This is open enrollment season for Medicare Advantage (MA) plans, and the public is being inundated with celebrity TV ads promising expanded benefits and low or no premiums and urging viewers to choose a Medicare Advantage plan now, with no mention of the option of traditional Medicare plus a “Medigap” supplement plan. So, what is Medicare Advantage and how does it work?

Medicare Advantage is a privatized form of Medicare. Instead of Medicare paying doctors and hospitals directly, it pays an insurance company intermediary a fixed amount per member and the insurance plan negotiates payment rates with providers of care. Unlike regular Medicare, MA plans are managed care plans and often use restricted networks of doctors and hospitals and they can impose prior authorizations and formulary restrictions.

So how can they offer expanded benefits and low or free premiums? They market to the healthy with gym memberships and other perks, and they often restrict their formularies and physician networks to discourage patients with expensive conditions from joining or staying in the plan. This is called “cherry-picking” and “lemon dropping,” and it is a consequence of per-member pre-payment with the opportunity to profit or lose if less or more is spent on health care than the capitated amount. The strongest determinant of financial success is securing a favorable risk pool of healthier than average subscribers.

Medicare added risk adjustment, which is intended to pay more for sicker, “higher risk” members so as not to discourage covering sicker people. The initial formula was based on demographics such as age, sex, and income, but it only predicted about 2% of the variability in cost and failed to deter “cherry-picking.”

In 2004, Medicare added diagnoses to their risk adjustment formula, and this improved its accuracy from 2% to 12% of cost variability. This is still way too inaccurate to discourage cherry- picking, and it introduces a great new way for MA plans to game payment — upcoding!

The MA plans soon discovered that by persuading their network doctors to give patients the most severe diagnoses they possibly could, they could rake in a lot more money. If a patient is diagnosed with diabetes, obesity, and mild heart failure, Medicare might pay the MA plan $9,000 per year, but if the diagnoses are changed to “morbid obesity,” “diabetes with retinopathy,” “chronic obstructive pulmonary disease,” and a “stage 3 ulcer,” their payment jumps to $32,000 per year.

The MA plans soon deployed representatives to patient homes and doctors’ offices looking for any justification they can find to inflate diagnoses. Some have resorted to using hints in the patient’s record to add diagnoses that were never given by a doctor. Even worse, if a patient leaves a MA plan to go back to regular Medicare and tries to buy a “Medigap” supplement, the Medigap plan can hold their inflated diagnoses against them and charge them more, even if the diagnoses are not real.

Recent business news articles have reported multiple whistleblower complaints by employees against MA plans for fraudulent upcoding, and DOJ is now investigating MA plans run by Kaiser, Cigna, Anthem, United Health Group, Sutter, Humana and Aetna for widespread Medicare fraud, to the tune of $30 billion per year at the expense of the Medicare Trust Fund.

A healthy risk pool does not cost the plan too much to insure, and the MA plan can report favorable “quality” measures because healthier people have better outcomes. They can then easily afford gym memberships and extra benefits and low premiums and still make huge profits by billing Medicare for inflated diagnoses.

Stephen B. Kemble, M.D., is a past president of the Hawaii Psychiatric Medical Association and of the Hawaii Medical Association