Why You’re Probably Committing Therapy Insurance Fraud (And How To Stop)
Dr. Lisa Marie Bobby is a licensed psychologist, licensed marriage and family therapist, board-certified coach, AAMFT clinical supervisor, host of the Love, Happiness, and Success Podcast and founder of Growing Self.
Hey there, fellow therapists! We need to talk about a topic that’s been lurking in the shadows of our profession: therapy insurance fraud. Now, before you click away thinking, “Lisa, I would NEVER do that!”, stick with me. You might be surprised to learn how this common therapy practice ends up becoming a common therapist mistake. You could be toeing the line of fraud without even realizing it.
Therapy Insurance Fraud
Imagine this: a bright, motivated client walks into your office seeking personal growth, better relationships, or career guidance. They’re not presenting with a diagnosable mental health condition but are eager to work with you. Then comes the question: “Do you take my insurance?” You want to help, they want your help, but insurance only covers treatment for diagnosed mental health conditions. So, what do you do?
Some therapists might consider assigning a diagnosis like “Adjustment Disorder” to fit the insurance requirements. Harmless, right? Not quite. This practice can be considered fraudulent.
It gets even trickier with couples counseling. Many insurance plans don’t cover therapy aimed at improving relationship dynamics unless it’s tied to treating a specific individual’s diagnosed mental health condition. Labeling one partner as the “identified patient” not only skews the therapeutic process but also misrepresents the service provided, edging into fraudulent and unethical therapy practices.
Repercussions of Therapy Insurance Fraud
Let’s be honest—the pressures on therapists in private practice are very real. Clients expect to use their insurance benefits, and many simply don’t understand that therapy isn’t always covered in the way they assume. As therapists, we want to make our services accessible while also keeping our practice financially viable.
And let’s not forget the administrative and financial challenges of running a private practice. The constant battle with insurance companies—waiting on reimbursements, handling denied claims, and navigating the complexity of CPT codes—can make it feel like bending the rules is the only way to make things work.
But here’s the thing: fudging diagnoses or misrepresenting services is a slippery slope that can have devastating consequences for your career, your clients, and your livelihood.
1. You Could Lose Your License
If you’re caught intentionally misdiagnosing mental disorders for reimbursement—whether it’s exaggerating symptoms, assigning a diagnosis that isn’t clinically accurate, or billing for services that don’t meet medical necessity—your professional license is on the line. Licensing boards take ethics violations seriously, and even if you didn’t intend to commit therapy insurance fraud, you’re still responsible for upholding the law.
Losing your license doesn’t just mean no more therapy practice—it means years of education, training, and hard work down the drain. Not to mention the reputation damage that could make it difficult to ever practice again, even in a different capacity.
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2. You Could Face Legal and Financial Consequences
Committing therapy insurance fraud—whether knowingly or unknowingly—is a crime. According to the FBI, healthcare fraud costs taxpayers billions each year, and mental health professionals are not exempt from investigation.
Depending on the severity of the fraud, therapists found guilty could face:
- Hefty fines and penalties
- Being required to repay fraudulent claims (with interest!)
- Potential criminal charges, including jail time
Even if you avoid jail time, being flagged for fraudulent billing could land you on the Medicare and Medicaid exclusion list, meaning you’ll be permanently banned from accepting insurance payments—even in non-therapy roles.
3. Your Clients Could Be Harmed
Beyond the legal risks, let’s talk about your clients. Assigning a diagnosis to fit insurance requirements isn’t just unethical—it can have long-term consequences for their medical records, career, and even financial future.
Many clients don’t realize that a mental health diagnosis in their permanent medical history can impact their ability to get life insurance, disability benefits, or even certain jobs. A diagnosis of “Adjustment Disorder” might seem harmless, but if an employer or insurer pulls their records later, it could affect them in ways they never expected.
Clients trust us to act in their best interest. When we assign diagnoses that don’t fit just to work around an insurance requirement, we’re violating that trust—and potentially setting them up for negative consequences down the road.
A Better Way Forward: How Coaching Can Ethically Transform Your Practice
Most of us got into this field because we love helping people grow. We’re passionate about guiding our clients toward healthier relationships, personal breakthroughs, and a deeper sense of purpose. But when we rely on insurance-based therapy, we often find ourselves boxed into a medical model and that doesn’t always fit the clients who walk through our doors.
You know the ones I’m talking about—high-functioning, self-aware, growth-oriented individuals who aren’t struggling with a diagnosable mental health condition but want to work on themselves. Maybe they’re navigating a career transition, wanting to improve their relationships, or striving to develop stronger emotional intelligence.
By integrating coaching into your practice, you can work with these motivated, growth-seeking clients without the need to label them with a medical diagnosis. Coaching is not therapy—it’s a structured, evidence-based approach that helps people gain insight, set goals, and take actionable steps toward the life they want.
- Instead of diagnosing, you’re empowering.
- Instead of focusing on symptom reduction, you’re fostering growth.
- Instead of being bound by insurance limitations, you’re running a practice that aligns with your values.
Expanding Your Practice, Ethically & Profitably
Beyond the ethical benefits, transitioning to a coaching model opens up incredible new opportunities. The demand for coaching has skyrocketed, with more and more people seeking out professional guidance to help them thrive—not just survive. As a licensed therapist with coaching credentials, you’re uniquely positioned to offer both therapy and coaching, meaning you can serve a broader range of clients without compromising your integrity.
And let’s talk about sustainability. Running an insurance-free practice means:
- No more claim denials or insurance headaches
- More financial stability with private-pay clients
- The freedom to design a practice that truly reflects your passion
It’s time to step into a model that allows you to do the work you love, serve the clients who need you, and stay firmly on the right side of ethics.
Ready to Start Coaching as a Therapist?
If you’re curious about how to make the transition, check out my free Masterclass: The Therapist’s Guide to Coaching. It’s designed to help you confidently integrate coaching into your work, attract and serve the right clients (who don’t need a mental health diagnosis), and run a profitable, sustainable practice without being tied to restrictive insurance policies. If you want to build a practice that aligns with your values, this is for you.
Also, check out my other LHS For Therapists podcast episodes for more therapist-focused professional development content. Every week I share my insights, research, and interviews with experts in our field so you can thrive as a therapist. You can also connect with me on LinkedIn! I’m always sharing bit-sized tidbits and discussing new therapist topics with fellow clinicians over there. It’s a great way to build community and support for yourself as a therapist.
Xoxo
Dr. Lisa Marie Bobby
P.S. Know a colleague who could benefit from this discussion? Share this article with them or in your professional community. Together, we can foster a more ethical and fulfilling practice for all.
Resources:
Federal Bureau of Investigation. (n.d.). Health care fraud. U.S. Department of Justice. https://www.fbi.gov/investigate/white-collar-crime/health-care-fraud
Braun, S. A., & Cox, J. A. (2005). Managed mental health care: Intentional misdiagnosis of mental disorders. Journal of Counseling & Development, 83(4), 425-433. https://onlinelibrary.wiley.com/doi/abs/10.1002/j.1556-6678.2005.tb00364.x
Lake, E. (2023). Intentional Misdiagnosis and Ethical Considerations of Mental Health Counselors Working with Managed Care (Doctoral dissertation, University of South Dakota). https://www.proquest.com/openview/1956f195bcfc90e19cc5e5e9c04c3b27/1?pq-origsite=gscholar&cbl=18750&diss=y
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