How to Prevent Fraud in Your Medical Practice

You work hard for your practice. What steps are you taking to protect your business from someone stealing from you - especially someone who is on the inside? Fraud can cost a medical practice hundreds of thousands if not millions of dollars. According to the Association of Certified Fraud Examiners, the typical organization loses a median of 5% of revenues each year because of fraud. Globally, they estimate $3.7 trillion is lost each year due to fraud.

Small businesses suffer more due to fraud than larger businesses. Those with less than 100 employees are at greater risk. The biggest opportunity is in the small business back office with one or two employees. Preventing fraud is possible, but it requires two important things to be in place. First, you must be financially intelligent. Second, take the following steps to prevent fraud from occurring.

Ways to prevent/detect

Mandatory vacation. Require all employees to take a vacation, at least one full week, each year. It is especially for those who employees who are involved in the cash conversion cycle in your practice. Employees who don’t want to take a vacation or be absent for an extended period likely aren’t dedicated to you or your practice. They are afraid of not being to cover up their illegal actions. If you want to take a week of vacation and an employee doesn’t, something is amiss.

Provide cross-training. Have a few different employees cross-trained for different roles. Rotate jobs so employees are familiar with other aspects of the office. Do not allow “silos” to exist in your practice. Standardize your accounting and cash management systems and train multiple people in how they operate. This will allow more people to catch innocent errors and not-so-innocent errors.

Ditch the signature rubber stamps. It can be tiring signing checks, and physicians are busy signing charts all day. However, no signatories on your checking account should have a stamp. You would be well served to have an owner or officer of the practice sign the big checks. Most bills will be paid by electronic funds transfer. Refund checks will probably be signed by someone in the office. This will allow you to verify the amounts, payees, reasons for the refunds. If you are using ETF to pay vendors, have a system that validates each invoice before it is paid. Creative thieves will use dummy vendors to funnel out of your account. Get to know the vendors you use. If you see a vendor you don’t recognize, ask questions quickly.

Have and use consistent, accurate financial reports. This is a MUST! Set the expectation of regular and accurate reports with your office staff and hold them to it. If they don’t have the numbers, demand answers. A response of “I don’t have those numbers.” might mean “I’m still figuring out a way to hide the money.” 

Use independent reviews and audits. This can be expensive but will go a long way toward identifying fraud. It’s always a good idea for someone else to review your books periodically. If you throw in a few “pop” audits, it will serve as a deterrent to thieves. They will never know when the books will be examined, making it hard to steal or hide money.

Create a budget and use it Budgeting isn’t just about projecting your revenues and expenses into the future. It’s also a useful tool to prevent or identify fraud. Use historical data to project your payer mix and revenues and costs. Each month compare where you are to your budget and why a variance exists. If you hit the budget every month, ask why, because no is ever perfect in projecting the future. Variances can be explained; it’s when they can’t be explained that you might have an issue.

Know what’s on your reports. Know and understand what each item represents on your financial reports. If a line item is “reclassified” from year to year, ask questions. If you don’t know, then ask questions. If you don’t get an answer, get suspicious. 

Know who is handling your cash. Completely examine your potential employees during the hiring process. Investigate them comprehensively. Just because they are your sister’s cousin-in-law doesn’t give them a pass. Don’t hire someone because you like them. Make a hire because you trust them and they are competent. Conduct background checks, criminal and financial, to undercover suspicious items or activity. High personal debt can lead people to misbehave with your money. Previous criminal history is also a red flag. 

Establish ethical standards. As part of the onboarding process, go over your ethics standards with the employees. It should be a written document that everyone knows. If you don’t have an ethics document, create one. Establish up front the behavior you want. 

Listen but verify the rumor mill. Sometimes the rumor mill is a source of pain and consternation for a business owner. However, sometimes rumors have a dab of truth in them. Trust but verify. If you hear rumors that indicate fraudulent activity, investigate it carefully. Watch and see if anyone has a lifestyle that is beyond their means. Better yet, set up a fraud reporting system.

Get fraud insurance. You can get insurance for almost anything. Find out how and where you get buy some protection from fraud. It won’t get you all your money back, but it will help.

Establish and use internal controls. Think carefully about who handles your cash, when they handle it, and how is it double-checked. How many people look at the bills and books? Who is involved in paying vendors and issuing refunds? How many times is this double-checked? Your CPA can help you establish good internal controls.

Watch the expense accounts. If you have expense accounts, are these accounts being abused? What accounts are open and active? Does the activity make sense? What is required for someone to use the expense account?

These are just a few tips you can use to prevent and discover fraud in your practice. First, become financially intelligent. Second, set up some robust systems that monitor and prevent fraud from happening. It’s your practice, your business, your livelihood, protect it.