To document the mechanism, scale, and regulatory failure of Medicare Advantage risk-score manipulation — a practice in which private insurers systematically add diagnosis codes to patient records to inflate reimbursements from the federal government, with estimated overpayments exceeding $30 billion annually.

Analysis of CMS Office of Inspector General audit findings, MedPAC (Medicare Payment Advisory Commission) annual reports, peer-reviewed health economics literature on risk-score gaming, Department of Justice False Claims Act settlements with Medicare Advantage plans, and investigative reporting cross-referenced with plan-level audit data.

Medicare Advantage is the private insurance alternative to traditional Medicare, currently covering more than half of all Medicare beneficiaries — approximately 33 million Americans. The federal government pays participating insurers a per-enrollee monthly premium calibrated to the health risk of their enrolled population: sicker patients generate higher payments.

This is the risk-adjustment system, and it is the mechanism through which approximately $30 billion per year is being extracted from the Medicare Trust Fund through what the federal government's own auditors have characterized as systematic overbilling.

The mechanism is called diagnosis code upcoding, and it works as follows. Medicare Advantage plans conduct in-home health assessments and chart reviews that are not connected to treatment decisions. Their purpose is to identify additional diagnoses that can be added to patient records to increase the patient's risk score.

These diagnoses increase federal payments to the insurer. Many of them are never treated, never followed up on, and sometimes medically questionable. The insurer gets paid for the diagnosis. The patient gets no additional care. The federal government gets a bill.

The scale is documented by CMS's own actuaries. A 2023 MedPAC report estimated that Medicare Advantage plans were overpaid by approximately $27 billion in 2021 relative to what traditional Medicare would have cost for the same population — roughly 22% above benchmark. The CMS OIG has completed audits of specific plans finding overpayment rates of 18-40% depending on the plan.

UnitedHealthcare, Humana, and Elevance Health have collectively faced billions in False Claims Act settlements and audit findings related to risk-score manipulation.

The regulatory response has been inadequate in ways that are not accidental. CMS has the statutory authority to conduct full audits of Medicare Advantage plans and recoup overpayments. For years it conducted only statistical extrapolation audits — a methodological choice that systematically underestimated overpayments.

When CMS finally moved to implement a Risk Adjustment Data Validation (RADV) rule that would have extrapolated audit findings across the full beneficiary population, the insurance industry sued. They also spent $30 million lobbying against the rule in a single year. The rule was repeatedly delayed.

The number that is genuinely mind-boggling, once you understand the mechanism, is this: the Medicare Advantage program is now more expensive per enrollee than traditional Medicare, in a program that was explicitly designed to save money through private sector efficiency. The Congressional Budget Office projected in 1997 that the private option would produce savings.

It has produced the opposite. The reason is not that private insurers are less efficient at delivering care. It is that they are extremely efficient at billing for diagnoses.

A health economist I know from Medellin — Catalina, who studies healthcare financing in Latin American mixed systems and has an encyclopedic memory for CMS regulatory footnotes that she deploys in conversation without warning, which is both impressive and slightly alarming — told me that the Medicare Advantage model is studied in her field as an example of how market-based mechanisms fail when the measurable output (diagnosis codes) decouples from the intended output (health).

She said a Colombian insurer tried something similar in the 1990s under the Ley 100 reforms, and the regulator shut it down within three years. She said this without apparent satisfaction, which I respected.