Health Care Manag Sci DOI 10.1007/s10729-013-9247-x Computer-aided auditing of prescription drug claims Vijay S. Iyengar · Keith B. Hermiz · Ramesh Natarajan Received: 19 March 2013 / Accepted: 18 June 2013 © Springer Science+Business Media New York 2013 Abstract We describe a methodology for identifying and ranking candidate audit targets from a database of prescrip- tion drug claims. The relevant audit targets may include various entities such as prescribers, patients and pharma- cies, who exhibit certain statistical behavior indicative of potential fraud and abuse over the prescription claims dur- ing a specified period of interest. Our overall approach is consistent with related work in statistical methods for detec- tion of fraud and abuse, but has a relative emphasis on three specific aspects: first, based on the assessment of domain experts, certain focus areas are selected and data elements pertinent to the audit analysis in each focus area are identi- fied; second, specialized statistical models are developed to characterize the normalized baseline behavior in each focus area; and third, statistical hypothesis testing is used to iden- tify entities that diverge significantly from their expected behavior according to the relevant baseline model. The application of this overall methodology to a prescription claims database from a large health plan is considered in detail. Keywords Audit · Fraud · Abuse 1 Introduction The audit process for health care claims must take into account two somewhat conflicting concerns. On the one hand, health care costs must be controlled by identifying and eliminating error, fraud and waste in the claims settlement V. S. Iyengar · K. B. Hermiz () · R. Natarajan IBM Thomas J. Watson Research Center, P. O. Box 218, Yorktown Heights, NY 10598, USA e-mail: khermiz@us.ibm.com process. On the other hand, within reason, the claims review process should not inhibit or constrain legitimate medical professionals and patients from achieving the best possi- ble health outcomes based on the most effective treatments. This intrinsic dilemma is an understated yet overriding con- cern for the design and implementation of a computer-aided audit methodology for health care claims. Most computer-aided audit systems invariably rely on business rules of thumb or heuristics to discover instances of fraud and abuse, although this approach may have many limitations in the health care claims context. For instance, these heuristics are often formulated in an ad hoc fashion, and may not adequately incorporate relevant domain knowl- edge and data modeling expertise. Furthermore, a rigid application of these heuristics may be inappropriate in cer- tain situations, and may lead to a large number of claims reviews that will undermine the utility of the computer- aided audit process. Lastly, while this approach may be quite adequate for subverting the known or obvious patterns of fraud and abuse, it may be less than adequate for unantici- pated and emerging patterns, or for sophisticated “under the radar” schemes, since respectively, these either completely bypass or completely conform to the prevailing heuristics. In the light of these limitations, this class of computer-aided audit approaches may not have the required flexibility and effectiveness for the health care claims context. Many aspects of the investigative process for detecting fraud and abuse in health care claims are human inten- sive, and rely on the expertise of a small number of pro- fessionals with specialized knowledge and forensic skills. However, computer-aided audit techniques are increasingly being used to supplement the human-intensive effort, and in particular, may be part of a preliminary screening process to identify a smaller set of targets for detailed investigation and prosecution. The use of computer-aided audit techniques