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Pondera FraudCast

Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.


Jon Coss
Jon Coss
Pondera's FraudCast Blog
Why It’s Important To Be Nimble When Fighting Fraud

Why It’s Important To Be Nimble When Fighting Fraud

Fighting fraud is an interesting challenge. When an organization shuts down a fraud scheme, bad actors don’t suddenly become good citizens. Rather, they evolve. They evolve by designing and testing new methods that, when they succeed, are exploited until they too are detected and shut down. In fact, many of the more enterprising fraudsters proactively try out new methods to avoid any “breaks in revenue”. This constant game of “whack-a-mole” is well known to program integrity staffs.

This ever-changing nature of fraud schemes demands an ever-changing detection system. If an organization’s fraud detection methods look more or less the same as they did the year before, I can almost guarantee you that their fraud rates have returned to the levels prior to the introduction of the detection systems. Bad actors will simply find another way to conduct their business.

For these reasons, it is important to be nimble in fighting fraud. Complex technologies and massive data warehouses will lose effectiveness over time. If it takes a year to negotiate a change order, to deploy new technologies, or to integrate new data sources, literally billions of dollars in improper payments can be lost. The trick is to stay even with or just a “step” behind the bad actors, not miles behind.

While all state agencies want to choose the right partner to help them with their fraud detection efforts, I would challenge them to ask themselves the following questions: How easy is the company to work with? How willing will they be to incorporate new technologies (even if not their own)? How important is fighting government fraud to their company versus everything else they do? How passionate are they about the problem? Honest answers to these questions will reveal a lot about the future success of your efforts.
RFPs: The Devil is in the Details

RFPs: The Devil is in the Details

As a company that works with government clients, we spend a tremendous amount of time and money responding to Requests for Proposals (RFPs). We understand that governments use RFPs to ensure competitive bidding processes and to articulate their requirements. However, the process still causes enough angst for prospective bidders that, ironically, it often actually limits competition.

We wrote in a previous blog post about the lengthy RFP procurement cycles and their impacts on the final project. Today I’d like to discuss the formats of the RFPs themselves which often cause confusion, leading to large numbers of vendor questions, which in turn leads to delayed timelines and incorrectly submitted bids. I confess that I have never been on the “other side of the table” writing an RFP and I can only imagine how difficult it must be. But I still have one simple suggestion that I wish government agencies would take prior to releasing an RFP.

Before releasing an RFP to the vendor community, I suggest that government run an internal “mock” procurement: “release” the bid to a few agency employees and ask them to respond to it. They don’t have to provide actual answers, just an outline so they can make sure they understand what the RFP requires, where responses should go, how the format works, and other structural issues. It’s important that these people had nothing to do with the writing of the RFP document itself because then they’d naturally understand what they intended when they wrote it.

Commonly confusing issues we see in RFPs include where to place a Statement of Work (in tables or in text), repeated questions, seemingly mutually exclusive statements or requirements, and “thrown in” requirements that belong in other sections and break up the flow of the response.

I think government officials would be amazed at how much confusion and time they could take out of their procurements by performing this simple quality assurance exercise. This would also reduce the number of questions the state would have to respond to and provide more focus on issues of substance rather than administrative or formatting issues. Finally, it would lead to more uniformity of responses allowing governments to evaluate responses for their merit rather than having to search for answers to their requirements.
Fraud, Waste, and Abuse Standards

Fraud, Waste, and Abuse Standards

One of my colleagues recently returned from a conference on government program integrity with an interesting anecdote. He recounted a vendor presentation where the speaker was touting a 52% accuracy rate in their fraud lead generation system. So… nearly half of the system’s leads generated false positives. Not so sure I’d brag about that.

High false positive rates lead to wasted investigative time and money and unwarranted intrusions into the lives of legitimate program beneficiaries and service providers. Ultimately, they lead to a lack of confidence in the system itself and investigators revert back to more manual detection methods. When one considers all the important services governments deliver and the immense political pressure they endure, this is obviously not acceptable.

Shortly after hearing this story, we were asked to respond to a question about false positive rates and any existing industry standards or even benchmarks. While every vendor, including Pondera, makes claims about our system efficacy, very few standards actually exist. Conversely, our clients (the government program administrators) generally are subject to improper payment standards placed on them by the federal government.

I think there is a great opportunity, even responsibility, for governments to create these standards. Fraud detection standards would challenge the vendor community to “put up or shut up”, leading to more innovation. They could also be adjusted as the standards are met and surpassed leading to constant improvement. And they would provide governments with a uniform method for measuring vendor performance.

It is true that fraud detection systems still rely on quality program data and can suffer from the old adage "garbage in, garbage out”. So government would still share in the responsibility of meeting any new standards. But clearly, there is more we can do. And this would benefit all parties involved… except, of course, the fraudsters.
The Most Important System Feature

The Most Important System Feature

I believe that simple things can make a big difference. This week, for example, I went through self-checkout at a local grocery store and the keypad gave me the options of “debit card” or “all other tenders” to complete my transaction. “All other tenders”—who talks like that? No doubt there was a group of people that decided that, technically, “tenders” was the best word to cover all the other options. It doesn’t really matter that it makes the system more confusing. That’s my problem.

Software systems suffer from this problem perhaps more than any other consumer product. I remember the old joke about having to go to the “start” button to stop the computer. This still happens, despite the fact that experience has shown us that the single most important feature contributing to the success of software is usability.

Put simply, even the most powerful system is completely worthless if people can’t figure out how to use it. My own brother discovered this when he recently decided to switch from the iPhone to an Android phone for the additional capabilities. Not a very technical person, he quickly switched back complaining that he was utterly confused by the “full fledged computer” he was carrying around in his pocket.

At Pondera, we make the claim that our system is “built by investigators, for investigators.” And it’s true. Our most important design principle is to “mask” the underlying complexity of the system and provide analysts and investigators with an intuitive system that works the way they do. Technical people can’t do this. Data scientists can’t do this. Only investigators can do this. That’s why we hire them and task them with our most important work.
Ugly Case of Health Care Fraud

Ugly Case of Health Care Fraud

A few weeks ago, I published a blog post titled “Money Obtained Fraudulently is Rarely Used for Good Purposes”. In it, I made the argument that government fraud is a serious, and at times very ugly problem. Now I no longer have to make that argument because the United States Justice Department is making the argument for me.

Last week, the Justice Department announced the largest health care fraud case it’s ever prosecuted; one that defrauded over $1 billion over the past 14 years. The alleged perpetrators of the fraud are said to have leased private jets and chauffeured limousines. One even bought a $600,000 watch! Remember, this is your tax money we’re talking about. The system ran on a complex network of bribes and kickbacks.

And if that’s not enough, here is one of the schemes they allegedly ran. They “treated” seemingly healthy, elderly people with medications they did not need in order to create addictions which would lead to further treatments. Pure evil. Unfortunately, fraudsters are most active where large amounts of money meet vulnerable populations. This is yet another example of that and more reason for us to do what we do.
The False Positive Problem

The False Positive Problem

Last year, 60 Minutes did a segment on the impact of errors in the Social Security Administration’s Master Death File—a database that stores dates of death for Americans. The system stores 86 million records, and despite all best efforts, it still has some issues.

60 Minutes pointed out that errors in the system contribute to millions of dollars in improper payments each year. After all, the system would seem to indicate over 6.5 million Americans over the age of 111 when, in fact, there are probably fewer than 100. On the other hand, false positives where people find themselves mistakenly placed on the list, lead to nightmarish scenarios for obtaining loans, opening bank accounts, and other everyday tasks.

This story demonstrates one of the largest challenges for government agencies: how to use imperfect data sources to minimize fraud, waste, and abuse while also not “harassing” legitimate people and businesses. And unlike a private business that may view a false positive as an inconvenience (who hasn’t had to call their credit card company to say that “yes, that large ice cream purchase was legitimate”), government officials are severely criticized when they act on false positives. In effect, they are criticized for not acting and they are criticized for acting.

Pondera suggests that governments mitigate the effects of false positives by using composite indicators that draw information from multiple sources—both simple data matches like the Master Death File and more complex behavioral sources. For example, a Medicaid investigator would feel much more confident looking into a person who not only shows up on the Master Death File, but also appears to be traveling 100 miles for 20-minute doctor appointments, receives highly unusual (and expensive) procedures for their apparent diagnosis, and often sees two doctors in distant cities on the same day.

Anyone who has worked for or with government program integrity units understands the unique pressures they face. Combining available data sources with intelligent analytics can go a long way toward helping them investigate the right cases while not interfering with program delivery.
Learning from Antivirus Software

Learning from Antivirus Software

Almost everyone is familiar with antivirus software. Not everyone is familiar with how it works though. Even fewer have examined how we can apply the way antivirus software works to combat fraud. I believe that there are important lessons here which can improve our approach to fraud detection and prevention.

At a high level, antivirus software performs two important functions prior to opening a file on your computer: 1) It compares the file to known viruses and other forms of malware, and 2) It checks the file for suspicious code which may indicate a new, previously unknown virus.

The first function depends on a network of users willing to share known viruses and a system that is able to collect the virus data, design a fix, and disseminate the fix to other users prior to them being infected. The second function depends on heuristic programmers that can design systems to learn and even anticipate potential problems. Working together, this is one of the most effective ways to address the constantly changing nature of Internet malware.

Government fraud prevention, when done properly, works in a very similar manner. By examining known bad actors, bad transactions, and bad behaviors, systems can quickly compare ongoing program data to identify suspect transactions. Modern fraud detection systems also include predictive algorithms that can detect anomalies, trends, patterns, and clusters that may indicate fraud.

Unfortunately, many governments are unable, or unwilling, to share data. This limits the “network” effect that antivirus software uses so effectively. If more states and programs shared fraud schemes and findings, the library of known bad actors and methods could detect fraud and prevent it from moving from state to state and program to program.

The good news is a number of states are moving toward state-wide fraud prevention efforts and a number of government subsidy programs are moving toward cross-state fraud prevention efforts. I am confident that the future success of these efforts will promote additional sharing, leading to a larger network, and more efficient governments.
Money Obtained Fraudulently is Rarely Used for Good Purposes

Money Obtained Fraudulently is Rarely Used for Good Purposes

People often ask me if I think we can make a difference fighting fraud by stopping down-on-their-luck Americans from grabbing a few extra bucks that they are not entitled to from government programs. In fact, many people ask if it’s even the right thing to do. After all, they explain, wouldn’t anyone do the same given the circumstances?

This illustrates the common misperception that fraud is only perpetrated in small amounts by desperate people who are temporarily bending the rules. In fact, much of what we see takes place on a larger scale. And more importantly, the truth is that money obtained fraudulently is rarely used for good purposes. Examples include:

  • During a “National Counter Terrorism-Awareness Week” in 2014, government officials explained that taxpayer money was being defrauded out of government programs (including student loans) to fund terrorism. In effect, we are helping to fund groups that want to do us harm.
  • The Wall Street Journal reported on, in March 2016, the growing trend of street gangs funding activities through fraud. Fraud offers attractive forms of theft because “they are more lucrative, harder to detect and carry lighter prison sentences”.

Considering that the government distributes over two trillion dollars per year in subsidies, and considering how fraudulently obtained money can be used, it is critical that we address the issue of fraud, waste, and abuse. So to answer the questions posed earlier: Yes, I do believe we are doing the right thing, and Yes, I do believe we can make a difference.

The Internet Changes Everything

The Internet Changes Everything

Way back in 2006, I read an article in the Harvard Business Review that described how the Internet had changed the sales profession. One key observation dealt with the “de-coupling” of the sales cycle from the buying cycle. Prior to the Internet, buyers had to contact vendors for information on their products. Today, buyers do their own research and successful salespeople need to unhinge preexisting customer assumptions prior to starting their sales process.

I believe that the Internet has had an even greater impact on fraud in government benefit programs. Government agencies are under constant pressure to move applications, certifications, and other processes on line to make them more convenient for citizens and businesses. This makes perfect sense because, after all, government exists to serve the needs of the citizens. Unfortunately, moving these processes to the Internet dramatically increases the incidence of fraud.

The Internet provides a degree of anonymity that makes it extremely attractive to fraudsters. The number of fictitious businesses and “ghost beneficiaries” in government programs has exploded in recent years. Many of our customers deal with applications associated with out-of-state or out-of-country IP addresses. Others come from deceased or incarcerated individuals. Still others show indicators of originating in “sweat shops” that create bulk applications and claims.

Just like the salesman that had to adjust to the new sales cycle, it’s important that government program integrity staff adjust to the changing fraud landscape. IP spoofing, anonymous email services, and the wide availability of stolen identities are realities in the post-Internet fraud market. Relying solely on the traditional detection and investigation techniques is no different than the sales person who thinks their prospect hasn’t done any of their own research.
SaaS Procurement Recommendations

SaaS Procurement Recommendations

This week, my company is responding to an RFP for SaaS fraud detection services. While we are thankful for the opportunity to respond, the RFP and its process also illustrates the need for governments to adjust their procurement processes with the advent of cloud computing. After all, we responded to the RFI for this procurement over two years ago!

This means that the current solicitation is at least partly based on product capabilities from early 2014. While this might not be a big problem for traditional IT projects, this is a lifetime in SaaS. In fact, if a SaaS solution offered mostly similar functionality over a two-year period, I’d recommend not selecting that solution. Effective SaaS solutions push new features in days and weeks, not months or years.

With this background in mind, I’d like to propose that governments consider the following three modifications to their procurement policies. Some of these changes may require assistance from legislative bodies and funding organizations in addition to procurement professionals.

1. Reduce the time between RFI and RFP: This will help governments avoid building their requirements on functionality that has long since been replaced. SaaS functionality is a moving target – it’s supposed to be.

2. Smooth out funding over multiple years: Traditional IT projects required large upfront implementation costs followed by lower ongoing support, maintenance, and operations costs (assuming the initial implementation was successful). SaaS solutions spread the cost more evenly over time as the solution continues to improve.

3. Make sure your staff is ready when you award: True SaaS solutions can be implemented quickly, often in as few as 120 days. By the time you award a project, you should be ready to discuss security plans, access the required program data, assign staff (not just project staff but system users), and address many other details that could often be delayed in lengthy IT projects.

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Pondera leverages advanced prediction algorithms and the power of cloud computing to combat fraud, waste, and abuse in government programs.



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