How operational efficiency leads to reducing fraud

Product Strategist, IBM Business Intelligence, IBM

When I think back to last year’s Information on Demand (now Insight) conference, one customer story in particular comes to mind: Memorial Healthcare System’s uncovering of vendor fraud, a bid rigging scheme and a potential staff risk in what began as an effort to simply streamline and improve the accounts payable process.

When this routine investigation turned ugly, it became apparent that there was a real need for attention to fraud identification and reduction in all businesses today.

A little background on Memorial Healthcare System

  • Fifth-largest public hospital system in the United States, based in Hollywood, Florida
  • Six hospitals across 50 locations throughout the South Broward County
  • Operates 2,500 licensed beds
  • Procures services and supplies from 5,800 vendors
  • USD1.3 billion in revenue

Achieving efficiencies in accounts payable

The original accounts payable project started small, with centralizing and automating the manual approvals of vendor bills at six hospitals; this was the first step in moving to digitized invoices and an automated payment system which enabled Memorial Healthcare to reduce its vendor billing cycle by almost 40 percent, and from 30 days to 18 days.

This new, faster invoice processing meant that Memorial could negotiate volume discounts, contract bundling and prompt-payment discounts. “Over the years, the solution has helped us identify and take advantage of vendor discounts in excess of USD2 million,” states David Alexander, VP of finance.

Illegal activity

In 2009, however, the healthcare system had concerns about spend patterns among certain vendors. It engaged Palmar Consulting Group Inc., an accounting firm specializing in forensic accounting, to investigate. The firm discovered a vendor kick-back scheme that included cooperation from some of the company’s employees. The Federal Bureau of Investigation (FBI) then became involved, and federal prosecutors tried and convicted former employees and four vendors. Despite high praise from the federal courts for uncovering the fraud, Memorial realized it had to do more to prevent fraud proactively.

Connecting the dots to uncover bid rigging and patient risk

At this point, partner Information Management Consultants, Inc (IMC) was engaged to build an application that cross-referenced suppliers and vendors identified in Memorial’s content management system against 800 internal and external databases, such as the federal government’s Excluded Party List, alerts from the Office of the Inspector General and D&B records. This automated vetting constantly drills into the people involved in the company, searching for lawsuits, criminal records, bankruptcies, liens and other red flags.

stethoscope and dollars 2.jpg

The resulting data sets are used to connect the dots between vendor companies and related individuals, enabling the identification of shell companies by searching for multiple ownership or “proximity alerts” when vendor personnel or headquarters are located near each other.

This automated approach has detected unethical activities such as bid rigging. “We require three bids on certain projects,” explains Alexander. “We found that one of the vendors had set up two fictitious companies in addition to his legitimate company to bid on a project.”

Besides reducing exposure to fraud, the solution helps Memorial avoid putting patients at risk. For example, the system revealed that a vendor bidding on a contract for a children’s hospital had a convicted pedophile on staff.

By setting up the proper framework and checkpoints to gather, analyze and report this information, Memorial Healthcare System has been able to vastly improve their quality of service and standards regarding fraud detection. A success story if I ever heard one!

Learn more

To hear more stories like this, attend the upcoming IBM Insight 2014, October 24-28. I hope to hear your story there.

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