Hospitals

Preventing fraud: How much do medical practices lose and why?

Medical practices and healthcare organizations are likely losing 5 percent of annual revenues to fraud, waste and abuse, according to the most recent study conducted by the Association of Certified Fraud Examiners. The numbers are truly staggering: A practice with revenues of $10 million loses an average of a half million dollars annually! Many years, […]

Medical practices and healthcare organizations are likely losing 5 percent of annual revenues to fraud, waste and abuse, according to the most recent study conducted by the Association of Certified Fraud Examiners. The numbers are truly staggering: A practice with revenues of $10 million loses an average of a half million dollars annually! Many years, these amounts will be the difference between surpluses and deficits. In today’s challenging economy, and with declining reimbursement rates, such losses can result in a practice’s disintegration.

The nature of a medical practice tends to exacerbate the exposure to fraud. The volume of information passing through even the smallest practice tends to bury physicians and their administrative staff in data, which can make detection of abusive schemes difficult. Patient censuses, co-pays, EOBs, utilization review oversight and a litany of contracts with varying rate reimbursements conspire with the usual business record-keeping to create a sea of information, tending to obscure fraud and waste.

Further complicating matters is the fact that medical practices often rely on one or two trusted administrative staff to handle billings, collections and disbursements, which can lead to improper segregation of duties in a practice’s internal control environment.

Finally, physicians tend to deny the existence of fraud. Often, I will hear doctors proclaim, “We have the best employees – they would never steal,” or, “If there was fraud, I would know about it.” Sadly, these blinders can result in many years of diminished profits.

Fraud, waste and abuse are everywhere. Sometimes the schemes are large — involving purchasing (such as kickbacks paid to your employees or fake vendors) or collections (including the theft of a practice’s accounts receivable or the skimming of co-pays). Sometimes the schemes are smaller, but add up over time — the submission of fictitious employee expense reimbursements or the personal use of company property.

Fortunately, there are many ways to minimize the exposure to losses without turning the office into a police state, and without incurring major internal control-related expenses:

  • Segregate incompatible employee duties: Generally, it is wise to divide responsibilities among several staff members so that the authorization of business transactions, the physical custody over assets and the accounting responsibilities for those assets are assigned to separate individuals.
  • Receive copies of all bank statements and payroll service reports independent of the administrative staff, review the reports and make a regular practice of inquiring about transactions. Employees who know that someone else is truly watching are less likely to perpetrate frauds.
  • Broadcast your resolve that fraud and abuse are unacceptable. The tone from the top of an organization goes a long way to defining the culture of a company. Draft an ethics policy and compel all employees to acknowledge the policy annually.
  • Always conduct background searches on potential new hires.
  • Secure fidelity bond insurance coverage.
  • Look for red flags or indicators of fraudulent behavior. Employees who work strange hours, who never take vacations or who appear to live beyond their means might be involved in activities detrimental to the practice.

There are many more policies and procedures that can be effective deterrents to unethical behavior. The goal should be to create an environment where employees understand that fraud and abuse are intolerable and where a perception of detection exists; namely that employees perceive that any untoward act would be quickly discovered.

The implementation of effective internal controls should go a long way towards reducing the losses experienced by medical practices. A mere reduction of the rate of loss from 5 percent to 3 percent can result in significant savings for a practice — amounts that far outweigh any costs of implementation.

B.J. Hoffman is a certified public accountant and certified fraud examiner for Citrin Cooperman, an accounting, tax and business consulting firm. He is a partner in the Philadelphia office. Hoffman provides clients with a mix of audit, tax and litigation support services. He often works with closely held entities in a variety of industries including professional service firms, healthcare practices and real estate enterprises. He can be reached at bjhoffman @ citrincooperman.com or 215-545-4800.

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