Record-Retention Programs Can Protect Group Practices

Group practices, like other businesses, are required by Federal or state statutes to retain certain records regarding their past activities. For example, many states require incorporated businesses to keep minutes of their board meetings, communications with shareholders, annual reports, and similar

documents for a specified period of time. It is a good business practice, however, to retain other types of records as well, even those not required by law. Group practices should retain not only corporate minutes that document the decisions of the practices, but also banking and other records.(a)

The key reason for retaining all types of records is to protect group practices in the event of litigation. Under the rules of evidence, a practice's business records can be introduced as an exception to the hearsay rule, by which the party who introduces the records receives the benefit of having maintained the business record over the testimony of witnesses. The hearsay rule, which can be found in the Federal Rules of Evidence Rule 801, states that hearsay is an out-of-court statement made by a person who is not testifying at trial that purports to be the truth. Hearsay is generally not admissible as evidence in court, unless one of the exceptions to the hearsay rule applies. Business records, however, are a recognized exception to the hearsay rule. This benefit assumes, of course, that the records are accurate and have not been tampered with.

Which Records to Retain

Group practices should adopt a record-retention policy that specifies which business records to retain and for how long. The policy can be put into practice through the use of a checklist (see Exhibit 1). In general, group practices should retain records that pertain to patient care, taxes, payroll, and contracts.

Patient care. The length of time medical records are kept is sometimes governed by state statute or regulation. In addition, some medical malpractice insurance carriers require their policyholders to maintain medical records for a set period of time as a hedge against a liability claim.

In addition, medical records are required to verify that the care rendered to patients was billed properly to third-party payers. Federal agencies have documentation requirements to support charges billed by physicians and other caregivers in physicians' offices, such as nurse practitioners and physician assistants.

Taxes. Group practices should retain records that relate to income-tax payment for at least six years. The IRS may audit a taxpayer's records up to three years after the filing date or up to six years if the agency alleges tax fraud or an error that is in excess of 25 percent. Records that generally should be retained include bank statements, canceled checks, payroll registers, paid invoices, billing ledgers, and general-accounting ledgers. During a tax audit, a group practice may be required to produce source documents used to generate cash, such as the patient schedule, to ensure that cash collections for copayments and deductibles were recorded and reported to the IRS.

EXHIBIT 1: RECORD-RETENTION MATRIX

Record                                      Years
Description                                Retained    Location(*)

Accident Reports                            21
Accounts Receivable Reports - Monthly        2
Accounts Receivable Reconciliations          2
Accounts Uncollectible - Bad Debts           7
Accounts Receivable - Paid                   7
Amortization Records                         P(**)
Annual Reports                               P
Audit Reports                                P
Balance Sheets                               P
Bank Reconciliations                         6
Bank Statements                              6
Budgets                                      6
Bylaws and Constitution                      P
Cash Receipts                               10
Cash Reports - Daily                         2
Charge Slips to Patients                     6

Checks

Canceled                                     7
Accounts Payable                             7
Payroll                                      7
Petty Cash                                   7
Other                                        7

Contracts

Employees                                    P
Loans (after date of payment in full)       10
Service                                      P
Vendors                                      P
Physicians                                   P
Third-Party Payers (after termination)      10
Others (after termination)                  10

Correspondence

Accounting                                   5
Cashiers                                     5
Credit                                       5
Payroll                                      4
Purchasing                                   2

Deduction Authorization - Payroll           20
Deposit Banks                                3
Deposit Slips                                3
Depreciation Schedules                       P
Disbursements, Cash                          8
Expense Reports                             10
Financial Statements                        10
Garnishments                                 7
Individual Earning Records                   P
Inspection Reports                           5
Insurance Policies                           P

Inventories

Control                                      7
Cost                                         7
Property                                     P

Invoices

Accounts Payable                             7
Accounts Receivable                          7
Paid                                         7
Journal Entries                              P

Journals

General                                      P
Payroll                                     10
Sales                                        7
Subsidiary                                   P
U.S. Savings Bonds                           6
Other                                        6

Leases

Equipment                                   10
Property                                    20
Other                                       10

Ledgers

Accounts Payable                             7
Accounts Receivable                          7
Payroll                                     50
Property Account                             P
Other                                        P

Licenses                                     P
Minutes Book - Board of Directors P
Mortgages                                    P
Operating Reports                           10
Operating Statement                          6
Organizational Charts                        P

Payroll

Analysis                                    10
Cash                                        10
Rate Authorization                          10

Pension and Retirement Plans                 P
Petty Cash Reports                           6
Policies and Procedures                      P
Price Adjustments                            6
Price Lists                                  P
Property Records (deeds, title, leases)      P

Registers

Accounts Receivable                          6
Cash                                         6
Payroll                                     10

Revenue Reports - Daily                      6
Revenue Reports - Monthly                    6
Social Security Reports - Payroll            4
Statistical Reports                          P
Time Cards/Slips                             4

Trial Balances

Accounts Payable                            10
Accounts Receivable                          6
General Ledger                              10

Vouchers

Cash                                        10
Expenses                                    15
Payroll                                     15
Petty Cash                                   7
W-4 Forms                                   10
W-2 Forms: 1099s                             4

Working Papers

Accounting                                   6
Budgets                                      5
Cost                                         5
Financial Statements                        10

* Indicates office or off-site location where stored.
** P = perpetual.

Payroll. It is important to retain payroll records, including time sheets, for several reasons. First, the records document the amount of time employees state they worked and thus can be used to defend wage-and-hour claims. Second, the records document the withholding for Federal and state income tax, Medicare taxes, and FICA taxes. Because the Federal government increasingly is concerned

about the proper withholding of FICA taxes, records also should be maintained for independent contractors. These records are needed to show that the payee is an independent contractor, for whom no FICA withholding is required, rather than an employee. Finally, payroll records should be retained in case some employees do not cash their paychecks. Some state laws require that the state be given the amount of any payroll check that has not been cashed within seven years of the date issued.

Contracts. Group practices should maintain records relating to various types of contracts, such as bills of sale and letters from sales representatives or others that specify services to be provided to the practice. In addition, any documents relating to a request for proposal or a request for information that the practice has initiated or responded to should he retained in the event of a contractual dispute. Also, any written correspondence between the parties should be retained during the term of the contract.

Generally, after a contract has been fulfilled, its related records can be destroyed unless needed for other documentation purposes, such as taxes. An exception, of course, is if the parties have any obligations that remain after the agreement is terminated. A common provision that survives termination is the indemnification clause. An obligation to indemnify often is limited to a certain time frame. A rule of thumb is to keep records related to a specific contract for six years.

It is particularly important to retain contracts relating to all services billed to a group practice by independent companies, such as billing and collection agencies, as evidence in the event of an investigation by regulatory agencies and for tax purposes. In addition, contracts for services provided by independent companies should include a record-retention requirement, Group practices should ensure that the company under contract keeps the documentation needed to prove not only the physician's services that have been billed but also the timely filing of claims with third-party payers.

Many contracts with third-party payers and managed care companies include a requirement for timely filing of claims. Many payers require providers to prove timely filing. Group practices should maintain adequate documentation to prove timely filing to prevent their claims from being disallowed. Practices could lose revenue if they cannot prove they filed a clean claim in a timely manner.

Format of Retained Records

To minimizing paper handling, many group practices have begun retaining patient medical and other records on microfiche, CD-ROM, or other nonpaper media. All of a group practice's computer records should be saved on a system backup, preferably daily, Group practices should consider storing the records off-site in case of fire or other natural disaster that could destroy the office-maintained records.

Before converting records from paper to another form, group practices should consider performing a cost-benefit analysis of such a conversion. Storage, retrieval, and supply costs should be considered in such an analysis.

Conclusion

To meet legal requirements and exercise sound business practices, group practices should establish a systematic record-retention program. Such a program can help relieve some of the stress of an audit or lawsuit, because records will be readily available and in good order to document the activities of the practice.

a. Krendl, James R., and Krendl, Cathy S., "Piercing the Corporate Veil: Focusing the Inquiry.," 55 Denver Law Journal 1 (1978).

Ellen E. Stewart, JD, FHFMA, MSHA, is a partner, Gorsuch Kirgis LLP, Denver, Colorado, and a member of HFMA's Colorado Chapter.