This paper examines the tradeoffs of monitoring for wasteful public spending. By penalizing unnecessary spending, monitoring improves the quality of public expenditure and incentivizes firms to invest in compliance technology. I study a large Medicare program that monitored for unnecessary healthcare spending and consider its effect on government savings, provider behavior, and patient health. Every dollar Medicare spent on monitoring generated $24-29 in government savings. The majority of savings stem from the deterrence of future care, rather than reclaimed payments from prior care. I do not find evidence that the health of the marginal patient is harmed, indicating that monitoring primarily deters low-value care. Monitoring does increase provider administrative costs, but these costs are mostly incurred upfront and include investments in technology to assess the medical necessity of care.

We study a 2008 policy reform in which Medicare revised its hospital payment system to better reflect patients’ severity of illness. We construct a simulated instrument that predicts a hospital’s policy-induced change in reimbursement using pre-reform patients and postreform rules. The reform led to large persistent changes in Medicare payment rates across hospitals. Hospitals that faced larger gains in Medicare reimbursement increased the volume of Medicare patients they treated. The estimates imply a volume elasticity of 1.2. To accommodate greater volume, hospitals increased nurse employment, but also lowered length of stay.