Catching Them Red-Handed: Optimizing the Nursing Homes' Rating System

The Centers for Medicare & Medicaid Services (CMS) launched its nursing home rating system in 2008, which has been widely used among patients, doctors, and insurance companies since then. The system rates nursing homes based on a combination of CMS's inspection results and nursing homes' self-reported measures. Prior research has shown that the rating system is subject to inflation in the self-reporting procedure, leading to biased overall ratings. Given the limited resources CMS has, it is important to optimize the inspection process and develop an effective audit process to detect and deter inflation. We first examine if the domain that CMS currently inspects is the best choice in terms of minimizing the population of nursing homes that can inflate and minimizing the difficulty of detecting such inflators. To do this, we formulate the problem mathematically and test the model by using publicly available CMS data on nursing home ratings. We show that CMS's current choice of inspection domain is not optimal if it intends to minimize the number of nursing homes that can inflate their reports, and CMS will be better off if it inspects the staffing domain instead. We also show that CMS's current choice of inspection domain is only optimal had there been an audit system in place to complement it. We then design an audit system for CMS which will be coupled with its current inspection strategy to either minimize the initial budget required to conduct the audits or to maximize the efficiency of the audit process. To design the audit system, we consider nursing homes' reactions to different audit policies, and conduct a detailed simulation study on the optimal audit parameter settings. Our result suggests that CMS should use a moderate audit policy in order to carefully balance the tradeoff between audit net budget and audit efficiency.