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Employee Theft Adds Up, Low-Cost Solutions Could Save Thousands

Could your organization use an extra $50,000? Could your organization use an extra $50,000 it already has? It turns out that many organizations receive funds that don’t end up in the practice’s bank account due to fraud. Based upon my own experience and research performed by the Association of Certified Fraud Examiners (ACFE), when fraud occurs it is not unusual to lose at least $50,000. Actually, according to the ACFE, the median loss is more likely $150,000 in the healthcare industry. What would a practice be able to do with these funds? Add additional staffing? Assist the implementation of an electronic medical record system? You decide . . . What causes this fraud to occur? Generally, inadequate internal controls and lack of appropriate safeguards increase a practice’s fraud risk.

Thus, better processes and procedures to mitigate fraud risk need to be implemented by the practice in an effort to protect the cash collected. Many times inadequate processes and procedures are overlooked as managers don’t necessarily believe that the cash-collection process represents an area of focus for improved controls and overall revenues. 

When I started my career in healthcare auditing over a decade ago, shrinking reimbursements and collection of co-pays and deductibles represented a focus for improvement for healthcare organizations. It turns out in 2011, the focus remains the same.  Like many people, I presumed that everyone knew the importance of collecting as much as possible of a practice’s payment on the front end of a visit as opposed to trying to do so on the back end. I also presumed that most organizations developed and implemented appropriate safeguards to ensure the cash collected made it safely into the bank account. Unfortunately, my presumptions did not reflect reality.

I continue to find that actual processes and controls over cash lack the segregation necessary to protect the practice, and at two of my clients in the last year, cash collections for a significant period of time ended up “diverted” by the employees in charge of ensuring that the assets safely made their way to the bank. In both instances, the process to collect cash on the front end of the patient visit worked; however, once collected, the cash never finished its journey to the correct bank account. In both cases the dollar amounts might be considered minimal, $30,000 on the low end and $75,000 on the high end. Regardless of amount , the funds went missing, and all due to a lack of appropriate controls.

In its 2010 Report to the Nations, the ACFE notes that the healthcare industry is fifth on the list for the most frauds perpetrated. The study also notes that the largest area where fraud occurred was the billing area, with employees skimming and stealing cash on hand. Further, the study finds that without strong controls in place, fraud generally took place over twice as long a period (24+ months on the high end without controls vs. 12 months with controls) with median losses much more severe ($100,000 with controls, and up to $245,000 without).

So what is a practice to do? First the practice must understand and accept that although employees may want to do the right thing in the performance of their assigned daily tasks, when put under pressure and stress, and unmonitored by strong internal controls, employees may well fall vulnerable to the temptations of fraudulent activity. Karl Bailey, associate professor of psychology at Andrews University, cites the studies by R.F. Baumeister et al. that note that as individuals' stress levels increase due to a variety of pressures (strain at home, for example), and as the individual expends energy to resist the temptation to take what he/she wants, or in our case, has access to, over time it becomes harder and harder for an individual to maintain or exercise self control.

Given the above-noted stress and pressures coupled with access to cash and weak controls (opportunity), individuals can rationalize the taking of the funds. Under these circumstances individuals may simply not be able to exercise the self-control level necessary in the performance of his/her daily tasks to resist taking the cash. We refer to the combination of opportunity, rationalization, and pressure as the fraud triangle: opportunity (access to assets with weak controls), motive or financial pressure (my spouse lost his/her job), and finally rationalization (I need the money more than the doctor does and I can get away with stealing it). When all three corners of the triangle exist, the risk of fraud increases dramatically.

What does this mean for your practices? We include here a few low-cost steps to safeguard your valuable cash resources and to protect your employees by reducing fraud risk. 

1. Institute a cross-training function so the practice does not always have the same person collecting the cash, if at all possible. 
2. Institute stronger cash controls that remove the liquid assets from the employees’ hands as soon as possible and place them into the bank. This should include not allowing actual checks and cash to go from the reception and collection areas to the payment posting areas (where photocopies provide all information needed to perform the daily posting task). 
3. Institute mandatory vacations for all employees for a five-day period at least once a year, if not twice a year. 
4. Add a fraud hotline for employees to call in anonymously to report suspicious activities. 

These simple fraud-prevention steps go a long way to helping the practice reduce its fraud risk and focus more fully on treating its patients.

If you have any questions on fraud prevention or best practices for your healthcare practice, please contact Paul D Smith, Jr. at psmith@BlackmanKallick.com or 312-980-2901 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.