Skip to main content

Red Flags for Fraud

 |  By HealthLeaders Media Staff  
   May 05, 2008

The American College of Healthcare Executives Code of Ethics states that the healthcare executive shall, within the scope of his or her authority, “prevent fraud and abuse and aggressive accounting practices that may result in disputable financial reports.”

But how can an executive even hope to detect this growing phenomenon, much less prevent it?

Losses to healthcare fraud total billions of dollars, according to government and industry estimates. The BlueCross BlueShield Association estimates that in 2005, $90 billion of the total of $1.8 trillion paid for healthcare costs was lost to healthcare fraud.

Fraud control remains a top priority of the U.S. Department of Justice. In fiscal year 2006, the DOJ opened 915 new civil healthcare fraud investigations and had 2,016 investigations pending at the end of the year. On the criminal side, the U.S. Attorney’s Offices opened 836 new criminal investigations involving 1,448 potential defendants in 2006 and had 1,677 investigations pending at the end of the year. These cases involve hospitals, pharmaceutical companies, nursing homes, laboratories, durable medical equipment suppliers, ambulance service companies, as well as physicians and other healthcare providers. In fiscal year 2006, the federal government won or negotiated approximately $2.2 billion in judgments and settlements involving fraud cases.

The Health Insurance Portability and Accountability Act of 1996 defines healthcare fraud as knowingly and willfully executing a scheme to defraud a healthcare benefit program or obtaining, “by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by … any healthcare benefit program.”

Fraud in the industry can be committed at every step of the healthcare delivery process.

The role of technology
The rise of technology in the billing arena can actually facilitate fraud opportunities. Highly automated claims processing without proper human oversight can make it easy for an individual to test the system and, once they find the proper combination of codes and pricing that passes cleanly through, increase the number of claims using different patients and different payers. Increased technology calls for increased fraud detection and prevention programs.

On the flip side, insurers have begun to use technology to identify potential fraud before claims are paid by flagging unusual patterns. “Borrowing techniques from financial and credit services,” says USA Today, “Medicare and private health insurers are increasingly mining claims data for suspicious patterns, comparing practitioners with their peers and larger databases of claims.”

Another key factor: coding
Coding practices, due to the significant inherent risk associated with this area, must be regularly scrutinized for intentional and unintentional abuse. Since coding usually includes both the healthcare providers and the organization’s information technology group (integral to the billing process), it is important to establish a working relationship between the groups to facilitate a common understanding of proper procedures. Coding audits are one tool that healthcare executives can use to detect questionable coding practices. Ideally, a coding audit should be performed by an independent outside agency and on a regular basis. An independent audit company should be able to tell you how your organization is operating compared to others, as well as suggest improvements to your organization’s policies and procedures.

Red flags for patient fraud
Patients can commit fraud in many ways. A common scheme is worker’s compensation fraud. When reviewing a worker’s compensation claim, look for things that don’t make sense.

  • Are the salary and days worked consistent with the occupation listed?
  • Is the occupation consistent with the business of the employer?
  • Is the injury consistent with the business?
  • Is the employee’s address consistent with the location of the employer’s business, and is the claim being filed in the state where the alleged injury took place?

Look for unusual conditions:

  • Is it impossible to reach the worker by phone?
  • Has the worker delayed or refused diagnostic treatment?
  • Did the worker move out of the area immediately after filing the claim?
  • Was a strike, layoff, or job termination in the offing? Is the worker in line for early retirement?

Finally, look at the details given for the incident.

  • Are the employer’s report and the initial medical evaluation consistent?
  • Was the claim filed in a timely manner?
  • Are all the details provided?
  • Were there witnesses?
  • Do co-workers remember the incident the same way?

Red flags for provider fraud can include the following:

  • Billing for unnecessary services or services not rendered, for unnecessary equipment, or for services performed by a lesser qualified person
  • Duplicate billing, or retaining duplicate payments or overpayments
  • Billing procedures over a period of days or weeks when the actual treatment occurred during a single visit, i.e., split billing
  • Improper coding practices
  • Kickbacks

Detection of these types of fraud can be difficult without extensive investigation. Internal audits and utilization review processes are common in many healthcare operations and are effective in correcting honest billing errors. But they’re ineffective in detecting fraud as some schemes simply apply the correct codes for procedures not performed.

When possible, put controls in place that could detect:

  • Higher frequency of treatment, longer duration of treatment, or a much larger volume of prescription drugs than expected for the condition
  • No measurable improvement over an extended period, but no change in treatment
  • Non-emergency billing for services provided on weekends or holidays
  • Medical documentation that does not support or is inconsistent with the service being billed
  • Frequent delays in the submission of requested records
  • Great distances between the provider and the patient.

Red flags for employer fraud
According to the U.S. Census Bureau, 59.7% of Americans were covered by employer-based health insurance in 2006. Employers’ incentive for fraud is often lowering the cost of the coverage. Other employer healthcare fraud schemes may include underreporting the number of employees, employee classifications, or payroll amounts. Employers may discourage employees from seeking needed care. More blatant schemes may direct employees to specific providers who will pay kickbacks.

Look for these indicators:

  • Number of employees, classifications and payroll are inconsistent or don’t make sense
  • Significant deposit premium made to avoid interim audits
  • Business reports significant payroll decreases, even though revenues remain stable or increase

If anything appears suspicious, other indicators may come from employee reports. Employees may report that the business may be shifting the costs from an employee’s non-work-related health problem to a workers’ compensation claim. They may report that they’re discouraged from seeking care, or encouraged to visit a specific facility. They may note that new employees are being asked to complete 1099 forms, asserting that they are independent contractors.

Healthcare fraud is a federal crime
The impact of healthcare fraud on every American, most directly in the increased costs of healthcare, should not be minimized. While these red flags for patient, provider, and employer fraud may be a start in helping industry executives to meet their obligation to detect and prevent healthcare fraud, the ever-growing industry has attracted some more experienced criminals who may be more difficult to combat.

According to the National Healthcare Anti-Fraud Association, “Law enforcement agencies and health insurers have witnessed in recent years the migration of some criminals from illegal drug trafficking into the safer and far more lucrative business of perpetrating fraud schemes against Medicare, Medicaid, and private health insurance companies.”

Richard Gray is a certified public accountant and business valuation manager for Kaufman, Rossin & Co., a regional accounting firm in south Florida. He may be reached at
Read our editorial guidelines to find out how you can contribute to HealthLeaders Media.

Tagged Under:

Get the latest on healthcare leadership in your inbox.