

Just can't close it?

In some situations, it makes sense for a practice to maintain its unapplied account. Here are some ways to manage it sensibly:

o Do not apply money to the unapplied account for any single payment, such as an individual patient payment or payment from an insurance company that is for one patient. If the correct account cannot be immediately identified, simply copy the check and deposit the money so that the check is not lying around the billing office.

o If the payment is included in a voucher, have staff investigate the issue and properly apply the money. In only extreme circumstances and with the approval of a supervisor or the office manager, use the unapplied account -- and be sure to reconcile the issues within a short, specified period of time. Unfortunately, overuse of an unapplied account makes it easy for the billing staff to be sloppy.


o Some practices employ less experienced, less knowledgeable clerks to enter the bulk of payments, and then more experienced, better trained, and higher paid personnel handle the more complex issues. It's better, in the long run, to hire more qualified billing personnel, keeping them up-to-date through training, and auditing the process to ensure payments are entered consistently, accurately, and completely.

The bottom line is, don't let your unapplied account grow into an uncontrolled, money-losing mess for your practice. If you must keep an unapplied account, manage it carefully.

Paul Angotti is president of Management Design, LLC, a company that helps physicians to establish and maintain financial and operational control of their practices. He can be reached at angotti@management-design.com or via editor@physicianspractice.com.

This article originally appeared in the January 2004 issue of Physicians Practice.