The Effects of Audits and Fines on Upcoding in Neonatology

Abstract

Upcoding is a common type of fraud in health care. Nevertheless, what has not yet been understood well is how audit policies need to be designed to cope with upcoding effectively. We provide causal evidence on the effect of random audits with different probabilities and financial consequences. In a controlled laboratory experiment, we mimic the decision situation of obstetrics staff members to report birth weights of neonatal infants. The subjects' payments depend on the reported birth weights and follow a typical non-linear remuneration scale which favors upcoding. Behavioral results show that upcoding declines significantly when audits are coupled with fines, while audits without financial consequences do not significantly reduce upcoding. Increasing the audit frequency further reduces detectable upcoding. However, upcoding that cannot be detected by an audit increases when audits become more frequent. Implications for audit policies are discussed.