Dental and Medical Counsel Blog

Acquiring a dental practice is a significant investment, and ensuring its financial health is crucial. One of the key aspects to consider during this process is the potential for fraudulent activities within the practice. Understanding the common types of fraud, recognizing the warning signs, and implementing effective prevention strategies can safeguard your investment and promote a successful transition.

Common Types of Fraud in Dental Practices

1. Employee Embezzlement
Employee embezzlement is a prevalent issue in dental practices. It involves staff members misappropriating funds or resources for personal gain. This can manifest in various ways:

• Skimming Cash Payments: An employee might pocket cash payments from patients and fail to record the transaction in the practice's financial system. This not only results in financial loss but also creates discrepancies in accounting records.
• Altering Financial Records: Staff may manipulate financial records to conceal their fraudulent activities. For example, they might adjust account balances, delete transactions, or create false entries to cover up the theft.
• Unauthorized Discounts or Write-offs: An employee might provide unauthorized discounts to patients or write off balances without proper approval, often as a means to divert funds for personal use.

• Billing for Services Not Rendered: Submitting claims for procedures that were never performed. This not only defrauds the insurance company but can also lead to legal consequences for the practice.
• Upcoding: Charging for more expensive procedures than those actually performed. For instance, billing a simple extraction as a surgical extraction to receive higher reimbursement.
• Misrepresenting Services: Altering the dates of service or misrepresenting the type of service provided to circumvent insurance coverage limitations or waiting periods.

• Using False Identification: Obtaining dental services under a false identity to exploit insurance benefits or avoid payment obligations.
• Misreporting Service Dates: Altering the dates of service to bypass insurance waiting periods or coverage limitations.
• Concealing Other Insurance Coverage: Failing to disclose additional insurance policies to maximize benefits from multiple insurers, which is often against policy terms.

• Overbilling for Supplies: Charging for products not delivered or billing for higher quantities than supplied.
• Providing Kickbacks to Staff: Offering incentives to employees in exchange for preferential treatment, which can lead to inflated costs and compromised service quality.
• Delivering Substandard Products: Supplying inferior products while billing for premium ones, potentially compromising patient care and leading to financial losses.

• Discrepancies in Financial Records: Inconsistencies between bank deposits and recorded revenues, unexplained adjustments in accounts receivable, or significant variances between daily collections and bank deposits can signal fraudulent activity.
• Unusual Inventory Shortages: Frequent or unexplained shortages in dental supplies may indicate theft or mismanagement.
• Employee Behavioral Indicators: Employees exhibiting signs of living beyond their means, reluctance to take vacations, possessiveness over their work responsibilities, or resistance to implementing internal controls may be engaging in fraudulent activities.
• Patient Complaints: Reports from patients about being billed for services not rendered, discrepancies in billing statements, or confusion over charges can indicate fraudulent billing practices.
• Irregularities in Insurance Claims: A high volume of denied claims, patterns of altered service dates or procedure codes, or discrepancies between treatment records and insurance submissions can be indicative of insurance fraud.

Strategies to Detect and Prevent Fraud

Implementing robust internal controls and due diligence procedures is vital in detecting and preventing fraud during the acquisition of a dental practice. Consider the following strategies:

1. Conduct Comprehensive Financial Audits
Engage a Certified Public Accountant (CPA) with experience in dental practices to perform thorough audits of financial statements, bank reconciliations, tax returns, and accounts receivable aging reports. This process can help identify discrepancies, unusual transactions, or patterns indicative of fraud.

2. Verify Patient Records and Billing Accuracy
Ensure that patient records align with billing statements and that services billed were actually rendered. Randomly select patient files and cross-reference them with billing records and insurance claims to verify accuracy and legitimacy.

3. Assess and Strengthen Internal Controls
Evaluate the practice's internal controls over cash handling, inventory management, and billing processes. Implement segregation of duties, where different individuals are responsible for cash collection, record-keeping, and bank deposits, to reduce the risk of embezzlement.

4. Perform Employee Background Checks
Conduct comprehensive background checks on key employees, including verification of work history, educational credentials, criminal background, and credit history. This can help identify potential red flags indicative of dishonest behavior.

5. Regularly Review Insurance Claims
Monitor insurance claims for accuracy and legitimacy. Establish protocols for handling discrepancies, such as conducting internal reviews or consulting with insurance auditors.

6. Implement Surprise Audits and Cash Counts
Conduct unannounced audits and cash counts to deter fraudulent activities. The element of surprise can act as a powerful deterrent against fraud.

7. Develop and Enforce a Clear Fraud Policy
Establishing a clear fraud policy is essential to protecting your practice. The policy should outline acceptable employee behavior, define fraudulent activities, and describe the process for reporting suspected fraud. Make sure all employees are aware of this policy through training and regular communications. An effective fraud policy creates a culture of accountability and transparency, which can significantly reduce the risk of fraud occurring in the first place.

8. Consult With External Experts
If you suspect fraudulent activities or want a more thorough evaluation of your practice’s vulnerability to fraud, bring in external experts. Consult with forensic accountants, fraud examiners, or attorneys who specialize in healthcare or dental practice fraud. These professionals can conduct a comprehensive review of the practice's financial records, identify vulnerabilities, and recommend safeguards that might not be immediately apparent to someone without specialized expertise.

9. Use Technology to Enhance Fraud Detection
In today's digital age, there are many software solutions and tools designed to help detect and prevent fraud. Consider implementing systems that track financial transactions, monitor inventory levels, and flag unusual activity. For example, many accounting platforms can generate real-time alerts for discrepancies, and some inventory management systems can track usage patterns to identify potential theft. By leveraging technology, you can enhance your fraud detection capabilities and gain greater control over the practice’s financial operations.

10. Create a Whistleblower Program
Encouraging employees to report suspicious activity is critical in catching fraud early. Establish a whistleblower program that allows staff to report concerns anonymously. Ensure employees know that they will not face retaliation for speaking up about potential fraud. By providing a safe and confidential reporting mechanism, you empower your staff to play an active role in safeguarding the practice’s integrity.

Conclusion

Successfully acquiring a dental practice involves more than just negotiating a good price or making sure the practice has a strong patient base. It’s equally important to evaluate the financial health of the practice and assess the risk of fraud. By understanding the types of fraud that commonly occur in dental practices, recognizing the red flags, and implementing strong preventative measures, you can ensure a smooth and secure acquisition process.

Contact Dental & Medical Counsel for Assistance in Identifying and Preventing Fraud in Your Dental Practice Acquisition

Ensuring your dental practice acquisition is secure from fraud is a crucial step in protecting your investment. At Dental & Medical Counsel, we specialize in providing expert legal guidance to dental professionals, offering strategies to identify, prevent, and address fraud during the acquisition process. Our team can help you navigate due diligence, evaluate financial records, and implement safeguards tailored to your practice. Contact us today to ensure your acquisition is not only successful but also secure from potential fraudulent activities.

Frequently Asked Questions

Q: What are some types of fraud I should be aware of during a dental practice acquisition?
A: When acquiring a dental practice, common types of fraud include employee embezzlement, where staff may misappropriate funds; insurance fraud, such as billing for services not rendered or upcoding; patient fraud, like using false identities or misreporting service dates; and vendor fraud, where suppliers overbill or provide substandard products.

Q: How can I identify employee embezzlement in a dental practice?
A: Employee embezzlement can be spotted through irregularities in financial records, such as unexplained cash shortages, discrepancies between deposits and reported revenues, or unauthorized discounts and write-offs. Unusual patterns in accounting practices may also suggest fraudulent behavior.

Q: What red flags should I look for to spot insurance fraud in a dental practice?
A: Signs of insurance fraud include billing for services that were never provided, upcoding procedures to claim higher reimbursements, and submitting altered service dates to bypass coverage restrictions. If claims appear inconsistent with the provided services or treatment records, it could be a warning sign.

Q: How can I verify the accuracy of patient records and billing during a dental practice acquisition?
A: Verifying patient records and billing requires cross-referencing treatment logs with the billed services and insurance claims. You can randomly select patient files, check for consistency in the dates and services, and ensure that what’s billed matches what’s documented in the medical records.

Q: What are some behavioral indicators that employees may be involved in fraudulent activity?
A: Employees displaying signs of living beyond their means, unwillingness to take time off, or resistance to changes in internal controls could indicate potential fraudulent activity. If an employee is protective over their job responsibilities or hesitates to follow established procedures, it may raise concerns.

Q: What are the risks of not detecting fraud during a dental practice acquisition?
A: Failing to detect fraud can lead to significant financial losses, damage to your practice's reputation, legal consequences, and even regulatory issues. Fraud can affect patient trust and make the practice more difficult to operate or sell in the future, putting your investment at risk.

Q: How can I prevent fraud in my dental practice acquisition?
A: Preventing fraud involves conducting thorough audits, implementing strong internal controls, such as segregating duties for financial tasks, and developing a clear fraud policy. Regularly reviewing insurance claims and monitoring inventory are also effective ways to identify potential issues early on.

Q: What are the most effective internal controls to prevent fraud in a dental practice?
A: Effective internal controls include setting up checks and balances within the financial system, ensuring that no one person handles both cash receipts and accounting tasks. Periodic audits and surprise cash counts can also act as deterrents. Employee access to sensitive information should be limited to what’s necessary for their role.

Q: How important is it to conduct a background check on employees in a dental practice acquisition?
A: Employee background checks are essential to identify any past criminal history or red flags that might indicate a propensity for fraudulent behavior. Checking work history, criminal records, and even credit reports can provide valuable insights into an employee’s integrity before they become a part of your team.

Q: How can Dental & Medical Counsel help me during the acquisition process?
A: Dental & Medical Counsel offers expert legal advice to guide you through the acquisition process, ensuring that your investment is protected from fraud. We help you conduct due diligence, assess financial records, and implement fraud-prevention measures to secure a smooth and successful acquisition. Contact us today to learn more about how we can assist you.

About the Author

At Dental & Medical Counsel, we've been instrumental in realizing the practice goals of countless dentists. Whether you're looking to purchase, launch, or sell a dental practice, our expertise is your guide. Beyond the initial stages, we're committed to ensuring your dental practice remains legally compliant.

We provide comprehensive support, including employment law protections, dental contract reviews, and assistance with dental employment agreements. Additionally, we specialize in incorporating dental practices and securing trademarks. And for long-term planning, our services extend to helping dentists with succession and estate planning. Trust us to be your partner in every step of your dental practice journey.

About Ali Oromchian, Esq.

Your Dental Lawyer

Ali Oromchian, JD, LL.M. is the founding attorney of the Dental & Medical Counsel, PC law firm and is renowned for his expertise in legal matters

Ali Oromchian, JD, LL.M., is a leading legal authority in dental law and the founding attorney of Dental & Medical Counsel, PC, with over two decades of experience. His deep connection to dentistry comes from his wife's nearly two-decade-long career as a pediatric dentist. 

This personal insight fuels his dedication to empowering dentists to navigate their legal challenges and achieve their practice goals. In doing so, Ali has helped thousands of doctors open their practices while maintaining legal compliance. 

Ali is frequently quoted and contributes articles to dental publications, including the California Dental Society, Progressive Dentist, Progressive Orthodontists, Dentistry Today, Dentaltown, and The New Dentist magazines, further showcasing his commitment to the dental community.