Practice Management Alert

Are you among the 80 percent of practices that will experience embezzlement in the next 5 years?

It’s the tragic type of story in the medical field that you hear at industry conferences, or from friends of friends. “The doctor knew the reimbursement climate had become tougher and all, but he just didn’t think the practice was making as much money as it should.”

It wasn’t. A trusted medical office manager had been embezzling money for years, and the CPA auditor the practice was using as a safeguard was in on the scam. Once the embezzlement was detected, the office manager was fired, and charges pressed. But the money was gone forever. Sure, the office manager was supposed to pay restitution, but she no longer had the money to repay. She’d spent it on cruises and clothes.

It’s a story that’s all too common. Businesses with 100 employees or fewer are more vulnerable than larger businesses, an Association of Certified Fraud Examiners (ACFE) report says.

And medical practices are at higher risk than most small businesses. Consider these statistics from Embezzlement in the Medical Practice — Are you at risk? by Carl N. Frost, CPA, CVA of Houston-based Frost & Company, P.C.:

• 10 percent of the nation’s healthcare cost is lost through fraud, twice the standard average.
• During the next five years, 80 percent of all medical practices will experience embezzlement in one form or another.
• Of those committing the embezzlement, it is estimated that 70 percent have practiced their embezzlement skills with a previous medical practice.

Why are medical practices so susceptible?

Physician owners must face the fact that they are open targets for fraud. But why? As Frost points out in his paper, medical offices are often comprised of close-knit groups, and this familiarity often leads to gradual breakdowns in policies and controls because of trust. This lack of control is mixed with a daily flow of cash and checks, centralized money functions and a lack of supervision, creating “an open account for a potential embezzler.”

And like most healthcare providers, physicians and their staff likely have what forensic accountant John L. Hughes, CFE with Audit Services of Virginia describes as a “basic instinct of wanting to offer aid and comfort,” which makes it easier for unscrupulous folks to take advantage of your good intentions.

Many of the forms of theft the employees commit take advantage of this atmosphere of trust. That trust gives them the benefit of the doubt in the case that you begin to feel suspicious of their fraudulent activities, such as:

• Employee takes cash payment from patient and does not post charge or payment.
• Employee gives patient a fictitious receipt for payment that was made.
• Employee gives busy doctor a sheaf of checks to sign, includes an extra one.
• Refund check made out to fictitious patient. (Employee has previously opened an account under that name.)
• Employee substitutes insurance check payment for cash taken and doesn’t post insurance payment.
• Rubber stamp is made of doctor’s signature: uses to make extra paycheck for self.
• Employee purposely pays a bill twice and then pockets the resultant refund.

How to Spot Embezzlers

So if 70 percent of employees who will embezzle in the next five years have stolen from a previous employer, how are they getting hired? This is also particularly tied to the medical field, or at least providers’ proclivities towards pride, as most physicians are reluctant to:

• Admit that it happened to them.
• Believe it’s anything other than a minor, isolated incident.
• Report it to the proper authorities.

In the paper, Frost asserts that you should never leave one employee in control of finances, regardless of your level of trust. This very trust is the springboard that allows employees to commit fraud undetected. You should also be wary if any employee largely responsible for handling finances suddenly quits or disappears without notification.

10 warning signs of potential embezzlement

• Your practice’s accounting processes seem disorganized.
• There are gaps in your accounting records and discrepancies among your financial reports.
• Claims are closed without payment.
• Vendors are calling to complain your practice hasn’t paid your bills, or you’re receiving past due notices.
• Patients are complaining that your practice has recorded their payments incorrectly.
• An employee wants to work unusual hours when no one else is around.
• A manager insists on doing routine tasks himself when clerical staff could be doing them.
• An employee refuses to teach colleagues how to do the job.
• An employee takes accounting materials home.
• An employee never takes vacations.

Note: To read Embezzlement in the Medical Practice — Are you at risk?, visit www.frostcopc.com/editoruploads/documents/embezzlement-article.pdf. To view the ACFE data, visit: www.acfe.com/rttn-small-businesses.aspx.