Audit Policies Under the Sentinel Effect: Deterrence-Driven Algorithms

Auditing has been commonly used in major industries including healthcare to curb fraudulent activity. In addition to the direct benefits of auditing, data collected in this study through interviews, a focus group, and surveys of medical practitioners and audit experts indicate that auditing has a second-order effect through which audit information diffuses in the practitioner network triggering deterrence. This second-order effect, referred to as the “sentinel effect,” has been overlooked by auditing algorithms that have traditionally focused on detection of fraudulent claims or practitioners only. The authors present an algorithm that supports a deterrence-driven audit approach in the presence of audit and sentinel effects. Simulation results, augmented with real practitioner data from two counties in Florida, indicate the potential of such algorithms at reducing excess costs, especially when waste and abuse are prevalent. Management insight: Savings from audit arise as a result of both the direct audit effect and the sentinel effect, which causes deterrence among people who might hear about audits. Insurance providers could therefore consider connectedness, conditional on high enough risk scores, when selecting practitioners for audit. Through the sentinel effect, large numbers of practitioners receiving the audit information are likely to improve billing behavior, ultimately maximizing deterrence from waste and abuse and reducing overall healthcare costs.