How To Handle Patient Credits When Buying or Selling Your Practice

Patient credits, refunds, and overpayments, which are distinguishable from insurer or third party payor overpayments (this blog focuses on patient credits), are a misunderstood and often mishandled aspect of running a dental practice. Generally speaking, a patient credit is money owed by the practice to the patient, for instance as result of an overpayment by the patient. It is vital that a practice owner properly account for and handle patient credits. Though rare civil and, in certain instances, criminal liability can result if you do not do so! So pay attention to the credits on your books!

What do you do with patient credits?

As for what a doctor should do with credits the answer is simple, though perhaps not what a dentist wants to hear: refund them to the patients. A doctor should take every reasonable effort to locate a patient and refund the positive balance. As for how to handle them in a practice sale, the same efforts should be taken, but the question becomes whether the seller or the buyer will be in charge of those efforts.

Who handles?

The cleanest way to handle patient credits in a practice sale, at least from the purchaser’s perspective, is for the seller to refund all balances to the corresponding patients at or before closing. Theoretically a practice owner should be doing that on an ongoing basis, so it should not be that monumental of a task. Of course, the practicalities of running a practice may result in credit refunds slipping through the cracks, yielding a large line item on the books of the practice and a hefty number of checks to be mailed. Often times a patient credit can be no more than a few cents. But that is still the patient’s money. Because of this practical difficulty in zeroing out patient credits by closing, if liability for refunding credits stays with seller, a corresponding (i) ongoing duty to refund after closing and (ii) duty to indemnify the purchaser from all costs and liabilities associated with credits post-closing should also be written into the deal. This way, liability is clearly delineated at the outset.

There is another practical issue, however, in that it can be awkward for a new practice owner to say to a patient seeking a refund or offset against a bill, “I’m sorry, you have to go talk to the other guy about your money.” This situation may not exactly help the goodwill the purchaser just spent so much money buying. But this may be worth it for the buyer to avoid having to deal with trying to find patients and refund money – patients move and can otherwise be difficult to find.

Alternative Option

The primary alternative to seller retaining liability is for (stands to reason) the buyer to take liability for patient credits. Under this approach, seller either cuts a check at closing for purchaser or the balance of the total credits is offset against the purchase price at closing. This represents the line item moving to the balance sheet of the purchaser for those credits. But, purchaser must take efforts to reimburse and refund those credits. It is not the practice’s money! Because this is an assumed liability, and as there could be credits that are very old or for patients that have moved or changed practices, a buyer should consider some type of cutoff as to what credits he or she will accept liability for, such as age and type.

As noted above, patient credits represent a positive balance in the patient’s account. A credit or overpayment is effectively money of the patient. The doctor should not consider it money of the practice. It is not working capital for the buyer, nor is it free money for the seller to walk away with. It is the patient’s money! This cannot be stressed enough. And the doctor responsible for those credits, whether seller or buyer, must follow proper protocol for handling those credits. That protocol eventually leads to the legal concept of escheat. I’ll spare you the legalese, but suffice it to say there is a process for handling credits and, if after this process is followed the credit remains on the books of the practice, it must go to the state in accordance with NC law.

For more information, speak to your CPA or bookkeeper and see the following links: