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All about bonding your employees
The first time Robert Sieben, MD, was ripped off by an employee, he didn't have an easy way to repay himself the roughly $2,500 the woman stole -- not even to cover that extra paycheck she issued herself one month.
Twenty years later when the San Francisco Bay area neurologist was again the victim of embezzlement, the losses were even larger. But this time he had a bond to help recoup them.
Bonding employees, which involves purchasing a type of insurance that would reimburse the medical offices for losses, is a practice that health plans and other payers already follow. In fact, federal law governing health plans requires bonding of all staff with financial responsibilities, points out Washington, D.C., healthcare attorney David Ermer. And it plays an important role in protecting businesses.
Few statistics are available on the prevalence of embezzlement by medical employees, but worker theft overall is a significant national problem. The U.S. Department of Commerce estimates $500 billion in annual losses due to employees with sticky fingers.
Medical practices may be particularly vulnerable because the focus of physicians is generally more on patient care and less on the business side of the practice. One CPA firm estimates the average loss from embezzlement to be $106,000 annually to "healthcare enterprises" that fall victim to it.
The type of bond most suited to protecting employers from theft goes by a number of different names, including fidelity bond, surety bond, employee dishonesty bond, or 3D bond (disappearance, destruction, or dishonesty).
"You can get [a bond] on an individual, on certain positions, on everybody in the office," says Charles T. Brown, vice president of Baker Welman Brown Insurance & Financial Services in Kennett, Mo. "I really try to encourage my physician clients to consider [a bond]. For not much money you can bond them and it sure gives you a whole different comfort level."
After his first unfortunate experience, Sieben didn't need convincing to buy a bond to help protect himself -- he made sure his property and casualty insurance included one. But his insistence on a bond puts him in the minority, according to experts.
Allan Tobias, MD, who is also a practice management consultant and attorney in Walnut Creek, Calif., says he doubts that many small practices bond their employees, which he considers a mistake.
"There is a lot of automatic trust that the doctor has for the people he ... hires," Tobias says, "and there is a lot of laziness in terms of not looking after his [own] interest, and believing -- erroneously -- that the accountant would pick up [on an embezzlement]. Most physicians are not good business people and they don't think about these things."
Tobias followed his own advice on bonding staff when he had a private urology practice. "I had a one-person [staff]," he says. "She did everything -- transcriptions, billing, collection, helped with patients. She was a jack-of-all-trades. I trusted her implicitly. She was and is a good friend. However, she did have complete control over the monetary issues of my practice. As much as I loved her, and her husband, I had her bonded. I did it openly and she understood the reasons. To me bonding is part of your overhead costs."
Tobias and others say the bonding process was easy to accomplish. "All you do is call the bonding company and tell them how much you want the bond for and they quote you a rate," he says.
Shopping for a bond
Bonds are typically sold by insurance brokers. While it may be worthwhile to shop around to compare premiums for bonds, rates do not vary much from state to state and are typically based on national underwriting guidelines. It may be possible to get a better deal on premiums by purchasing the bond for three years instead of one, and by prepaying it.
And medical practices do not have to worry about rising bond premiums like physicians have experienced with malpractice insurance. "The rates for fidelity bonds have been fairly stable for the past 15 years," says Mike Swetnam, vice president of Smith-Reagan Insurance Agency in San Benito, Texas.
The first step toward obtaining coverage is to review your existing office property and liability insurance package. Some insurance companies provide packages that may include employee dishonesty coverage ranging from $5,000 to $25,000 in losses; you'll need to make a judgment call as to whether the amount is adequate. The lower amount "might be enough for the average employee, for others it probably isn't," says Brown, referring to administrative workers who handle funds for large medical offices.
Some experts contend that bonds that are sold packaged with other policies may offer coverage that is too low in value; they suggest investigating purchasing a separate bond that would offer an additional level of coverage.
As Brown notes, a primary issue in obtaining a bond is to determine which members of the practice should be covered. The office may want to purchase a blanket policy that will cover everyone in the practice, or simply select the employees who typically handle money. Specifying who is covered can occur in two ways: An employee could be issued assigned coverage under his or her name, or it could be assigned based on a job title, explains Swetnam. Some experts recommend that practices consider bonding physicians as well.
The size of the bond can be based on the cash flow or income of the office. A rule of thumb that Swetnam suggests is that a bond should be equal to five times the amount of the physician's monthly patient billings. He recommends a minimum of $250,000 in coverage for a blanket bond.
While it might seem improbable to some physicians that embezzled funds could reach that high a level, keep in mind that the theft can go undetected for many years, as was the case with Sieben. "We have paid claims that are up in the half-million-dollar range," says Swetnam, whose firm provides insurance and bonds to over 400 medical practices in Texas.
He quotes a three-year premium of $829 for a blanket policy of $100,000 that covers up to eight employees, including a physician, receptionist, insurance clerk, lab technician, physician assistant, registered nurse, and others. Increasing that coverage to $1 million would bring the premium to $2,500 for a three-year policy.
Similarly, Brown says his agency sells a $50,000 bond covering all employees with an annual premium of $200 to $350, depending upon the number of employees.
Another consideration is whether to purchase an "occurrence" or "claims made" bond. An occurrence bond covers claims stemming from events that occurred while the policy was in effect, regardless of whether the bond was in force when the theft is discovered. This kind of bond would be useful, for example, if a former employee who was bonded is found to have stolen during his employment period. The reverse is true with a claims made or "loss sustained" bond, which will only cover losses that are found from the time the bond is written, and only if the bond is in effect on the date the loss is discovered.
Before a bond is issued, the broker or insurance company typically asks the medical practice a number of questions designed to help reveal what measures are in place to guard against theft and to determine if the office is a good risk. These include whether the office splits up some of the duties pertaining to handling money, such as having different employees open mail, sort checks, and deposit them or post them to accounts.
In addition, Swetnam's office typically runs a credit history with any bankruptcies highlighted, and will check with motor vehicle agencies and with the state medical board. "If [the physician] has any character flaws, a restricted license ... those are red flags" and coverage may be denied, he says.
What if you use an outside billing company? To adequately protect the practice, D.C. attorney Ermer says that billing companies must be bonded and also purchase a type of insurance called Errors and Omissions (E&O). Ermer recommends that physicians ask about both of these before hiring an outside biller, and if they aren't in place, to consider another billing firm.
"The important thing to remember is that a bond only covers criminal misconduct such as embezzlement. If it was a goof, it wouldn't be covered. If the billing company screwed up, sent money to the wrong doctor's office and couldn't get it back, that would be covered under E&O insurance."
A hard lesson to learn
"I was happy I had the bond," says Sieben, but his two experiences have humbled him about his ability to judge people, and it pained him that the workers who stole from him were unrepentant. "The message I've learned is they see the money going through, they had a financial need, and they thought they had it coming to them," Sieben says. "They justified it in their own minds."
In the first instance, the staff member was forging Sieben's name on checks, which she hid by intercepting the bank statements and cancelled checks. The second time, another worker tipped him off that an employee was pushing his front office staff to collect patient copayments in cash, and was seen hovering over the mail as checks were removed from envelopes. Later he found her "secret file" where she stashed checks she planned to cash.
Ultimately each office must decide whether a bond is necessary. "It's really a business judgment about how far you trust your employees," says Ermer. "If they are all family members, then it is not imperative."
But simply relying on bonding is a mistake, say Ermer and other experts. And as Sieben's tale demonstrates, having a bond is not a guarantee that theft will not occur.
"You cannot simply abdicate your responsibility to the bonding company," says Sieben. "The bond protects you, but you also have to set up internal controls to protect yourself. The bond will cover the financial loss, but there is also an emotional cost to having an employee stealing."
While Tobias made certain to bond his staff, he also knew not to stop there. "I had my own little way of dealing with things -- once a week or so I would look at the day sheets, look at the charts, and make sure everything was above board. I was looking to make sure the appointment book, charts, and day sheets were all in line as far as the billing went. I looked at all aspects that were possible. In terms of cash received, checks, I would call the bank periodically and have them make sure my checks were being deposited to my account."
Putting the staff on notice that the physician or someone else will be checking in this way "does put a fear in someone who might be thinking of embezzling," says Tobias.
He believes an office embezzler will eventually be caught, because "criminals by nature are stupid people" and may make an error that leads to his or her downfall. The person may start off taking small amounts that are not missed and grow ever bolder as they evade discovery. But why let it go that far?
Theresa Defino can be reached via
This article originally appeared in the February 2004 issue of Physicians Practice.