How NOT to Become a Victim of Medical Fraud

When we hear of fraud in a medical setting, most medical practitioners think of Medicare/Medicaid and insurance fraud. We’ve been sensitized to this because of the proliferation of Stark Laws, the first of which was included in the Omnibus Budget Reconciliation Act of 1989.

However, there is another face of fraud in medical practices. Employee fraud and embezzlement present significant risks to every medical practice type and structure, whether primary care, specialty or even concierge.

A medical practice, whether solo practitioner or multi-provider group, is subject to many of the same risks of any business. The Association of Certified Fraud Examiners (ACFE), headquartered in Austin, Texas, recently published its 2010 bi-annual Report to the Nation on Occupational Fraud and Abuse. The report contains many statistics and a few of the noteworthy were:

• While the median loss caused by occupational fraud was $160,000, nearly 25% of the frauds involved losses of at least $1 million
• Almost 30% of the losses were between $100,000 and $500,000
• Frauds lasted a median term of 18 months prior to detection
• Small organizations are disproportionately victimized by occupational fraud
• Asset misappropriation (primarily cash) represented 86% of the cases investigated

Asset misappropriation schemes include:

• Skimming
• Cash Larceny
• Billing
• Expense Reimbursement
• Check Tampering
• Payroll Fraud
• Fraudulent Expense Disbursement
• Cash on Hand Embezzlement
• Theft/misuse of inventory, supplies, investments

As indicated above, small businesses (<100 employees) fall victim to occupational fraud more often than large businesses. It is suspected this occurs for several reasons. First, large business has greater resources to secure the assets of the company. Many large corporations have a Loss Prevention Group whose job is to constantly monitor potential for embezzlement and fraud through various means. Secondly, in larger businesses internal controls are constantly subject to testing, analysis and, where necessary, adjustment and refinement.

No one can guarantee controls of any type will provide absolute assurance that your practice will be protected from embezzlement. However, the placement of certain strategic controls will help any medical practice alert employees to the fact somebody is watching, making early detection of fraud easier.

Control # 1 — The Bank Statement

When the monthly bank statement arrives it should be given, unopened, to one of the partners who has agreed to take this responsibility. Each check should be reviewed, looking at the front and back to make sure it is legitimate. Some things to look for are payees who are not recognized, erasures or other apparent changes to the check, a hand endorsement of a check payable to a business, checks to employees outside the payroll system, etc. This process generally takes no more than 15 minutes per month.

Control # 2 — Reconciliation

The bank account must be reconciled each month and reviewed by someone other than the person preparing the reconciliation. No excuses!

Control # 3 — Fraud Hotline

Consider implementing a Fraud Hotline, providing the ability for any employee to call and anonymously provide information to a third party regarding improper or illegal activity, whether real or merely suspected. Most people are honest and are upset when they see somebody stealing from their employer. However, they may work directly with the suspected thief and in order to avoid confrontation, or put their jobs at risk, the theft goes unreported.

The fraud hotline has a contact in the practice to which it forwards the information. Consequently, anonymity is maintained and the issue is brought to the attention of the practice. This is the number one method of fraud detection in the cases studied.

Control # 4 — Signature Stamp

If you use one, get rid of it. Even keeping it locked up is not protective enough. Just get rid of it!

Control # 5 — Positive Pay

Virtually every commercial bank offers this service. When you write checks to vendors, or for payroll, you submit an electronic file to your bank with the information for each check. When the checks clear the bank they are matched against the file. Exceptions are forwarded to the customer for resolution.

The above controls are just a few suggestions to help protect your practice from employee fraud and embezzlement. If you are not currently following the above suggestions, take them to heart. Speak to your accountant about additional controls to implement. They will go a long way to protecting your practice.

Joel Charkatz, CPA, CVA, CFE and Melissa Pitchford, CPA are Shareholders at KatzAbosch, P.A. in Timonium, Maryland. KatzAbosch is a leading provider of accounting, tax and consulting services to the medical community. For more information about KatzAbosch, or the topic discussed in this article, Joel and Melissa can be contacted at jcharkatz@katzabosch.com and mpitchford@katabosch.com or 410-828-6432.

KatzAbosch, P.A. is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.