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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.

Analytics are more than Numbers and Stats – It’s About People by Tammy Marple, VP - Special Investigations Unit

Analytics are more than Numbers and Stats – It’s About People by Tammy Marple, VP - Special Investigations Unit

During my time as a fraud analyst, I realized that my work was so much more than just numbers and statistics. I worked in State Government for many years and a few years ago, my manager asked me to conduct a study on Opioids. I lived that assignment for 18 months.

After the Opioid study was completed, I traveled the state and shared what I had learned with our regulatory and law enforcement partners. That assignment really stuck with me. The overall impact of the Opioid epidemic on healthcare costs, society, and the family unit is devastating. It is a sad truth when we can say “everyone knows someone addicted to these types of drugs,” regardless of how they got there. An even worse reality is the impact on the family as a whole: newborn babies born addicted to drugs, children being raised by their grandparents or in foster care because the parents are either dead or in jail as a result of their addiction and drug diversion activities, and families living with the daily possibility of overdose.

One of the most eye-opening documentaries regarding this epidemic was created by Vanguard and is titled “The OxyContin Express.” Although the video is many years old, the story it tells is still very real today and it is no longer just a Florida issue. I often suggest that our interns and new employees in Pondera’s Special Investigations Unit watch the video. It explains drug diversion schemes from drug seeking patients to the cash operations of those that prescribe the drugs, as well as the overall human element. It’s been years since I conducted the study on Opioids, and yet Opioid abuse is still on the rise and growing fast with the introduction of illicitly manufactured fentanyl.

An in-depth analysis conducted in 2016 by the Centers for Disease Control and Prevention (CDC), stated that drug overdose deaths were spreading not only geographically but also across demographic groups. Listed below are some of the stats from the CDC analysis:

• Drug overdoses killed 63,632 Americans in 2016.
• Nearly two-thirds of these deaths (66%) involved a prescription or illicit opioid.
• Overdose deaths increased in all categories of drugs examined for men and women, people ages 15 and older, all races and ethnicities, and across all levels of urbanization.
• CDC’s new analysis confirms that recent increases in drug overdose deaths are driven by continued sharp increases in deaths involving synthetic opioids other than methadone, such as illicitly manufactured fentanyl (IMF).

Pondera’s technology can identify these areas of risk in a variety of programs. This is the reason behind what we do to make a difference and potentially effect change for the better. Certainly, our goal is to detect fraud, waste, and abuse in government programs, but it really does come down to people. Sure, technology is always a cool thought when it comes to smart phones, cars that drive themselves, video games, and other advancements, but technology can also be used to detect certain behaviors within large data sets and identify highly suspect activities, patterns, or hot spots of concern. Pondera leverages technology to identify suspect activity and protect vulnerable populations within a program to make a significant difference, not only from a government budget point of view but also in the lives of our fellow citizens.

Cited Sources
Van Zeller, Mariana. “The OxyContin Express.” YouTube, Current TV - Vanguard, 19 October 2009, https://www.youtube.com/watch?v=wGZEvXNqzkM

Researchers for the Centers for Disease Control and Prevention (CDC). “U.S. Drug Overdose Deaths Continue to Rise; Increase Fueled by Synthetic Opioids.” www.cdc.gov, 29 March 2018, https://www.cdc.gov/media/releases/2018/p0329-drug-overdose-deaths.html
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.
The Problem With Knowing What You Know

The Problem With Knowing What You Know

I bet you cna’t bvleiee taht you can uesdtannrd waht you are rdnaieg. Unisg the icndeblire pweor of the hmuan mnid, aocdcrnig to rseecrah at Cmabrigde Uinervtisy, it dseno't mttaer in waht oderr the lterets in a wrod are, the olny irpoamtnt tihng is taht the frsit and lsat ltteer be in the rhgit pclae. The rset can be a taotl mses and you can sitll raed it whoutit a pboerlm. Tihs is bucseae the huamn mnid deos not raed ervey ltteer by istlef, but the wrod as a wlohe.

The preceding paragraph, which has made its way around the Internet for years, can be really fun to share with friends. However, it also serves as a caution to anyone involved in fraud detection. In many ways, bad actors, knowingly or unknowingly, have depended on how the human mind works to perpetrate fraud schemes. Like the old expression goes, sometimes the best place for fraud to hide is in plain sight.

This is especially true in government programs that process massive amounts of transactions and must adhere to a staggering number of program regulations. Traditional “top down” systems can analyze large data sets and find nothing wrong (after all, the first and last letters are in the right place). “Bottom Up” systems, on the other hand, will identify individual problems (the word is scrambled) but may miss the patterns in the data (this entire paragraph is scrambled). A common example of this is the medical provider that always “flies just below the radar” by maximizing claim amounts and frequencies.

The best detection processes take both a “top down” and “bottom up” approach. They can identify individual transaction problems as well as identify patterns of bad behavior over time. In this way, you can make the old “80-20” rule work in your favor. 80% of improper payments are likely caused by 20% of program participants. If you only address each individual transaction, you’ll never run out of work but you also never really improve your program integrity efforts.

Click here for an infographic on the "80-20 rule".

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