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“Helping clients build, preserve and transfer business value since 1958.”
Healthcare Fraud
Kevin Crumbo
May 22, 2012
“‘Financial statements tell a story ’ saysFinancial statements tell a story, saysaccounting professor W. Steve Albrect, ‘and the story should make sense.’ If not, it’s possible the story is a fake.”
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Irrational Ratios, by Joseph T. Wells, August 2001
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“Robbery, theft and other street crimes are the bailiwick y,of the young and undereducated. According to the FBI,
these kinds of offenses are at a 30-year low. Why? First, our society--because of baby boomers--is aging…Second, because of mass media, that smaller pool of young people
has learned a very valuable lesson:
The best way to rob a bank is to own one.” y(emphasis added)
New Approaches for Fraud Deterrence, by Joseph T. Wells, February 2004
Objectives
Elements of occupational fraud Elements of occupational fraud
Fraudulent schemes
Current trends in healthcare fraud
Case examples
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Financial Fraud
In general, most forensic accountants define financial fraud as the intentional deception of others to obtain property, services, and/or other
lvalue.
What is “Occupational” Fraud?
The term “occupational fraud” may be defined as:
The use of one’s occupation for personal enrichment through the deliberate
i i li i f
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
misuse or misapplication of the employing organization’s
resources or assets.
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When is Occupational Fraud Possible?
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Types of Frauds:Occupational Fraud and Abuse Classification System
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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The Cost of Occupational Fraud
Fraud by its very nature does not lendFraud, by its very nature, does not lend itself to being scientifically observed or
measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine or hidden; almost
all fraud involves the attempted concealment of the crime.
Source: 2010 Report to the Nations on Occupational Fraud & Abuse, published by ACFE
concealment of the crime.
Distribution of Fraud Losses
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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How Occupational Fraud is Committed
4The sum of percentages in this chart exceeds 100% because several cases involved schemes from more than one category.
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Median Loss by Fraud Type
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
How Much Does the Company Lose?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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How Long Can They Get Away With It?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Gender of Perpetrator Based on Region
Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Who are the Perpetrators?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
How is Fraud Detected?
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Source of Tips
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Primary Internal Control Weakness Observed by CFEs
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Anti-Fraud Controls
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
Anti-Fraud Controls
Source: 2012 Report to the Nations on Occupational Fraud & Abuse, © 2012 by the Association of Certified Fraud Examiners
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Ways Fraud is Committed
Asset Misappropriation Perpetrator steals or misuses an organization’s resources Perpetrator steals or misuses an organization’s resources.
Corruption The employee uses his or her influence in business
transactions in a way that violates his or her duty to the employer for the purpose of obtaining a benefit for him- or herself or someone else.
Financial Statement Fraud Involves the intentional misstatement or omission of
material information in the organization’s financial reports.
Asset Misappropriation Schemes
Scheme Description
Skimming Cash is stolen before it is recorded on the books
Cash larceny Cash is stolen after it is recorded on the booksCash larceny Cash is stolen after it is recorded on the books
Billing Fictitious invoices, inflated invoices or invoices for personal purchases
Expense reimbursement
Claims for reimbursement for fictitious or inflated business expenses
Check tampering Intercepting, forging or altering a check drawn on the organization’s bank account
Payroll False claims for compensation resulting in payment
Register disbursement False entries on a cash register to conceal the fraudulent removal of cash
Non-cash misappropriations
Employee steals or misuses non-cash assets
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Corruption Schemes
Scheme Description
Bribery and kickbacks Offering, giving, receiving or soliciting anything of value to influence the outcome of a business transaction.
Economic Extortion The flip side of bribery – demanding something of value as a condition of awarding business
Conflicts of interest When an employee, manager, or executive of an organization has an undisclosed personal economic interest in a transaction that adversely affects the company of shareholders’ interests.
Illegal gratuities Similar bribery, except something of value is given to reward a business decision rather than influence it.
Financial Statement Fraud
Scheme Examples
Overstating Revenue Recording gross, rather than net, revenue Recording revenues of other companies when acting as a “middleman” Recording sales that never took place Recording future sales in the current period Recording sales of products that are out on consignment
Understating expenses Reporting cost of sales as a nonoperating expense so it does not negatively affect gross margin
Capitalizing operating expenses Omitting expenses by not recording them at all Recording expenses in the improper period
I t l ti M i l tiImproper asset valuations Manipulating reserves Changing useful lives of assets Failing to take a write down when needed Manipulating estimates of fair market value
Smoothing of earnings (“Cookie Jar Reserves”)
Overestimating liabilities during “good” periods and storing away funds for future use against declining revenues
Improper Disclosures Failure to disclose adequate information, particularly involving related party transactions and loans to management
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Red Flags for Entities
Thrives despite competitors struggling with declining sales and profits
Excessive pressure on senior managers and employees to achieve unusually tough profit targets and business goals
Complex or unusual payment methods and agreements between business and certain suppliers/customers
Multiple banking arrangements rather than one clear provider
Consistently pushes the limits/boundaries regarding matters of financial judgment or accounting treatmentfinancial judgment or accounting treatment
Excessive secrecy about a function, its operations and its financial results
Not forthcoming with answers or supporting information to internal inquiries
Increased profitability fails to lead to increased cash flows
31Source: KPMG International Cooperative “Who is a Typical Fraudster”
Simultaneous Fraud
DELOITTE STUDY “Ten Things about gFinancial Statement Fraud”• 74% of the SEC enforcement releases described at least 2 fraud schemes • 25% described at least 5 schemes • 7% described more than 10 alleged fraud schemes • 1% alleged over 20 schemes
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Other Schemes
• Financial Institution Fraud
• Tax Fraud
• Check & Credit Card Fraud
• Ponzi Schemes
• Telemarketing Fraud
• Medicare FraudMedicare Fraud
• Insurance Fraud
• Securities Fraud
• Bankruptcy Fraud
Health Care Fraud
Losses from health care fraud are estimated to be tens of billions of dollars per year. Impact to consumers: Higher premiums and out of pocket
expenses
Reduced benefits/coverage
Impact to employers: Increases overall cost of doing business
34Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
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Health Care Fraud
Majority of HC fraud is committed by a ll i it f di h t idsmall minority of dishonest providers.
Variables at play in schemes The entire population of our nation’s patients
The entire range of potential medical conditions and treatments on which to base false claims
The ability to spread false billings among many insurers i l l i l di M di d M di idsimultaneously, including Medicare and Medicaid,
increasing proceeds and lessening chances of detection.
35Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
Health Care Fraud
Common provider schemes:illi f i d d Billing for services never rendered
Upcoding
Performing medically unnecessary services
Misrepresenting non-covered treatments as medically necessary covered treatments to obtain insurance payments
Falsifying diagnosis to justify not medically necessary y g g j y y ytests, surgeries or procedures
Unbundling procedures
Kickbacks for patient referrals
Waiving co-pays or deductibles and over-billing the insurance carrier or benefit plan
36Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
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Health Care Fraud & Organized Crime
Criminals are migrating from Criminals are migrating from illegal drug trafficking to Medicare, Medicaid and private health insurance fraud.
Criminal rings based in Central and South America fabricate claims from non-existent clinics.
37Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
Human Face to Health Care Fraud
Individual victims subject to unnecessary or unsafe medical procedures
Medical records are compromised
Compromised limits on patient’s benefitsbenefits
38Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
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Detection Methods
Whistleblower Whistleblower Dodd-Frank Act
False Claims Act (“Lincoln Law”)
Data analysis Ad hoc
Automated procedures
Continuous auditing and monitoring
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Data Analysis Techniques
Statistical parameters / identify outliers Statistical parameters / identify outliers
Classification
Stratification of numbers
Digital analysis using Benford’s Law
Duplicate testing
Gap testing
Validating entry dates
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Federal Penalties
HIPAA establishes health care HIPAA establishes health care fraud as a federal criminal offense Federal prison term up to 10 years
Financial penalties
Prison term can double or be life if fraud results in injury or death of patient.
41Source: The Problem of Health Care Fraud, published by the National Health Care Anti-fraud Association
Case Studies
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“Helping clients build, preserve and transfer business value since 1958.”
Thank You
Kevin Crumbo
(615) 782 4274
KraftCPAs Turnaround & Restructuring Group PLLC
www.kraftcpas.com
(615) 782-4274