The Medicare Advantage Program: Public Money & Private Insurance Companies

When I investigated and litigated False Claims Act (FCA) cases at the U.S. Department of Justice (DOJ) over the last 10 years, I was often surprised by just how little I knew about the broad array of government agencies and the intricacies of how those agencies’ various programs work. Sometimes, I was not even aware of a particular government program’s existence until I was charged with investigating allegations of fraud against it. Other times, I thought I understood a government program but learned that it works in an unexpected way. One example of a surprising feature of a well-known government program is the Medicare Advantage program (also known as Medicare Part C).

What is Medicare Advantage?

People think of Medicare as a health insurance program run by the government. Actually, most of the Medicare program is outsourced to private health insurance companies operating myriad Medicare Advantage plans. Medicare Advantage is a program run by the Centers for Medicare & Medicaid Services (CMS) that allows private insurance companies to contract with the government, receiving Medicare trust fund dollars in exchange for providing health insurance coverage to Medicare beneficiaries. Medicare beneficiaries may opt out of traditional Medicare (Parts A & B) and choose to receive their health insurance coverage through private health plans, known as Medicare Advantage Organizations. The government has little direct oversight of these private health plans and relies on them to faithfully carry out the Medicare Advantage program.

This privatization of Medicare has spurred evolving allegations of massive fraud schemes and FCA cases that are just beginning to proliferate, as some companies taking part in Medicare Advantage engage in business practices that, in the government’s view, improperly inflate the payments these private Medicare players receive from the government. During my tenure at the DOJ, I conducted investigations in several sealed matters involving Medicare Advantage plans and providers, and was part of the litigation team in the DOJ’s ongoing FCA case against the country’s largest provider of Medicare Advantage plans: United States of America ex rel. Benjamin Poehling v. UnitedHealth Group, Inc., (C.D.Cal. 16-08697).

Pursuing cases alleging false claims in the Medicare Advantage program has been one of the DOJ’s top FCA priorities over the last few years. The DOJ touted $200 million in Medicare Advantage settlements in 2023 and called Medicare Advantage FCA enforcement “critically important.” Just this past Friday, the DOJ announced a $98 million FCA settlement with Independence Health for allegedly improperly increasing payments to its Medicare Advantage plans.  In November 2024, the Department of Health and Human Services (HHS) reported that FY2023 Medicare Advantage payments were improperly inflated by over $19 billion, and in October 2024, the HHS Office of Inspector General (HHS-OIG) reported that two specific questionable Medicare Advantage practices[1] improperly inflate Medicare Advantage payments by $7.5 billion annually. All of this activity underscores the government’s view of Medicare Advantage practices aimed at increasing payments and reinforces that Medicare Advantage is likely to continue to be a top FCA enforcement priority going forward.

The Growth of Medicare Advantage

As of 2024, 54% of all Medicare beneficiaries are enrolled in Medicare Advantage plans instead of traditional Medicare, up from 19% in 2004. If current trends continue, two thirds of all Medicare beneficiaries will be enrolled in Medicare Advantage plans by 2034.

Source: Kaiser Family Foundation. 

The growth of Medicare Advantage enrollment corresponds to a large and growing slice of federal spending to the health insurance companies that run Medicare Advantage plans. CMS now pays more money to Medicare Advantage plans than it spends on traditional Medicare, and in 2023, CMS paid more than $450 billion to Medicare Advantage Organizations.  That spending is quickly growing and will soon eclipse $1 trillion per year.  Notably, Medicare Advantage enrollment is highly concentrated among a small number of large companies.  The top 4 companies account for nearly 75% of the entire Medicare Advantage population.

Source: Kaiser Family Foundation.

How does the Government pay Medicare Advantage Organizations?

The way that federal funds flow through the Medicare Advantage system differs from traditional Medicare in important ways, affecting the shape and nature of allegations of fraud and FCA cases in Medicare Advantage. In traditional Medicare, when a Medicare beneficiary visits a doctor for treatment or medical services, the federal government (through CMS) directly pays that doctor for each service performed and billed to Medicare. In Medicare Advantage, a private health insurance company or Medicare Advantage Organization contracts with CMS, promising to provide beneficiaries with the same level of healthcare coverage they would receive in traditional Medicare. The Medicare Advantage Organization then pays doctors who treat their beneficiaries, and CMS in turn reimburses the Medicare Advantage Organization with federal money from the Medicare trust fund.

Medicare Advantage Risk Adjustment

CMS pays Medicare Advantage Organizations a monthly fee per beneficiary enrolled in that organization’s plan. Importantly, rather than paying Medicare Advantage Organizations the same amount for each beneficiary, CMS payments to Medicare Advantage Organizations are “risk adjusted” – reimbursing MA plans more for covering sicker (riskier) beneficiaries, and less for covering healthier (less risky) beneficiaries. The precise way Medicare Advantage Organizations report and certify beneficiary health status to CMS is byzantine. The model that CMS uses beneficiary health status to “risk adjust” the payments it makes to Medicare Advantage Organizations is complicated.  Both will be discussed in more detail in a future blog, but the purpose of this system is easy to understand without going too far into the weeds.

Risk adjustment provides an incentive for Medicare Advantage Organizations to cover sick patients, instead of cherry-picking only the healthiest Medicare beneficiaries. This system provides increased Medicare Advantage payments corresponding to the increased average cost of care associated with sicker beneficiaries. From the Medicare Advantage Organizations point of view, reporting “sicker” patients to CMS means increasing revenue.

Perverse Incentives?

One of the unintended effects of risk adjustment is providing a massive incentive to Medicare Advantage Organizations to misrepresent their beneficiaries’ health status as sicker than they are. Medicare Advantage Organizations employ a variety of business practices to generate increased revenue in reporting beneficiary health status, most notably health risk assessments and chart reviews. In the government’s view, these practices often amount to little more than knowingly misrepresenting Medicare beneficiaries as sicker than they are to improperly inflate payments from the government. And that is the type of conduct that has increasingly been the subject of FCA cases, as we will discuss in more detail in future blogs.

[1] The HHS-OIG specifically points its finger at the use of health risk assessments and health risk assessment-linked chart reviews, both of which will be discussed in more detail in a future blog.