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How Medicare can save $500 billion

A privately managed offshoot of the government’s health insurance program appears far costlier than it needs to be.

The official US government Medicare handbook for 2020.Wayne Partlow/Associated Press

In 2021, the United States settled a lawsuit against California health care provider Sutter Health for $90 million. According to the lawsuit, Sutter siphoned government money by falsely labeling temporary conditions as chronic, pressuring physicians to add unnecessary conditions to charts, and even revising patient records behind doctors’ backs.

Sutter’s alleged misrepresentation of its patients’ health isn’t isolated. So-called “upcoding” for Medicare Advantage (MA) beneficiaries costs the federal government an estimated $10 billion to $50 billion each year. But upcoding and other forms of fraud are just a small slice of the waste happening in MA, a privately managed, publicly funded alternative to traditional Medicare for older Americans. Over the next decade, taxpayers stand to lose hundreds of billions of dollars due to faulty rules that overpay MA plans and providers.


Some rules are baked into Medicare and will require congressional action to change. But according to our latest research, the Centers for Medicare & Medicaid Services (CMS) has immediate authority to save $500 billion over the next decade by adjusting the way it estimates MA patients’ health risks. On the whole, MA beneficiaries are less sick than plans claim and healthier than people in regular Medicare, meaning CMS can cut costs without cutting care.

Like Social Security, Medicare faces a long-term financial crisis. It is in danger of depleting its trust fund by 2031, putting millions of vulnerable Americans at risk. While traditional Medicare is a big part of the problem, waste in MA is a rapidly growing issue. The program has been around for decades, but over the past 13 years, the share of Medicare beneficiaries who choose to enroll in MA has doubled — from only a quarter in 2010 to over half today.

MA plans are often a win-win for patients and private insurers. The patients receive good coverage, and the insurers make a good profit. However, this all adds up to a big loss for the government and taxpayers. The privatization of public health under MA promised gains in innovation and efficiency that have largely failed to materialize. Improvements in health outcomes and efficiency that were found earlier appear to be dwindling. Instead, plans demonstrate their greatest creativity in figuring out how to squeeze more money out of the government.


But these taxpayer losses aren’t inevitable. They’re the product of three big choices by CMS that allow profiteering to go unchecked.

First, MA plans and providers are often tempted to make patients appear sicker than they really are. While upcoding will probably always be an issue, certain features of the MA program make it especially easy to pull off. For instance, the insurance plans use what are known as chart reviews to change or add to a physician’s diagnoses, transforming asthma into chronic obstructive pulmonary disorder or slight issues with weight into obesity and high blood pressure. Plans also conduct health assessments in people’s homes that exaggerate diseases. Our research found that chart reviews and home health assessments lead to annual overpayments of $2.3 billion and $11.8 billion respectively.

Given how vulnerable data from these sources are to manipulation, CMS should change its policies to reject diagnoses that come from chart reviews or home assessments — or set a limit on them. In general, CMS can preemptively adjust for bad behavior by giving less weight to the diagnoses that the MA plans report. Instead they can prioritize diagnoses that come from health care providers who directly examine patients.


Second, CMS can do more to punish bad behavior. The agency audits only a few plans each year. It recently took a step in the right direction and announced it would assume that overpayments found among a portion of plan beneficiaries apply to all participants in the plan, a change that could claw back $4.7 billion over the next decade.

But CMS still has a huge backlog of audits and appeals. Shifting resources to enforcement could generate returns for the agency as it uncovers wrongdoing. The IRS provides an example: It gets back as much as $12 for each dollar it spends on auditing. Research shows that with more aggressive enforcement, CMS could save over $10 billion each year. Increased enforcement would also deter plans by making it clear that fraudulent behavior will be discovered and overpayments recouped.

Finally, and perhaps most important, CMS must account for the fact that the MA patient population is, on the whole, healthier than the pool of traditional Medicare beneficiaries: Sicker beneficiaries tend to favor traditional Medicare because it has fewer restrictions on care. The government uses data from Medicare to set benchmark rates for Medicare Advantage. CMS then pays MA plans a fixed amount of money based on these benchmarks — regardless of how many services each patient actually ends up using. This formula results in overpayments that may be costing taxpayers over $40 billion annually. CMS must consider patient health differences when setting reimbursement rates.


A page on Medicare Advantage plans from the 2019 US Medicare Handbook.Pablo Martinez Monsivais/Associated Press

Neither policymakers nor health care experts like us anticipated that Medicare Advantage would grow so rapidly. America’s public health care system was not built for this scenario. But we believe MA can be renovated instead of being demolished.

CMS should take immediate action to stop lining insurers’ pockets with taxpayer money. Our latest research suggests the steps outlined above and related tweaks can save up to $500 billion over the next decade without significant cuts to services. These changes could even free up funds for CMS to expand benefits for traditional Medicare. Each dollar saved will extend the clock for us to develop longer-term solutions to Medicare’s looming financial crisis, including further changes to how MA plans are structured and funded.

MA plans will fight back. An industry trade group, for example, called the government’s new audit rule “unfair, inappropriate, and legally impermissible.” The plans will try to weigh down important reforms much as they weigh down patients’ charts with exaggerated diagnoses. But the diagnosis for Medicare as a whole should convince us to fight back. Overpayments will be terminal if we don’t stop them.

Andrew Ryan and David Meyers are professors of health services, policy, and practice at the Brown University School of Public Health.