Monitoring Healthcare Spending Generates Savings and Does Not Negatively Affect Patient Health

A forthcoming paper examining Medicare’s largest initiative to track for wasteful spending reveals that every $1 that the government insurance program spent on monitoring from 2011-2015 generated $24–$29 in government savings—a massive return on investment – without negatively affecting patient health. The study also finds that technology adoption to help hospitals make decisions about patient stays was a significant driver of these results.

Authored by health economist Maggie Shi, an assistant professor at the University of Chicago Harris School of Public Policy, the paper looked at Medicare’s Recovery Audit Contractor (RAC) program to assess its effects on government savings, provider behavior, and patient health. Shi reports that the majority of the government savings created by the RACs stem from its deterrence of future care, rather than from reclaimed payments from patient care already delivered. Shi finds no evidence that patient health is harmed as a result, indicating that the effort primarily deters low-value or unnecessary care.

“The extent to which Medicare should monitor for wasteful spending depends on the balance between the savings generated and the effects and costs imposed on patients and providers,” Shi explained. “These findings suggest that audits of Medicare substantially reduce unnecessary spending without causing harm to patients. This has important implications for policymakers considering these kinds of trade-offs.”

Through the RAC program, private auditing firms (“RACs”) conduct manual reviews of individual Medicare claims (“audits”) to identify and reclaim payments for unnecessary care. At the program’s peak, four percent of all hospital admissions – Medicare’s largest expenditure category – were audited, and one percent of all Medicare inpatient revenue was reclaimed through the RAC program. These savings resulted mostly from hospitals scaling back on short stays and stays with diagnoses associated with high Medicare payment error rates, such as  ambiguous diagnoses like chest pain or after elective procedures like joint replacements.

Shi extrapolated these effects to all US hospitals, calculating that the RAC program would have led to upwards of $9 billion in Medicare savings from 2011 to 2015. Shi further discovered that most of these savings resulted from hospitals having adopted “medical necessity checking” software, which cross-references electronic health records with payer rules to advise on the medical necessity of care for individual patients. Hospitals subject to more audits were more likely to adopt this software.

Despite the substantial savings, hospital administrative costs actually rose at RAC’s onset as investments like technology adoption contributed to a one-time spike that occurs in 2011, but levels off in later years. This suggests that technology adoption rather than compliance costs drove the additional costs. Hospitals incur an average of $178–218 in administrative costs for every $1,000 saved over the five-year period the study tracked. 

“These results suggest that monitoring can be a highly effective tool to improve compliance and to combat waste in Medicare and potentially in public spending more broadly,” Shi concludes.  “It’s clear, as well, that technology solutions have an important role to play, which decisionmakers should consider as they assess these kinds of economic trade-offs.”