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Interview: Most dental practices will encounter fraud

Updated: January 28, 2012, 07:46


LITTLETON, Colo., USA: The potential for embezzlement and theft is a problem no business is immune to. And research shows that smaller businesses are more likely to experience problems than larger ones. For dental practice owners, it’s not just being small that increases risk. The typical dental office management structure is inherently vulnerable to fraud, according to dental-practice fraud expert David Harris.

Adding to the challenge, Harris said, detection can be trickier in a dental practice compared with other small businesses. And the bad news continues: Harris, who has 20 years of experience in dental-practice fraud investigation, puts little stock in deterrence. Instead he emphasizes early detection as the only viable defense. He shared those thoughts and more with Dental Tribune.

Robert Selleck: What is the likelihood of a dental office experiencing fraud?
David Harris: There have been several studies by the American Dental Association and others. Collectively they suggest that the probability of a dentist being a fraud victim in his or her career is between 50 and 60 percent. However, such statistics are necessarily low because there is an unquantifiable amount of fraud that is never detected or is detected but not disclosed.

Are there any reasons why dental practices would be more likely or less likely than other types of small businesses to experience fraud?
Two main points influence the prevalence of fraud in dentistry. First, the clinical responsibilities carried by dentists effectively reduce them to being absentee owners in their own businesses. Second, the fact that so much of dentistry is paid for by third parties removes one of the most basic controls that businesses depend on.

Is there a difference in potential for fraud in a three- or four-person office compared with a practice with 20 or more?
Intuitively, one would think that a larger practice should be able to have tighter controls through increased separation of duties. But many group practices are essentially several solo practices sharing space, thus offering no particular administrative synergy. When a group practice is run as a single unit, the dentists owning the clinic tend to delegate oversight of the administrative functions to a single dentist. Given that there are many thefts perpetrated against a solo dentist, imagine the fraud possibilities when one dentist is overseeing a much larger business activity.

Do you have statistics for average or median losses to fraud based on various sized dental practices?
Unfortunately, there isn’t any published data specific to practice size. Bill Hiltz, who heads our investigation department, has a hypothesis that frauds typically range between 4 and 7 percent of monthly revenue while the fraud is going on. In its 2007 Survey of Current Issues in Dentistry, the ADA surveyed dentists who had been fraud victims. The average estimated loss was $18,174. Based on our own experience, this number is tremendously low. That’s not surprising because in the same survey only 51.3 percent of the dentists who were fraud victims completed a fraud investigation, raising questions on how the remainder determined their losses. We normally find that the amount of fraud that dentists are able to identify without the benefit of professional assistance is far less than the true fraud.

We surveyed our own files several years ago and found an average theft of more than $150,000. This is superficially consistent with the Association of Certified Fraud Examiners number of $200,000 for the average small business loss, but many of its “small businesses” are much bigger than most dental practices. We have seen a number of dental frauds of more than $500,000 and a few exceeding $1 million.

What are the most typical types of fraud cases seen in dental practices?
Most of the fraud that we see is “revenue fraud.” Some examples are writing off amounts that were actually collected, deleting treatment that was done so that collections are “off the books” and billing the full amount to two insurance companies when someone has dual coverage.

A second type of fraud that we are seeing involves creation of “phantom” revenue. Insurance companies are billed for work that was never done, with funds either stolen directly or “lapped” (used to pay someone else’s balance to cover a stolen payment). Obviously, if discovered by an insurance company, this type of activity can have serious consequences for the innocent dentist.

Most thieves use more than one method of stealing; very few stick to a single methodology. Also, we are continually seeing new variants. For example, we recently saw a thief take advantage of a server crash to decrease some accounts receivable balances. When patients paid the correct balances, they would be paying more than the “official” balance in the practice management software, with the thief pocketing the difference.

Is there a type of fraud more prevalent in a dental practice compared with other small or similarly sized businesses?
Since we investigate only dental embezzlement, my knowledge of fraud patterns in other small businesses is limited to what I read. My perception is that much of the fraud committed against other businesses involves expenses: payroll, paying non-existent suppliers, padding expense claims, etc. The majority of embezzlement that we see in dental practices involves revenue.

While we do see a fair number of thieves who will steal revenue and also manipulate their payroll or create a phony supplier, very few will commit expense fraud while concurrently resisting stealing some of the cash that patients hand them daily.

What about fraud that’s more indirect, such as questionable workers’ compensation claims?
We have seen an astonishingly wide variety of unconventional thefts, everything from stealing the gold that is recovered from old restorations to misappropriating dental supplies and instruments and selling them online. However, embezzlement typically involves larger amounts and takes place undetected for a longer period.

What motivates the typical perpetrator?
We see two types of fraudsters. One type we call “dishonest” — these people typically believe that they should live better than their “official” compensation permits. I immediately think of one thief who rented a private plane with stolen funds for a New York City shopping trip with girlfriends. Funds from another major theft were used to purchase a yacht and the most expensive BMW available. The other group I would characterize as “desperate.” These people struggle to meet basic needs. There might be an addiction, an uninsured medical condition, a divorce or an unemployed spouse. In contrast to the dishonest fraudsters, these people have their moral compass altered by their desperation. Many initially plan to repay what they “borrow,” but a continuing deficit frustrates this. Interestingly, the desperate thieves have normally worked for more than eight years at their office.

What are the strongest deterrents?
Deterrence is effective with crimes of opportunity or where thieves can choose their target. Embezzlement is not a crime of opportunity; it is carefully planned with complete awareness of the control systems in place, and it is crafted to bypass these controls. Adding more controls simply increases the circumvention challenge. Most of the thieves we see can easily adapt.

Because shoplifting is a crime of opportunity, control systems such as video cameras and radio-frequency identification tags on merchandise are effective at helping to prevent pilferage; however, such deterrence is unlikely to work in a dental practice.

The other point I will make is that fear of punishment seems to be virtually ineffective in deterrence. Embezzlers we see are well aware of the consequences of their actions, which include loss of livelihood and potentially, loss of liberty. Because of the needs of each group, we should not expect punishment to deter either the dishonest or the desperate fraudsters.

Are there any effective deterrents?
My suggestion is that deterrence strategies that provide no collateral benefit (i.e., are done only to discourage fraud) are a waste of resources; instead dentists should focus on early detection of fraud.

I will again disagree with much of the collective “wisdom” that exists on dental embezzlement when I say that for a dentist or advisors to try to confirm fraud by some form of audit or analysis is unproductive and possibly dangerous. Because there are many possible ways to steal from a dentist, without considerable knowledge and some specialized software, this activity is looking for a needle in a field of haystacks.

Fortunately for dentists, even though there are myriad ways to steal, the behavior of embezzlers is remarkably consistent. With the right knowledge, identifying embezzlement through behavioral analysis is painless and reliable.

We have a behavioral assessment questionnaire requiring less than five minutes to complete, which dentists can request from our website.

How does an economic downturn affect dental-practice fraud?
Difficult economic times create more of these desperate people I mentioned earlier, which creates more fraud. We did notice a much larger incidence of fraud in the Detroit area after the auto industry downsizing a few years ago.

What are the first critical steps a dental practice owner should take if he or she suspects internal fraud is occurring?
Unfortunately, intuitive steps are not always the right ones at this point. Dentists try to conduct their own investigation, bring their CPA into the office, or call the police. Doing any of these will likely alert a perceptive thief to your suspicions.

The overarching objective is not to telegraph your suspicion to the suspect. When fraudsters think they are about to be discovered, their strong urge is to destroy evidence. This invariably causes collateral damage. Destruction might consist of wiping the computer’s hard drive and destroying all backup media.

In one spectacular case, the victims did not engage us but began their own (clumsy) investigation. The thief, once alerted, burned down the office!

This is really the point where expert guidance is needed. We have an “immediate action checklist” for dentists who suspect fraud in their office. They can request the checklist from our website.

Our investigative process is completely stealthy. I promise never to send a nerdy-looking investigator to your office. This helps ensure that evidence is protected, and also that working relationships are not destroyed in the event that suspicions are groundless.

What is the most unusual fraud case you have encountered?
About once a month we see something innovative. The alteration of receivable balances after the server crash is one I think of — we suspect that the thief caused the server to crash. By placing a magnet inside one of our lab computers, we could replicate the crash quite easily.

Is there specific insurance owners can buy to protect their business against loss to fraud? Is such insurance worth getting?
This insurance is either included in the basic insurance package that offices already have or an “employee dishonesty” rider can be added. I don’t have cost details, but understand that it is quite inexpensive. Based on what I said about the probability of fraud in offices, I think everyone should have this coverage.

How much of a problem is external fraud involving customers, vendors, suppliers or other business relationships compared with internal fraud?
It certainly happens. We see a fair amount of identity theft from people trying to make use of someone else’s insurance coverage or to obtain prescription medication. However, the financial and other damage that this type of activity normally causes pales in comparison to the damage caused by embezzlement.


David Harris has had the pleasure of hearing many cell doors slam shut on thieves he has caught. He is president of Prosperident, the only company in North America specializing in the detection and investigation of embezzlements committed against dentists. He is a member of the Academy of Dental Management Consultants and has been called the “The Dental Fraud Guru.”

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