A Trillion-Dollar “Advantage": How Private Insurers Are Bilking Medicare and Taxpayers

The idea behind Medicare Advantage was simple: Pay private insurance companies to enroll elderly patients instead of forcing those over 65 to use traditional government-run Medicare. The competition between insurance companies would incentivize them to lower their premiums and offer more benefits to attract customers, saving taxpayers billions of dollars and allowing them more freedom to choose their own health insurance.

Instead, deceptive practices by the insurance industry have turned Medicare Advantage into a cash cow that costs taxpayers 22% more than traditional Medicare (an extra $83 billion per year).

Once insurance companies receive their federal subsidies, they use a tactic called “favorable selection” to seek out customers they know are unlikely to use up the entire subsidy. Then, large chunks of the expense come from “upcoding” — insurers’ tendency to exaggerate how sick their patients are to bill the government extra money.

The Committee for a Responsible Federal Budget has estimated taxpayers will spend $1 to $1.4 trillion on upcoding and favorable selection from 2024 to 2033. That’s up to $140 billion per year. There are only six federal agencies that spend that much in their entire annual budget.

Upcoding

Medicare Advantage plans are reimbursed by the government based on how sick their patients are. A patient with a chronic condition will have higher medical bills than a healthy patient, so the government pays insurance companies extra money to cover the unhealthy patient through a process called risk adjustment.

Risk adjustment is needed for Medicare Advantage to function. Otherwise, private companies would control costs by simply refusing to cover patients with serious illnesses. But it also gives insurance companies a perverse incentive to exaggerate how sick their patients are. That’s where the trickery comes in.

Imagine that during a routine doctor’s visit, a patient complains of mild soreness in their left hand. The doctor might examine their hand, but as long as everything appears normal, they are unlikely to record such a minor complaint in their medical records.

A Medicare Advantage provider is more likely to seize the opportunity to increase the patient’s risk adjustment. They might record a note along the lines of, “This patient is showing early signs of arthritis.” The insurance company can then upcode the patient and earn extra money from the federal government by claiming it is needed to pay for future arthritis care.

Research suggests that United Healthcare, which covers 29% of Medicare Advantage patients, may be particularly guilty.From 2019 to 2023, United gave its patients risk scores that were 36% higher than scores from the nonprofit Alliance of Community Health Plans. United also received 42% of all overpayments to Medicare Advantage providers in 2021.

Favorable Selection

The deception does not end there. Medicare Advantage plans are subsidized based on how much their patients’ medical bills would cost under traditional Medicare. But the Advantage providers spend 11% less money to treat their patients, and then pocket the extra government funds.

Through favorable selection, Medicare Advantage plans intentionally seek out patients whose health costs will be overestimated by the government. For example, an insurance company in Memphis might know that some local doctors happen to charge unusually low rates for diabetes treatment. They will go out of their way to recruit patients with diabetes and claim a reimbursement from the government that is higher than necessary.

One potential solution is the Prompt and Fair Pay Act, introduced in the House this July by Texas Democrats Greg Casar and Lloyd Doggett. It would require Medicare Advantage plans to reimburse doctors at the same rate as normal Medicare, disincentivizing favorable selection.

Favorable selection also means doctors see lower profit margins for treating Medicare Advantage patients, because the Advantage insurance companies are legally allowed to pay doctors lower rates than traditional Medicare does for the same medical care. As a result, many no longer accept the insurance. A 2024 survey by the Healthcare Financial Management Association found that 35% of major health systems had dropped at least one Medicare Advantage plan, and another 45% were considering it.

That leaves Medicare Advantage patients with fewer options for care — the complete antithesis of the program’s intent. Ken Albert, CEO of the Maine-based healthcare nonprofit Andwell Health Partners, says many rural areas are approaching “crisis mode” with doctor shortages. According to Albert, patients in rural Maine wait up to six months just to get into primary care.

The problem will likely get worse after the Geographic Practice Cost Index adjustment expired on Sept. 30. The law required Medicare to reimburse rural doctors at a higher rate to incentivize doctors to open offices beyond city centers.

Conclusion

The federal government has not always been able to prove in court that upcoding and favorable selection reach the level of criminal fraud. In March 2025, the Department of Justice lost a $2.1 billion lawsuit against United Healthcare. Some smaller lawsuits have been successful, including ones against Cigna, Independent Health and more.

Regardless, Medicare Advantage enrollment has increased every year since at least 2007. Today, 34.1 million out of 62.8 million (55%) Medicare recipients use Medicare Advantage.

These practices only worsen the Medicare solvency crisis, one of the most important fiscal issues facing the country. Medicare will be underfunded by $52.8 trillion over the next 75 years. In 2024 alone, it cost $867 billion, almost 7% of all federal spending. Advantage payments accounted for 53% of it, or $462 billion.

Aside from astronomically raising taxes or the federal debt, the only solution is to decrease spending. Fixing the “advantage” private insurers have finagled is an obvious starting point.

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