by Rand Gambrell,

Benjamin Franklin said “an ounce of prevention is worth a pound of cure.”  This statement is especially true in health care and health care professionals agree preventing illness is more effective, and more cost efficient, than treating illness.  The same idea is true when it comes to fraud and occupational abuse—prevention is key.

According to the 2008 Report to the Nation on Occupational Fraud and Abuse prepared by the Association of Certified Fraud Examiners (the “2008 Report”), organizations in the United States lose an estimated $994 billion annually to fraud.  This figure represents approximately 7 percent of the total revenue generated annually by U.S. companies.  In addition, according to the 2008 Report, the typical fraud scheme went on for two years before the organization caught it and resulted in a median loss of $175,000.  More disturbingly, more than one-quarter of frauds resulted in losses greater than $1 million.

The frauds and related fraud losses in the 2008 Report happened despite increased focus on antifraud controls.  The Sarbanes-Oxley Act of 2002 and the Statement on Auditing Standards 99, with its mandated consideration of fraud in financial statement audits not only raised awareness but also brought in new antifraud requirements, but still, fraud continues.  In addition, occupational frauds are still more likely to be detected by a tip than by audits, internal controls or any other means.

The 2008 Report also highlights the fact that no industry was able to escape the specter of fraud, including the health care industry.  In fact, the health care industry was the third most frequent victim of fraud, accounting for more than 8 percent of the fraud cases reported.  Only banking/financial services and government and public administration were more prevalent targets of fraud, comprising 14.6 percent and 11.7 percent of reported fraud cases, respectively.

In the health care industry, the most common fraud schemes reported included cash skimming (stealing cash before it is recorded on a company’s books), corruption (which includes conflicts of interest, bribery, illegal gratuities and economic extortion) and noncash schemes (which includes the theft of assets other than cash).  These schemes accounted for approximately 20 percent, 26 percent and 20 percent of reported health care fraud cases, respectively.

So what can health care organizations do to protect themselves and help prevent fraud?  First, upper management must create a culture in the organization and “tone at the top” that shows employees fraud will not be tolerated.  In addition, every employee must be recruited into the company’s fraud prevention efforts.  Specifically, employees must be trained to look for various fraud warning signs.  These fraud “red flags” include unusual bank statement activity, increases in refunds or write-offs, out-of-balance conditions, missing documents and other situations or transactions that just don’t make sense.  If employees identify any of these situations, the organization needs to have a means by which employees can report their suspicions.  One way to encourage employees to report suspicious activity and, in fact, one of the most effective fraud prevention tools a health care company can implement is a fraud hotline.

As highlighted in the 2008 Report, no industry is immune from fraud.  However, just like preventative medicine, fraud prevention is a key to your organization’s financial health.  Through “tone at the top” and increased employee awareness, fraud risk can be reduced to help ensure fraud losses do not become terminal to your organization.