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Detect and prevent fraud, waste and abuse with data mining


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Title: Detect and prevent fraud, waste and abuse with data mining

Detect and prevent fraud, waste and abuse with
data mining
Todays agenda
  • Examine the impact of fraud, waste and abuse
  • Data mining for detection and prevention
  • Data mining in action case studies

For the purpose of todays seminar
  • Fraud, waste and abuse includes
  • Illegal practices
  • Waste
  • Payment error
  • Non-Compliance
  • Incorrect billing practices

The impact of fraud, waste and abuse
The impact of fraud
  • GAO cited 19.1billion in improper Government
    payments in 17 major programs for fiscal year
    1998. GAO, Financial Management Increased
    Attention Needed to Prevent Billions in Improper
    Payments, October 1999
  • Medicare 12.6 Billion
  • Supplemental Security Income 1.6 B
  • The Food Stamp Program 1.4 B
  • Old Age and Survival Insurance 1.2 B
  • Disability Insurance 941 Million
  • Housing Subsidies 847 Million
  • Veterans Benefits, Unemployment Insurance and
    Others 514 Million

The impact of fraud
  • An IRS audit of returns claiming the EIC (Earned
    Income Credit) for tax year 1994 found 4.4
    billion in overpayments out of 17.2 billion in
    total claims. A follow-up study by the IRS
    determined that, even after the implementation of
    compliance reforms, the error rate was still at
    least 20 percent of all EIC claims filed. GAO,
    Major Management Challenges and Program Risks
    Department of the Treasury, January 1999.
  • From 1994 through 1998, defense contractors
    returned a total of roughly 4.6 billion in
    overpayments. GAO, DOD Contract Management
    Greater Attention Needed to Identify and Recover
    Overpayments, July 1999
  • Federal Employees Health Benefits Program, is
    estimated to consume as much as 1.8 billion a
    year in waste, fraud, and abuse--Office of
    Personnel Management IG, Most Serious Management
    Problems Office of Personnel Management, 1
    December 1999

A pervasive problem...
  • Medicare, Medicaid and other essential public
    health programs
  • Entitlement and subsidy payments
  • Tax collection
  • Procurement
  • Food stamps
  • Child welfare benefits
  • Workers compensation
  • Unemployment benefits
  • Any benefit payment

And it is set to continue...
  • Total public sector transaction volumes now
    exceed 2 trillion
  • Forrester Research

The impact if fraud goes undetected
  • Much needed programs and services are
  • Billions of dollars are lost
  • Countless man-hours spent on investigative and
    auditing efforts yielding little in recoupments

Data mining for detection and prevention
Data mining defined
  • The process of discovering meaningful new
    relationships, patterns and trends by sifting
    through data using pattern recognition
    technologies as well as statistical and
    mathematical techniques.
  • - The Gartner Group

Matching known fraud/non-compliance
  • Which new cases are similar to known cases?
  • How can we define similarity?
  • How can we rate or score similarity?

Anomalies and irregularities
  • How can we detect anomalous or unusual behavior?
  • What do we mean by usual?
  • Can we rate or score cases on their degree of

Data mining is not
  • Blindapplication of analysis/modeling
  • Brute-force crunching of bulk data
  • Black box technology
  • Magic

How do you mine data?
  • Use the Cross Industry Standard Process for Data
    Mining (CRISP-DM)
  • Based on real-world lessons
  • Focus on business issues
  • User-centric interactive
  • Full process
  • Results are used

Techniques used to identify fraud
  • Predict and Classify
  • Regression algorithms (predict numeric outcome)
    neural networks, CRT, Regression, GLM
  • Classification algorithms (predict symbolic
    outcome) CRT, C5.0, logistic regression
  • Group and Find Associations
  • Clustering/Grouping algorithms K-means,
    Kohonen, 2Step, Factor analysis
  • Association algorithms apriori, GRI, Capri,

Techniques for finding fraud
  • Predict the expected value for a claim, compare
    that with the actual value of the claim.
  • Those cases that fall far outside the expected
    range should be evaluated more closely

Techniques for finding fraud
Decision Trees and Rules
  • Build a profile of the characteristics of
    fraudulent behavior.
  • Pull out the cases that meet the historical
    characteristics of fraud.

Techniques for finding fraud
Clustering and Associations
  • Group behavior using a clustering algorithm
  • Find groups of events using the association
  • Identify outliers and investigate

Fraud detection using CRISP-DM
  • Provides a systematic way to detect fraud and
  • Ensures auditing and investigative efforts are
  • Continually assesses and updates models to
    identify new emerging fraud patterns
  • Leads to higher recoupments

Data mining in action Fraud, waste and
abusecase studies
How can data mining help?
  • Payment error prevention
  • Billing and payment fraud
  • Audit selection

Payment Error Prevention
The US Health Care Finance Administration needed
to isolate the likely causes of payment error by
developing a profile of acceptable billing
practices and...
used this information to focus their auditing
Payment error prevention solution
  • Clementine
  • Using audited discharge records, built profiles
    of appropriate decisions such as diagnosis coding
    and admission
  • Matched new cases
  • Cases not matching are audited

Payment error prevention results
  • Detected 50 of past incorrect payments
    resulting in significant recovery of funding lost
    to payment errors
  • PRO analysts able to use resultant Clementine
    models to prevent future error

Billing and payment fraud
The US Defense Finance and Accounting Service
needed to find fraud in millions of Dept of
Defense transactions and...
Identified suspicious cases to focus
Billing and payment fraud solution
  • Clementine
  • Detection models based on known fraud patterns
  • Analyzed all transactions scored based on
    similarity to these known patterns
  • High scoring transactions flagged for

Billing and payment fraud results
  • Identified over 1,200 payments for further
  • Integrated the detection process
  • Anomaly detection methods (e.g., clustering) will
    serve as sentinel systems for previously
    undetected fraud patterns

Audit selection
The Washington State Department of Revenue needed
to detect erroneous tax returns and...
Focused audit investigations on cases with the
highest likely adjustments
Audit selection solution
  • Clementine
  • Using previously audited returns
  • Model adjustment (recovery) per auditor hour
    based on return information
  • Models will then score future returns showing
    highest potential adjustment

Audit selection results
  • Maximizes auditors time by focusing on cases
    likely to yield the highest return
  • Closes the tax gap

Data mining - key to detecting and preventing
fraud, waste and abuse
  • Learn from the past
  • High quality, evidence based decisions
  • Predict
  • Prevent future instances
  • React to changing circumstances
  • Models kept current, from latest data

Questions?SPSS Sales 800-543-2185 or