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Fraud Detection Techniques to Incorporate into Healthcare-Related Financial Statement Audits

The National Health Care Anti-Fraud Association estimates that three to 10% of overall healthcare spend is fraudulent, which means that between $123 and $410 billion in U.S. healthcare spend is impacted.

Fraud Detection Techniques to Incorporate into Healthcare-Related Financial Statement Audits

By Kevin Green, Eric Roncone, and Emily Skalecky

Over the past two decades around the United States (U.S.), prices have been skyrocketing, including the cost of gas, food, college tuition, and medical care. In 2020, the Centers for Medicare and Medicaid Services (CMS) estimated total healthcare expenditures in the U.S. at $4.1 trillion, meaning that the average medical expense per American, per year, is $12,500.(1) The National Health Care Anti-Fraud Association estimates that three to 10% of overall healthcare spend is fraudulent,(2) which means that between $123 and $410 billion in U.S. healthcare spend is impacted. This estimated amount far exceeds the amount of alleged losses for individuals who are actually charged with health care fraud (see Exhibit 1 below).(3) An interesting thing to note is the average for a single individual charged with committing health care fraud was $22.6 million in 2020.(4) When fraud goes undetected, this leads to increased costs to all, be it higher health care premiums for individuals/businesses or increased Government spending. The goal of a financial statement audit is not to determine if fraud exists, but rather, ensure the financial statements are free from material misstatement. However, it is important to understand the ways fraud can be perpetuated, as it may help identify unintentional errors.

Exhibit 1: Facts & Statistics

Methods of Fraud
According to Fraud Magazine and the Federal Bureau of Investigation (FBI), the way most healthcare fraud is perpetrated results in overstated assets and/or revenues. This can take several different forms, including:(5)

  • Upcoding – this occurs when a higher Current Procedural Terminology (CPT) code is used on the health care claim compared to the service rendered by the provider. A common example is related to evaluation and management (E&M) codes, where the service rendered is the same and the difference between the codes is in the length of time a provider spends with the patient. Another way is by adding extra modifiers to a CPT code, which provides additional or clarifying information about the procedure. As a result, this could alter the cost of the procedure.
  • Unbundling of services – this is when an all-inclusive medical procedures or tests are separated into individual transactions. An example of this would be laboratory tests where the results are generated together, but the patient/insurance company receives a separate charge for each test.
  • Billing for non-covered services – insurance companies may not cover some medical services. Some providers may switch the CPT code to something similar that is covered. Providers may also include these non-covered CPT codes in their bills.
  • Services not performed – this is when a provider indicates they performed medical services on a patient when they did not.
  • Double billings – this occurs when transactions that are for the same service on the same date (or within too narrow of a time window) that billed out to patients or insurance companies’ multiple times. This could involve going to a patient more than once, to insurance companies more than once, or to both the patient and their insurance company one or more times each.

What Can Auditors Do?
Health care is a specialized field that has many nuances to ascertain prior to successfully auditing a health care entity. An important first step in any financial statement audit, but especially to a health care-related financial statement, is to gain an understanding of the entity and its operations under audit. Having a greater understanding of how health care operations may be different from those of other businesses is crucial to creating an effective plan for the audit. Two ways this can be achieved are increasing skills and knowledge and improving efficiency, which are explained in more detail below.

  • Increase skills and knowledge – Properly structure the engagement team to understand the ins and outs of the operations by doing any or all the following:
    • Learning new skills – The most unique skill an auditor could have working on a health care-related financial statement audit is an understanding of the medical billing process, which is driven by the CPT code(s) on the billing documents. Current members of the audit team could be encouraged to learn additional skills and get certified in the medical coding field to perform the detailed review of medical claims themselves.
    • Bring in specialists – If it is not feasible for current team members to become certified in the medical coding field, the audit team could invite medical coding specialists to support.
    • Take medical coding trainings – Even if team members do not receive a certification in the medical coding field, it is beneficial for them to increase their understanding of the industry.
  • Increased Efficiency – Data analytics are important techniques to incorporate into the audit to improve efficiency. The medical field has been shifting to electronic health records over recent years, which makes the data easier to query and more accessible in larger quantities. An audit team would be able to configure a query to compare a database of medical claims to a list of non-covered CPT codes for exclusion. A query could also be completed to compare bills being sent out to patients seen by the facility or search for duplicated transactions. Using data analytics, the audit team could even search for abnormal CPT code and modifier combinations with ease.

By keeping common health care fraud schemes in mind, auditors can be alert to ways in which financial statements could be misstated at health care organizations. While auditors are not required to find fraud, it is necessary to perform procedures to gain an understanding of the entities fraud procedures and areas that are susceptible to fraud to ensure the financial statements are represented accurately. These procedures can also be helpful in performing the review of internal controls. Ensuring proper engagement planning by obtaining the necessary specialized knowledge and taking advantage of a growing number of data analytics techniques can help an audit team perform at high level of efficiency.

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This publication is for informational purposes only and does not constitute professional advice or services, or an endorsement of any kind. Readers should first consult with a professional before acting with regard to the subjects mentioned herein.

Kearney & Company, P.C. (Kearney) is a Certified Public Accounting (CPA) firm focused on providing accounting and consulting services to the Federal Government.

(5) January/February 2013 Fraud Magazine, “10 popular health care provider fraud schemes” and