Embezzlement in Medical and Dental Practices is a Real Thing

Guest Author: Laurie M. East, CPA

Theft and embezzlement are widespread in healthcare, and according to the Association of Certified Examiners, approximately $25 billion annually is lost in medical practice offices from theft and embezzlement by employees. According to a 2011 Marguet Report, physician practices suffer from some of the highest money mishandling amongst service industries.  In fact, three out of four physicians will suffer embezzlement during their professional career with a median annual loss of $450 thousand per occurrence while three out of five dentists will be embezzlement victims of roughly 7% of their monthly income.

According to “The 2013 Marquet Report on Embezzlement,”[1] embezzlers tend to fit a particular profile. Typically, they are women (64%) with no criminal history who have worked their way up through the practice.[2]   They generally start at entry-level positions, perhaps as a front desk clerk and later move into accounting, billing or to the office manager position. The embezzlement starts small, escalates and can go undetected for 10 or 15 years or even longer. According to “The 2016 Hiscox Embezzlement Study,” 66% of employees who embezzle from physician practices are office managers. Whether the person is a trusted family member or friend generally has no bearing on whether they will remain loyal and honest and thus not steal from you.

The reasons for embezzling are like other industries with one exception. Sometimes the crime is triggered by unexpected financial hardships, such as a job loss for a family member, a sickness in the family. Other times, the theft is driven by an addiction to drugs, alcohol, gambling, or a desire to live a lavish lifestyle. Additionally, in the medical/dental practices, employees feel underpaid in comparison to what the physician earns.[3] They believe that without them, the physician would not be successful and thus they deserve a piece of the pie.

Too much trust by the physician, too much demand on their time and lack of internal controls are the leading reasons why it is so easy to embezzle from a physician or dentist. Physicians and dentists have been trained in medical/dental school on clinical care only. They have never been trained in how to run a business. They tend to over trust those running the practice while they focus on what they enjoy doing. With the increasing demand on them, physicians don’t think they have the time to review the finances and operations of their practice. Add all this together, and you have a disaster waiting to happen.[4]

Employee theft starts by doing any of the following at a small scale as the employee tests the waters. If they perceive no one is watching, they gradually test it a little more, perhaps weekly or monthly until eventually the embezzling is fully escalated and can go on for years.

Below are examples of how employees can embezzle from medical or dental practice.

1. Creating fake companies
2. Creating fake vendors
3. Stealing petty cash
4. Handling payroll and giving themselves a raise or a bonus
5. Overstating hours worked
6. Using business credit cards for personal expenses
7. Using personal credits for business expenses
8. Writing checks on behalf of the provider
9. Personal use of credit card points on the business credit card
10. Purchase of supplies for home use
11. Theft of drugs or medical supplies (i.e., Botox)
12. Issuing refunds to an employee’s personal credit card instead of a patient, account
13. Stealing from the cash received at the front desk
14. Upcoding a CPT code
15. Creating a fictitious patient claim
16. Directing insurance claims to an employee’s bank account
17. Depositing checks directly into their bank account

“With the median annual loss of nearly $450,000 due to theft, many medical practices have plenty of room for improvement, new research from MGMA found.”[5]

Physicians and dentists work hard, and with the decrease in reimbursement for medical billing and increased competition, both physicians and dentists need to be even more vigilant about the cash flow in and out of their practice.[6] Although an employee who is determined to steal will find a way, implementing simple steps could mitigate damages and prevent the temptation.

1. Put safeguards in place[7]
2. Implement internal controls[8]
   1. Separate all bookkeeping, accounting, and financial duties[9]
      1. Cash drawer
      2. Receipts
      3. Mail
      4. Check Writing Authority
      5. Review bookkeeping records – mandate vacation for all staff (and not always during times the office is closed)
      6. Verify vendors

3. Reconcile bank statement to practice management system
4. Perform periodic spot checks on all records
5. Hire an independent accountant to review financial records
6. Cross-train employees
7. Develop and review monthly financial reports
8. Create a budget and stick with it
9. Monitor the timing of your cash flow
10. Conduct background checks on employees you hire
11. Treat and pay your staff well
12. Perform random drug testing on employees
13. Create company policies and procedures that inform staff of zero tolerance for theft and all theft will be reported to law enforcement
14. Watch out for behavior changes from staff.
15. Look out for the Embezzlement Red Flags[10]
    1. Diminishing cash flow when patient volume is up
    2. Actual bank deposits in a month don’t reconcile to payments posted in the practice management system
    3. Increasing accounts receivable and accounts payable balances
    4. Transactions lacking documentation or approval
    5. Patient and payer complaints about the recording of payments
    6. A significant number of year-end adjusting journal entries
    7. Poor accounting records

The guest author collaborating with Sage Investigations this month is Laurie M. East, CPA, MBA, FACMPE. She is a healthcare leader with over 30 years of extensive knowledge in healthcare finance, financial operations, and strategic planning in both hospital and physician practice settings. Ms. East has proven success in P&L management, financial reporting, financial forecasting, budgeting, revenue cycle, strategic planning, analytics, financial operations, and general ledger management. She has unparalleled knowledge in minimizing risk and the potential of theft in medical and dental practices.

The general areas of preventing embezzlement discussed above are relevant in today’s medical and business environment. They may damage business relationships and impact the cash flow and the ongoing nature of companies. The matters must be properly approached with an attorney, a financial investigator, CFE, CPA, and if necessary, the testimony of an Expert Witness. If you find yourself or your client in an ongoing embezzlement, consider hiring a private investigator / forensic accountant with experience in developing fraud for civil or criminal purposes.

To learn more about embezzlement, please read the below articles.

12 Top Tips to Reduce Employee Theft

A Tale of Two Victims

Who are Embezzlers?

Embezzlement? Let me count the ways

On the other hand, if you or your client want to be proactive to avoid these and all types of fraudulent activities consider hiring an experienced CPA like Laurie M. East email: laurie.east@cardinal-360.com or call 512-699-6801 or experienced private investigator / forensic accountant, by contacting Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3179, or email: edmartin@sageinvestigations.com. Let our firm’s associates and 26 years as an IRS Special Agent and 16 years of Private Investigation benefit you and your clients. Please visit our website for our team and their CVs.

[1] https://www.medicaleconomics.com/health-law-and-policy/10-tips-avoid-embezzlement-your-medical-practice

[2] https://www.medicaleconomics.com/money/warning-signs-look-avoid-practice-embezzlement/page/0/1

[3] https://www.dentistryiq.com/practice-management/staffing/article/16362250/embezzlement-it-can-happen-in-your-practice

[4] http://www.frostcopc.com/editoruploads/documents/embezzlement-article.pdf

[5] https://www.healthcarefinancenews.com/news/medical-practices-can-make-it-harder-employees-embezzle-money-these-basic-steps

[6] https://www.medicaleconomics.com/health-law-and-policy/10-tips-avoid-embezzlement-your-medical-practice

[7] https://gettingpaid.kareo.com/gettingpaid/2011/06/best-practices-12-steps-to-avoid-embezzlement-in-your-medical-practice/

[8] https://www.physicianspractice.com/embezzlement/how-stop-theft-your-back-office

[9] https://www.aapc.com/blog/41655-protect-your-physician-office-from-embezzlement/

[10] https://www.texmed.org/Template.aspx?id=48431