The Billing Gap Nobody Fixed
Medicare Advantage, the privatized alternative to traditional Medicare that now covers more than half of all Medicare enrollees, has carried a well-documented overpayment problem for years. Private insurers collect per-member monthly payments from the federal government based on how sick their enrollees are projected to be. The sicker the patient pool looks on paper, the higher the payment. That formula created a predictable incentive: make patients look sicker than they are, collect more money, and hope auditors never catch up.
Now they are catching up – or at least trying to.
The Centers for Medicare and Medicaid Services has renewed its push to recover billions in overpayments through a process called Risk Adjustment Data Validation, or RADV audits. After years of delayed enforcement and legal battles that let insurers operate in a comfortable gray zone, federal regulators are pressing forward with audit findings that could force major insurers to return substantial sums to the government. The industry is pushing back hard, and the outcome will shape how much taxpayer money stays with private health plans versus returning to the federal treasury.
How the Risk Adjustment System Gets Gamed
Risk adjustment was designed as a fairness mechanism. Insurers covering sicker, higher-cost patients should receive more funding than those covering healthy retirees who rarely need care. In practice, the system depends on diagnostic codes submitted by doctors and insurers to CMS, and those codes are only as accurate as the people entering them. What regulators found, across multiple audit cycles, is that insurers were routinely submitting diagnosis codes that made their patient populations appear more ill than medical records could support. Codes for chronic conditions would appear in a payment submission without appearing in actual treatment records. The government paid for complexity that was never actually treated.
The mechanism is sometimes called “chart chasing” – where insurers send nurses or contractors to review patient records specifically looking for any diagnosis that could be added to a billing submission, even if that condition played no role in the patient’s actual care that year. A passing mention of diabetes in a chart five years ago, never actively managed, could become a diagnosis code that inflates the next payment cycle. CMS has known about this pattern for over a decade. The problem is that auditing millions of records across hundreds of health plans is slow, expensive, and legally contested at every step.
A major complication in the clawback effort has been a methodological dispute over how extrapolation works. CMS audits a sample of medical records, finds a certain error rate, and then wants to apply that error rate across an insurer’s entire enrollment population – which is the standard way government audits recover large-scale overpayments. Insurers successfully argued for years that CMS couldn’t extrapolate findings beyond the audited sample itself, which kept recovery amounts artificially small. A 2023 final rule attempted to close that loophole, but litigation continues.
Billions at Stake, and a Industry That Fights Back
The dollar amounts involved are not trivial. The Government Accountability Office has previously estimated that Medicare Advantage overpayments run into the tens of billions annually, driven primarily by diagnosis coding differences between how insurers code patients versus how traditional Medicare would code the same individuals. Whether any single figure is precisely accurate matters less than the scale: this is a structural overpayment built into the program’s architecture, not a handful of bad actors submitting fraudulent claims.
Major insurers – the same companies that dominate Medicare Advantage enrollment – have lobbied aggressively against aggressive RADV enforcement. Their argument is that the audit methodology is flawed, that retrospective clawbacks create financial instability, and that overpayment estimates don’t account for underpayments that offset the gap. CMS has largely rejected those arguments in its formal rulemaking, but the lobbying has been effective at slowing implementation. Years passed between audit cycles being completed and final payment demands being issued, during which insurers continued collecting at the same rates.
The political dimension matters here. Medicare Advantage is enormously popular with enrollees, who often receive additional benefits like dental and vision coverage not included in traditional Medicare. Any enforcement action that destabilizes a major insurer’s Medicare Advantage business carries real political risk, and both parties have constituencies in the program. That popularity has functioned as a kind of political shield around the program, making it difficult for regulators to act aggressively even when the audit findings clearly support doing so.
What Comes Next Won’t Be Simple
CMS has signaled it intends to move forward with RADV audit settlements covering contract years going back to 2011, which means some insurers could be facing repayment demands for business they wrote well over a decade ago. The legal fights are not over – at least one major insurer has sued to block extrapolation methodology – and courts will likely have the final word on how aggressively the government can recover. Meanwhile, new contract years continue to generate new payments under the same risk adjustment system, meaning the overpayment gap continues to accumulate while the old one gets litigated. The federal government is essentially trying to drain a tub while the faucet stays on.
