Internal controls for a physician practice – Part II


Monitor contractual adjustments for reasonableness Depend-ing on the practice’s payor mix, a high volume of contractual adjustments could indicate possible embezzlement. For example, an insurance claim for $1,000 is prepared and mailed to an insurance plan for services rendered by the practice. The plan approves 80 percent of the charge and subsequently sends a check in the amount of $800 to the practice. An employee in the practice takes the $800 check, deposits it into his or her own personal bank account, and then accesses the practice’s computer to write off the $1,000 patient account balance as a contractual adjustment. 

The best way to prevent embezzlement from occurring in this situation is to make sure the person who handles money is not responsible for posting it into the computer. Another method would be to establish passwords in the computer system and allow access only to authorized personnel. If possible, see if the practice’s computer can be programmed to prevent a patient’s entire balance from being written off without authorization. 

You should also make sure that contractual categories are specifically identified. A medical office should not have one catch-all category called credit adjustment or contractual adjustment. Establish a credit adjustment category for each of the practices’ major payors, for example, the categories could be credit adjustment—Medicare, credit adjustment—Medicaid, credit adjustment—Worker’s Compensation,  credit adjustment—Aetna, and so on. 

By specifically categorizing contractual write-offs, the CPA, consultant, or the practice manager can compare these adjustments to the practice’s actual payor mix to look for inconsistencies. For example, 75 percent of the practice’s revenues come from commercial insurance carriers. The computer records indicate that the practice is writing off 35 percent of its charges as contractual adjustments. This could indicate an embezzlement situation.  

A final internal control measurement you can take is to print out and review patients’ account ledgers periodically. You should look for and investigate any balance that has been written off in its entirety without approval. If possible,  use the practice’s computer to scan for files that have been written off. If the office’s computer does not have this capability, someone will have to go through each ledger to identify such charges. 

Encourage employees to take their vacation time in multiple days Having employees take extensive vacation leave may help uncover embezzlement tracks. When an employee is away from the office for an extended period, such as a week, the person who takes over the vacationing employee’s tasks could stumble across errors and embezzlement caused by the vacationing employee. For example, an employee who is responsible for billing and collection takes a one-week vacation. While the employee is away, a patient calls about his account statement. The statement shows a deductible balance due, although the patient says he already paid. Because the vacationing employee was not able to intercept this type of call, her embezzlement was exposed. 

Accounts Payable 

Accounts receivable is not the only area in which embezzlement occurs; controls for accounts payable should also exist in every medical practice. Accounts payable controls prevent a practice’s employee from preparing checks to an unauthorized vendor, which may in fact be in the employee’s control. For example, a check could be made out to a fake office supply company and mailed to a post office box controlled by the employee. 

The best internal controls for accounts payable are (a) to limit check-signing authority to the physician and (b) to attach a vendor invoice to each check when it is  signed. In situations in which a physician refuses to take the responsibility for signing checks,  make sure the endorsements on the back of the canceled checks are reviewed. Look specifically for third-party endorsements or endorsements that do not appear to match the payee on the check. Many times it is obvious when a business check is endorsed personally by someone other than the vendor. You should have the bank statement and canceled checks mailed directly to his office for reconciliation. 

As added protection, the physician may want to receive the bank statement and review it first, in which case the bank could send the statements directly to the physician’s home. Just by scanning the transactions, a physician can sometimes detect that something is wrong. 

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