Medical Practice Embezzlement
A medical practice hires a new administrator. He’s a likeable guy and has a robust resume of credentials. He also has a taste for the finer things in life. Within two months of starting the job, he splurges a brand-new black Mercedes. Not long after, he’s caught red-handed embezzling hundreds of thousands of dollars from the practice. In the end, the practice is forced to shutter its doors after declaring bankruptcy.
Sounds like a movie plot, right? Or at least like something that could never happen at your medical practice.
Here’s the thing: It’s a true story. And it could happen to any medical practice or healthcare entity.
In my years of advising CPA firms as a Certified Healthcare Business Consultant, I’ve seen more instances of medical practice embezzlement than I can count on two hands. Sadly, I’ve also witnessed the devastation that goes along with it. Many practices are simply unable to bounce back from the financial loss.
The problem is, physicians tend to be good-hearted people who don’t naturally assume the worst about others. They’re also up to their eyeballs in running their practice and caring for patients. When no one’s looking for theft, it’s easy for a thief to steal.
What is medical practice embezzlement?
Embezzlement is a type of fraud that involves the theft of funds that belong to one’s employer. Medical practices, because of their operational structure, are often easy targets for embezzlers.
What types of embezzlement are common in medical practices?
Generally, there are three areas in a medical practice where embezzlement tends to take place:
- Billing and collection process (especially if patients pay in cash)
- Accounts payable process
- Payroll process
Instances of indirect theft are common, too. For example, at one practice I advised, the staff members had devised a system of clocking out for each other to “game” the time clock. At another, a nurse had ordered medical supplies in bulk as part of a sales promotion and taken home the flat-screen TV “bonus” that came with it.
It’s worth noting that the thief isn’t always easy to spot. People commit fraud for different reasons; just because someone has worked for you for years doesn’t mean they couldn’t steal from you. Understanding common motivations for fraud, as well as characteristics of fraudsters, can help you be better at noticing suspicious situations.
In fact, there are three elements in every fraud situation:
- Motive – This could be anything from lifestyle needs to illicit behavior, such as drugs or gambling.
- Rationalization – Fraudsters typically don’t see their actions as a crime. Instead, they often think they deserve the money, or that their boss won’t miss it.
- Opportunity – This is the situation that allows the fraud to occur. It could be created by events such as a control lapse, a lack of involvement by management (i.e., no one’s looking), or out-of-the-ordinary activities, to name a few.
How can you prevent embezzlement at your medical practice?
First and foremost, it’s critical to recognize that no medical practice (or business, for that matter) is immune to embezzlement. And that includes your practice. Keeping your “embezzlement radar” up—and taking steps to proactively prevent embezzlement—is the best thing you can do to avoid becoming a victim. Purchasing embezzlement insurance is a smart move, too.
When I work with a client, we begin by looking at the practice’s internal controls, making sure to closely analyze its segregation of duties. Are the controls they have in place sufficient? Do gaps exist that could create an opportunity for fraud?
Next, I schedule a series of meetings with the practice administrator to provide ongoing oversight. We might do things like compare the practice’s vendor listing to a previous period and check payments posted to the billing software to what was put in the bank. I also conduct independent oversight on a periodic basis because, as we learned earlier, sometimes the administrator is in on the fraud. If needed, I provide a formal review.
What role does a review play in detecting embezzlement?
A review involves testing various transactions to identify abnormal or suspicious activity. Although it’s an important tool in identifying fraud, it’s not 100% accurate. That’s why it’s so important to do everything you can to prevent embezzlement from happening in the first place.
Don’t let embezzlement infect your medical practice.
There are small things you can do on an ongoing basis to help prevent embezzlement in your medical practice. The most important thing is to acknowledge it could happen. With this mindset, you can be proactive in your fight against it.