Health Care ARTICLE -
Forensic Accountant Case Study: Healthcare Fraud & Other Financial Diseases

Like a versatile virus, fraud and other financial problems can take many forms in a healthcare organization. While some of these are not directly related to financial statements, they always impinge on the group’s financial well-being -- and negatively affect the health of its loans. To avoid contagion, a good understanding of the industry is key. Here is a case in point.

The Case of the Bogus Certificates: The Background

FeelGood, a fast-growing managed care company, was under competitive pressure to retain more well-qualified doctors and healthcare professionals to capture a larger share of its market.

Government regulations require managed care companies to review the professional qualifications of healthcare providers joining their systems. The companies then issue certificates to verify the legitimacy of those qualifications. Even though reviewing healthcare providers’ professional qualifications was a lengthy, labor-intensive process, FeelGood’s management made the rapid issuing of a large volume of certificates a top priority. Unfortunately, the certificate review department was understaffed. Rather than confess that they couldn’t meet the management goal, the staff began to bypass the legitimate review process and create false certificates.

The Investigation

Because certain employees then made allegations of fraud, FeelGood hired John X. Amin, a forensic accounting specialist, to investigate the situation. John looked for the elements of fraud: motive, opportunity and rationalization. He found that the review department staff’s motive was not obvious, as no one staff member could directly benefit from this type of fraud. They might, however, have feared the loss of their jobs if they didn’t comply with the management goal. In addition, John discovered during his forensic accounting investigation that the review department staff did have the opportunity to engage in the alleged fraud: The department performed a self-contained function that no one outside of the department understood. The department manager reported directly to senior management without accountability to any other department, and an audit of the department was highly unlikely.

Because this type of fraud would have to be conducted by a group rather than an individual, John decided that if it had occurred, the rationalization for the crime would probably relate to the wish to benefit all employees by meeting the management goal.

When interviewing the staff during his forensic accounting investigation, John at first found nothing unusual. But finally one person mentioned a special room where department staff spent an inordinate amount of time cutting and pasting documents, and John knew he was onto something. Eventually, several nurses in the department said that, at the direction of the department supervisor, they had altered dates and initials and changed document sections around to make false certificates appear legitimate.

The Result

Enlisting the help of a forensic accountant to uncover the fraud caused a massive upheaval at FeelGood. The company’s reputation was severely damaged, costing it a large amount of business. The certification process had to be started again from scratch, with a price tag of approximately $4 million. Both of these results endangered FeelGood’s financial health and its loans. Many employees lost their jobs, and the careers of some were destroyed.

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Be Aware

This is one way a healthcare organization can be seriously damaged or fail, but there are others. If you are lending to healthcare organizations, be aware of requirements, restrictions and problems unique to the industry. If a healthcare organization borrower is not showing a profit, evaluate whether the lackluster performance is due to poor management practices, which could lead to fraud, or lack of capital. Check to make sure:

• Financial reports are timely. You should receive monthly operating statements within 30 days of the end of the month and year-end statements within 120 days of the end of the organization’s fiscal year.
• Numbers make sense. If you see items on the balance sheet that don’t change from month to month, it could be a sign that management is unfamiliar with the items. If the changes in equity or fund balance are not the same as the bottom line on the statement of operations, management may be running prior period adjustments through the equity section to hide the current monthly results.
• Accurate prediction of cost report adjustments. Healthcare organizations have numerous complicated revenue sources that are difficult to keep straight. If the healthcare organization is not able to predict where its revenue will come from, you know that its adjustments could well be inaccurate. The financial department may be hiding unfavorable operating swings in the third entry settlement section of the balance sheet. Those in charge of the organization’s finances may not understand how to account for the facility’s operations in accordance with generally accepted accounting principles.
  

Lenders Can Be Doctors Too

These are just a few symptoms of a poorly managed healthcare organization. If you notice these problems, you may diagnose a case of severe financial instability. The cure? Advise management to obtain training or outside consultation to help them establish internal channels of communication, with checks and balances to improve the company’s financial health -- before it’s too late and a forensic accounting firm is required to look into the situation.

For more on lending to healthcare organizations, fax back page 6 for a complimentary copy of our Lending Insights report, “Lending to Healthcare Providers: What You See Is Not Necessarily What You Get.”

A Real-Life Incident of Healthcare fraud

Healthcare fraud is not just hypothetical -- it happens. Take the case of Columbia/HCA Healthcare Corp., which was under investigation by federal prosecutors for more than a year. The government’s case against the company had to do with an alleged scheme on the part of Columbia’s managers to defraud the government and their attempts to obstruct a federal auditor’s investigations. An indictment charged that the company misappropriated about $2.8 million in government funds. The alleged conspiracy largely involved a Columbia-run hospital in Florida and problems with its cost reports.

Prosecutors alleged that Columbia managers participated in a scheme to inflate the hospital’s expenses, accounting for interest on the hospital’s debt in such a way that it was 100% reimbursable by the government. In fact, only a portion of the debt should have been reimbursable. Federal investigators served the company with search warrants requesting documents on the company’s Medicare billing and business practices, extended their investigations to six states, forced the CEO to resign, charged three midlevel executives with conspiracy to defraud the government, seized computer files and delivered an additional indictment.

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