Vet vendors, watch out for fraud warnings

Risk managers are obligated to take the proper steps to detect fraudulent activity and to avoid becoming a naive conspirator, says Steve Lee, an investigator with Steve Lee & Associates, a forensic accounting and litigation consulting firm in Los Angeles. He has consulted on a number of high-profile fraud cases and says risk managers can reduce their vulnerability to billing scams with a few simple precautions.

But not enough do.

"Most hospitals, including the big research hospitals, fail miserably when it comes to having the controls in place that can spot this kind of fraud and keep you out of it before it's too late," Lee says. "If you were to pick up their audit reports, there typically are paragraphs describing all the failures to have controls in IT, invoicing, purchase orders — all the areas subject to fraud. That's what fraudsters look for. They exploit those gaps."

Much of the defense involves checking out the other party that you will be doing business with, reviewing documents, and even the physical facilities to make sure that the business is what it says it is.

"You need to bring the same kind of skepticism that auditors rely on," Lee says. "Don't assume that anything is true or that it is reasonable. Use a critical eye."

That means looking for red flags such as duplicate bills and documents, records that appear to be the same except for changing the patient's name, or durable medical equipment (DME) that is associated with no freight charges.

"You'd be surprised at how many invoices pass through a provider for DME with no reasonable freight charge," he says. "It's very rare for risk managers to step back and question the good deal you're getting from a vendor and ask why it is so cheap. If you have a vendor who is offering something that is way out of the cost range quoted by other vendors, that should make you very suspicious."

Some precautionary steps are easy and free, such as checking with the Better Business Bureau (BBB). The vendor need not be a member of the BBB necessarily, but a score lower than a B- might raise suspicions, and the lack of any rating would be cause for worry. Also, checking the vendor's web site can be helpful, Lee says. If it provides no physical address, or contact is difficult, it could be a fly-by-night outfit.

Also, most states offer business information through the Secretary of State's office that can reveal the basic background of the company, such as the incorporation date and who the officers are.

"All this requires is time," Lee says. "It is basic diligence in terms of vetting a vendor, but it can be difficult, because you're taking people whose core job is moving paper and moving it as fast as possible, and now you're asking them to apply some skepticism to what they're seeing."

Lee also recommends establishing a fraud hotline through which employees and consumers can alert you to any concerns about impropriety. The difficulty here is maintaining vigilance with the hotline, Lee says.

"Just because Old Man Meyers has called six times and he's been wrong each time doesn't mean the seventh time he's automatically wrong," he says. "Maybe he sees black helicopters following him all the time, but the seventh time he's run into a crooked wheelchair provider who's trying to get him into some crooked deal."


For more on detecting fraud with vendors, contact:

• Steve Lee, Steve Lee & Associates, Los Angeles. Telephone: (310) 785-1000. E-mail: