Audit Policies Under the Sentinel Effect: Deterrence-Driven Algorithms

Fraud, waste, and abuse are significant problems in major industries such as healthcare, particularly when third-party payers such as Medicare are involved. Auditors looking for fraudulent activities use scoring models to select practitioners or claims that are likely to be fraudulent. In addition to the direct benefits of the audit effect, which evokes a response by auditing fraudulent individuals, the sentinel effect provides second-order benefits. Yet current auditing algorithms do not take the sentinel effect into account. In this paper, we present an algorithm that supports a deterrence-driven audit approach in the presence of audit and sentinel effects. Our results indicate that a significant reduction in healthcare excess costs can be achieved, while maintaining fairness, when auditing policies take sentinel effects into account.

The online appendix is available at https://doi.org/10.1287/isre.2019.0841.