Encouraging Crime: Settlement Rewards Medicare Advantage Fraud

Imagine you rob a bank and steal $1 million. If caught, you lose all the money and face significant prison time; hence, that’s why you probably don’t want to rob a bank. But, what if the punishment for getting caught robbing the bank is that you get to keep half the money – $500,000 – and don’t face any prison time?

In fact, you don’t even have to admit that you committed any crime. All you need to do is give back half the money to the bank. In this scenario, you’d probably plan on robbing more banks. Stealing $1 million gives you $500,000 in profit.

This situation sounds ridiculous because it is. No sane legal system would reward bank robbers with half the money they steal. Unfortunately, the American legal system is not sane.

On January 14, the US Department of Justice (DOJ) announced a legal settlement with Kaiser Permanente – the health care consortium that both provides health care to patients while also offering health coverage – over “allegations that they violated the False Claims Act.”

More specifically, the DOJ went after Kaiser Permanente for a widely reported phenomenon in the Medicare Advantage program that has led to hundreds of billions of dollars in stolen taxpayer money.

Upcoding: How to Steal Billions

In Medicare Advantage, the federal government pays insurance companies like UnitedHealthcare, Aetna, Blue Cross Blue Shield, and other entities like Kaiser Permanente on a per capita basis. In other words, for every patient that enrolls in one of an insurance company’s plans, the government pays a lump sum to the company.

The insurers then use this money to cover health care expenses of their enrolled patients, and they keep the money they save as profit. The size of the lump sum – otherwise known as a capitated payment – differs from patient to patient based on various factors such as geography and how sick a particular patient is (risk adjustment).

Several academic studies, yearly estimates from the Medicare Payment Advisory Commission (MedPAC, an independent congressional agency), and multiplelawsuits against insurers by the DOJ show that insurance companies have lied about how sick their enrollees are in order to get higher payments. This theft is called upcoding, and it is when insurers scheme to improperly apply more diagnostic codes to their patients, making them appear sicker, and reaping more taxpayer money.

For 2025, MedPAC estimated $84 billion in stolen taxpayer dollars going to insurance companies in the Medicare Advantage program, with upcoding accounting for $40 billion (46.6 percent). The remaining $44 billion comes from favorable selection – the practice of insurers hunting for healthier patients who require less health care spending.

Based on MedPAC’s estimates, the Committee for a Responsible Federal Budget estimated that taxpayers will overpay insurance companies by $1.2 trillion over the next decade (2025-2034). For reference, the Trump administration and congressional Republicans cut Medicaid by slightly under $1 trillion over the next decade as part of their major legislative victory last year, the “One Big Beautiful Bill.”

However, MedPAC projections for overpayments have decreased following the adoption of a new model (V28) meant to improve risk-adjusted payments. Compared to the $84 billion estimate for overpayments in 2025, the 2026 preliminary estimate is $76 billion.

In the case of Kaiser Permanente, the DOJ alleged that the company knowingly stole $1 billion from the federal government from 2009-2018 as part of a scheme to pressure physicians to add unnecessary diagnostic codes to make their patients appear sicker. According to the DOJ press release announcing the legal settlement:

“The United States … alleged that Kaiser set aggressive physician- and facility-specific goals for adding risk adjustment diagnoses. It alleged that Kaiser singled out underperforming physicians and facilities and emphasized that the failure to add diagnoses cost money for Kaiser, the facilities, and the physicians themselves. It also alleged that Kaiser linked physician and facility financial bonuses and incentives to meeting risk adjustment diagnosis goals.”

The reason the DOJ refers to the behavior as allegations is that the legal settlement does not include Kaiser Permanente admitting any guilt: “The claims resolved by the settlement are allegations only and there has been no determination of liability.”

Rather than face any criminal liability, the DOJ had Kaiser pay the government back to “resolve the allegations.” But rather than pay more than $1 billion to punish the company or exactly the amount of money Kaiser stole, the DOJ agreed to have Kaiser Permanente pay $556 million, roughly half the money the company collected through illegal behavior. In other words, the bank robber got to keep half the money they stole as profit while facing no criminal liability.

However, the situation gets worse regarding the DOJ’s ability to enforce the law. The department did not itself catch Kaiser Permanente in its upcoding operation; rather, several whistleblowers from the company reached out to law enforcement. The first whistleblower – Ronda Osinek – filed her case in late August 2013. Thus, not only did the legal settlement allow Kaiser Permanente to keep hundreds of millions in illegal, ill-gotten profits, but it took the DOJ over 12 years from the first whistleblower filing to conduct such “enforcement.”

Unfortunately, this situation is not unique. Other enforcement actions involving insurance companies conducting upcoding schemes have similarly involved payments less than the amount of money stolen. And the DOJ has resolved cases with pharmaceutical companies for illegally marketing products that killed and injured Americans on top of earning the companies exorbitant profits exceeding any fines.

It is one task to write a law that makes behavior illegal, and a potentially greater one to enforce it –  especially when the perpetrators are powerful corporations with extensive resources to hide their behavior, influence policymakers, and fight legal battles. Thus, it is critical for efficient governance that the laws don’t simply allow corporate misdeeds but prevent them.

Court cases, government reports, academic studies, and more have repeatedly shown that insurance companies in the Medicare Advantage program overbill the government. Congress created this privatized version of Medicare to supposedly increase efficiency and save money compared to traditional Medicare, which the government directly administers. Yet, Medicare Advantage has never saved money.

The methods for insurers to steal taxpayer dollars are clear: enrolling healthier patients who require less spending to cover and making them appear sicker than they actually are to get higher government payments.

What Could Stop This Corruption?

Rather than relying on DOJ enforcers to eventually after years reach an underwhelming legal settlement, policymakers can directly stop the mechanism of the theft. For example, the bipartisan No UPCODE Act would change how the government calculates the amount of money it pays insurers to prevent upcoding.

However, it is unclear to what extent policymakers can succeed in stopping the for-profit insurance giants that dominate Medicare Advantage from finding any means possible to exploit loopholes and steal taxpayer money. For example, the V28 model that changed risk-adjusted payments looks to have only slightly reduced overpayments. As MedPAC Commissioner Scott Sarran told Healthcare Dive, Medicare Advantage “creates irresistible incentives to play the game … You have to do it as a plan in order to be competitive.”

Other countries’ systems of universal health care achieved through government-supported private insurance (similar to Medicare Advantage) rely on non-profitinsurance companies. Thus, a stronger method to prevent profit-seeking behavior is to bar for-profit actors from the Medicare Advantage program, where taxpayer money is meant to finance health coverage for the elderly and disabled.

At the same time, policymakers could simply eliminate Medicare Advantage given that traditional Medicare already does not include for-profit insurers because the government directly provides coverage. Traditional Medicare saves money and is significantly more efficient than Medicare Advantage, and it has several significant benefits for patients. For example, Americans enrolled in traditional Medicare do not have to worry about restricted provider networks as exist in Medicare Advantage and private insurance overall given that 98 percent of non-pediatric physicians accept traditional Medicare.

There are financial downsides for patients with traditional Medicare, given that there is no cap on out-of-pocket expenses as the government requires in Medicare Advantage. Additionally, traditional Medicare does not offer supplemental coverage like the vast majority of Medicare Advantage plans do (even if the quality of such coverage may be poor). However, the amount of money that insurance companies steal from taxpayers can cover the cost of providing a $1,000 annual cap on out-of-pocket expenses and offer supplemental benefits such as vision, dental, and hearing coverage.

Ultimately, the current situation is not remotely sane, as it has federal agencies serving as police officers who are signing agreements with corporate bank robbers to allow them to keep half the taxpayer money they stole as profit while facing no criminal liability. This lack of enforcement only encourages further illegal activity by informing bad actors that they can profit from breaking the law without real consequences.

If policymakers want to put an end to the theft, they need to tackle the Medicare Advantage program at its root to prevent illegal behavior.

This first appeared on CEPR.

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