Medicare Billing Audits: Are They Worth It, Or Is the Cure Worse Than the Disease?


Health care in the United States is frequently highlighted as the most expensive of anywhere in the world. An important, yet often overlooked, portion of these costs comes from administrative activities such as billing and processing of medical claims. Various studies over the past few decades have estimated that these costs range from 20 to 30 percent of total US health care spending, a staggering figure considering that U.S. health care expenditures are measured in the trillions of dollars. One component of these administrative costs is claims audits conducted by payers (like the Centers for Medicare & Medicaid Services; CMS) with the purpose of detecting and preventing improper payments such as fraud, waste, and abuse.

These audit programs can be expensive to implement, but conventional wisdom has been that they recover more in improper payments than they cost. However, several administrative challenges have cropped up in recent years that have dramatically increased the costs of these activities. It is therefore important to consider whether these claims audit programs as currently designed are still an efficient use of Medicare program funds, or whether we should rethink our approach as a nation.

A perfect storm of misaligned incentives and imperfect information

Billing claim audits are primarily meant to ensure that providers are caring for patients and billing in a manner allowed under Medicare’s regulations. These regulations have two purposes:

  • to tell providers how to bill for a service
  • to ensure that providers treat patients in a high quality and cost-effective way.

Audits confirm this, and also help Medicare ensure that services provided were in fact medically necessary. However, the rules are at times vague on what constitutes medical necessity.

The audits are conducted by contractors acting on behalf of CMS, and clinicians working for these contractors are tasked with interpreting Medicare regulations and filling in gaps on a case-by-case basis. Further, while CMS identifies certain broad categories of claims of interest (e.g., short inpatient hospital stays), the review contractors cannot possibly audit every claim and are generally left to determine, by way of statistical analyses broadly described by CMS, which claims to audit. These decisions are made internally by each contractor, and though they are required to explain in detail their rationale for each overturned claim, changing regulations and changing contractors can leave providers unclear on exactly what is expected  of them. As past studies have shown, setting clear expectations can have an important impact on provider adherence to regulations.

The bigger problem from a cost perspective is the incentives inherent in the structure of the various audit programs. Review contractors are typically paid based on the amount of improper payments they recover. In other words, there’s a significant incentive for a contractor to overturn a claim. To combat this incentive, providers are allowed to appeal claims that they believe were overturned in error, and review contractors are not paid for denied claims that are overturned on appeal. However, the appeals process can be a lengthy one, during which the payments to providers are caught in limbo.

Still, aside from operational costs and potential litigation costs, there’s not much of a downside to submitting an appeal. The American Hospital Association (AHA) found that 45 percent of claim denials were appealed in the third quarter of 2016, with 60 percent  of those being overturned. As a result, in recent years a significant backlog of appeals has developed. CMS has attempted to reduce this by settling with providers for 60 percent of what they claim they’re owed. Over the past few years, 419,000 claims from 2,414 hospitals have been settled, totaling $1.78 billion in payments. The backlog, however, has persisted. AHA also filed a lawsuit challenging the government’s authority to withhold payments in this manner. In 2016 a federal judge ordered the U.S. Department of Health and Human Services (HHS) to clear their backlog of appeals by 2021. While progress has been made more recently in reducing the backlog, they do not anticipate being able to meet that deadline and are working with AHA to develop new approaches for clearing the backlog more quickly.

Is it worth it?

The short answer is it depends. Certainly, combating fraud and abuse is a worthy goal, and there will likely always be a need for some form of claim audit. From a purely financial perspective, it’d be very difficult to determine exactly how much has been spent on the current approach between the audits themselves, appeals, litigation, and other related activities. We therefore don’t know whether the full cost of the audits exceeds the amount recovered.

Bigger picture, however, it’s important to also consider the role programs like these have had in incentivizing more efficient and cost-effective care. For example, in a study several colleagues and I recently published, we find that instituting a new Medicare audit program significantly increased the likelihood that patients presenting in the emergency department with non-specific chest pain would be treated in a less costly observation stay instead of being admitted to inpatient care.

Billing regulations themselves should be, and often are, structured in a way that promotes evidence-based efficient and cost-effective care—though it can admittedly take them some time to catch up with the latest evidence. A regulation, however, is only as good as its method of enforcement, especially when it tells providers to choose a lower-revenue treatment. If audits of billing claims can successfully shift long-term practice patterns towards more cost-effective, evidence-based care, they may result in savings beyond simply funds they recover. This makes a compelling case for continuing these programs despite their limitations. Future efforts, therefore, should focus on realigning incentives to reduce waste and inefficiency, and maximize their return on investment.