Medicare Risk Adjustment Fraud

Last Updated on: 31st May 2025, 06:27 pm

Medicare Risk Adjustment Fraud Defense – What Federal Prosecutors Don’t Want You to Know

Back in 1985, Congress passed something called TEFRA – the Tax Equity and Fiscal Responsibility Act, and buried inside was a provision that would change how Medicare pays health plans forever. They created this thing called risk adjustment, where insurers get paid more for sicker patients. Sounds reasonable right? Well heres where it gets interesting – and dangerous for healthcare organizations. The system relies on diagnosis codes, and those codes translate directly into dollars. More codes, more money. And thats exactly where the fraud allegations start.

The way Medicare calculates these risk scores is actually pretty complex when you dig into the math. Every patient starts with a demographic score based on age, sex, disability status, and whether they’re in an institution. Then you add condition categories – things like diabetes, heart failure, cancer — each with their own numerical weight. A 70-year-old woman might have a base score of 0.436. Add diabetes with complications, thats another 0.318. Throw in congestive heart failure, and you’re looking at an additional 0.323. These numbers get multiplied by a base rate – lets say $800 per month – and suddenly that patient is worth $862 per month instead of $349. See how quickly the dollars add up? But wait, it gets more complicated. CMS doesn’t just add these numbers together simply. Theres interaction terms, hierarchies where certain conditions trump others, and community vs institutional factors. The CMS risk adjustment model has over 80 different condition categories, and the formulas change every year. Most healthcare executives dont actually understand how their risk scores translate to revenue — they just know higher scores mean more money. And that’s where the problems begin.

The $15 billion problem that nobody talks about – except the Office of Inspector General, who talks about it constantly.

Their 2020 report found that Medicare Advantage organizations received $15 billion in improper payments due to diagnosis errors. That’s not fraud necessarily – it includes mistakes, documentation issues, and yes, some intentional upcoding. But when you’re a prosecutor looking at those numbers, everything starts to look suspicious. They see patterns like sudden spikes in certain diagnosis codes, especially ones that pay well. Diabetic retinopathy diagnoses jumping 300% in one year? That raises eyebrows. Regional variations make it even more interesting. Plans in certain states consistently report risk scores 20-30% higher than the national average. Same demographics, same socioeconomic factors, but somehow their patients are much sicker – atleast on paper. Prosecutors love this data because its hard to explain away. They’ll pull Medicare claims data going back years, run statistical analyses, and look for outliers. If your organizations coding patterns dont match your actual patient population, you’ve got a problem.

Now let’s talk about what really happens when someone blows the whistle — because thats how most of these cases start.

Some coder or nurse or medical director gets uncomfortable with what theyre seeing and decides to file a qui tam lawsuit under the False Claims Act. The process is actually fascinating if you understand it. The whistleblower – called a relator in legal terms – files their complaint under seal. That means its secret, even from you. Federal authorities get 60 days to investigate, but they almost always ask for extensions. I’ve seen cases stay under seal for three, four, even five years while the FBI and OIG dig through records. During this time, you wont even know you’re being investigated. Agents might be interviewing former employees, pulling data from CMS, analyzing patterns. The relators attorney – usually some specialized qui tam firm — is feeding information to prosecutors, hoping to convince them to intervene. Why? Because if DOJ takes over the case, the relator gets 15-25% of any recovery. If prosecutors decline and the relator proceeds alone, they can get up to 30%. On a $100 million settlement, thats serious money.

The whistleblower protections are robust too. The False Claims Act has anti-retaliation provisions that make it illegal to fire, demote, harass, or discriminate against someone for reporting fraud. Violations can result in reinstatement, double back pay, and special damages. Some of our clients have paid millions just in retaliation claims, separate from the underlying fraud allegations.

And here’s the thing – even if the fraud claims are weak, the retaliation claims can still stick.

The data mining techniques that trigger audits are getting more sophisticated every year. CMS uses something called RADV – Risk Adjustment Data Validation – to audit a sample of patient records and then extrapolate error rates across your entire population. They pick 201 patients, find that 20% have unsupported diagnoses, and suddenly you owe millions. The extrapolation methodology is controversial – we’ve challenged it successfully in several cases — but its still their favorite tool. Beyond RADV, CMS and its contractors use predictive modeling to identify suspicious patterns. Auditors look for things like diagnoses that appear only during risk adjustment periods, conditions that require ongoing treatment but show no corresponding claims, and statistical impossibilities like every patient in a practice having the exact same combination of conditions. One client got flagged because 90% of their patients supposedly had protein-calorie malnutrition – a condition thats actually quite rare in the Medicare Advantage population. The cross-referencing with pharmacy data is particularly damaging. If you’re coding diabetes with complications but the patient isnt filling insulin prescriptions, that’s a red flag. Same with heart failure patients not taking diuretics, or COPD patients without bronchodilators. Federal data analysts are smart, and they have access to everything – medical claims, pharmacy claims, lab results, hospital records. Theyll build a complete picture of each patient and compare it to your coding.

When it comes to proving fraud, prosecutors need to establish several elements under the False Claims Act.

First is falsity – were the claims actually false? This isn’t as straightforward as it sounds. A diagnosis might be technically supported by documentation but still be false if it doesnt reflect the patients actual condition. We had a case where a physician documented “diabetes with complications” based on a single elevated blood sugar reading. Technically documented? Yes. Actually false? Prosecutors thought so. The knowledge element is where things get really interesting. DOJ doesn’t need to prove you specifically intended to defraud Medicare. They just need to show you acted with “reckless disregard” or “deliberate ignorance” of the truth. Thats a pretty low bar. If you should have known your coding practices were aggressive, if you ignored compliance warnings, if you incentivized staff based on risk scores – all of that can establish knowledge. We’ve seen cases where executives never touched a medical record but still faced personal liability because they created the environment that encouraged fraud.

Materiality became a bigger issue after the Supreme Courts decision in Universal Health Services v. Escobar.

Now prosecutors have to prove that the false information was material to Medicares payment decision. You’d think that would be easy with risk adjustment — higher codes equal higher payments, obviously material. But we’ve had success arguing that CMS pays claims even when it knows about coding problems, suggesting the issues arent really material. Its a nuanced argument that requires deep understanding of how Medicare actually operates.

The defense strategies that actually work aren’t what most healthcare executives expect. Forget about arguing that “everyone does it” or that the rules are confusing – judges have heard that before and theyre not impressed. What works is attacking the prosecutions evidence methodically. Their statistical sampling? Challenge the methodology. Their extrapolation? Point out the flaws. Their clinical conclusions? Bring in better experts. Good faith clinical judgment is a powerful defense when used correctly. If your physicians genuinely believed their diagnoses were accurate based on their clinical assessment, thats not fraud – even if they were wrong. Building these defenses means diving deep into medical records, interviewing physicians, understanding their thought processes. The key is showing that any errors were mistakes, not fraud. Documentation helps, but testimony is crucial. Physicians who can articulate why they made certain diagnoses, who can point to clinical indicators, who demonstrate genuine care for patients — juries respond to that. Challenging damages calculations is another critical strategy. Federal prosecutors love to throw around huge numbers – $50 million, $100 million, $500 million in alleged false claims. But their calculations often include legitimate claims mixed with allegedly false ones. Statistical sampling gets used to extrapolate from a small number of claims to your entire patient population, but sampling has rules. If they didnt follow proper statistical methodology, if their sample wasnt representative, if they cherry-picked the worst examples — we can get their damages theories thrown out or severely reduced.

Settlement dynamics in these cases are unlike anything else in white collar defense.

The Department of Justice has specialized teams that do nothing but healthcare fraud cases. They know the industry, they know the regulations, and they know how to pressure defendants. DOJ will start with an impossibly high demand – based on treble damages and maximum penalties under the False Claims Act. A $10 million overpayment becomes a $30 million liability, plus penalties of $11,000 to $23,000 per claim. Suddenly youre looking at $100 million or more. But heres what they don’t advertise – they want to settle. Trials are expensive, risky, and time-consuming for prosecutors too. Theyd rather get a guaranteed recovery than risk losing at trial. The key is understanding their pressure points. Are they worried about their legal theories? Do they have resource constraints? Is the relator pushing for quick resolution? Using this leverage helps negotiate better deals.

Corporate integrity agreements are often the most painful part of settlements.

Its not just about paying money – its about having federal oversight for the next five years. Independent monitors, required audits, employee certifications, hotlines, training programs — the compliance costs can run millions per year. Some organizations spend more on CIA compliance than they paid in the original settlement. Fighting hard to limit CIA terms or avoid them entirely matters. Sometimes paying more upfront is worth it to avoid ongoing oversight. The admission versus non-admission debate is crucial too. DOJ often wants admissions of wrongdoing, especially in big cases. But admissions can trigger exclusion proceedings, private lawsuits, and licensing issues. Pushing hard for non-admission settlements means arguing that our clients are settling to avoid litigation costs, not because they did anything wrong. Its a delicate negotiation that requires understanding both DOJ priorities and collateral consequences.

Let me tell you what really happens during a Medicare fraud investigation – because its not what you see on TV. First, you might get a subpoena or civil investigative demand. These are fishing expeditions, asking for years of records, emails, policies, audit results. Prosecutors want everything, and they want it yesterday. Miss a deadline or withhold documents, and youre facing obstruction charges on top of the fraud allegations.

Your employees will get contacted – usually at home, often without warning.

FBI agents are trained to be friendly, to make it seem like just a casual conversation. But everything your employees say can and will be used against you. Tell clients to institute a clear policy immediately upon learning of an investigation all employee interviews must go through counsel. Some employees will talk anyway, especially former employees with grudges. Federal agents will also send in undercover patients or auditors posing as consultants. They’re looking for evidence of ongoing fraud, trying to catch people in the act. One client had an undercover CMS contractor attend their risk adjustment training sessions, recording everything. Another had fake patients wearing wires during annual wellness visits. Its aggressive, but its legal, and it works. Executives making careless statements about “maximizing risk scores” or physicians being told to “find more diagnoses” – thats gold for prosecutors.

Meanwhile, your business is falling apart. Employees are scared, morale is shot, and everyones lawyering up. Key people start leaving – nobody wants to stick around for a federal investigation. Contracts get harder to negotiate because partners dont want to be associated with a company under investigation. Stock prices tank if youre publicly traded. The reputational damage often exceeds the financial penalties.

Heres what Spodek Law Group does differently in these cases.

First, we don’t wait for prosecutors to build their case – we build our own. Internal investigations we conduct are more thorough than what DOJ does. Interviewing every key witness, reviewing thousands of patient files, bringing in statistical experts, clinical experts, coding experts. When sitting down with DOJ, we know the case better than they do. Focus on the human element matters too. Prosecutors are people too, and they respond to compelling narratives. If we can show that our client is a good organization that made mistakes, thats different from a criminal enterprise. Highlighting the positive things – patient care initiatives, community benefits, employee satisfaction. Humanizing the organization and the executives makes a difference. Its harder to throw the book at someone when you see them as a person trying to do the right thing who got caught up in a complex regulatory scheme. Our approach to parallel proceedings is crucial too. Medicare fraud cases often involve multiple fronts – criminal investigation, civil False Claims Act, administrative actions, state investigations, private litigation. Each forum has different rules, different standards of proof, different potential outcomes. What you say in one proceeding can be used against you in others. Coordinating defense strategy across all fronts means making sure were not winning one battle while losing the war.

The timing of when to engage with prosecutors is critical.

Some lawyers advise staying quiet, hoping the investigation goes away. That rarely works in healthcare fraud matters. Others want to cooperate immediately, throwing the client on the governments mercy. Thats usually a mistake too. Taking a calibrated approach — engaging when we have something valuable to offer, holding back when silence serves our interests better. Every case is different, and cookie-cutter strategies dont work.

One thing that makes Medicare risk adjustment cases unique is the clinical complexity. These arent simple billing fraud cases where someone charged for services not rendered. These involve medical judgment, clinical documentation, coding interpretation. Federal experts will say one thing, our experts will say another. The key is making complex medical issues understandable to prosecutors, judges, and potentially jurors who dont have medical backgrounds. Spending enormous time and resources on expert witnesses is essential. Not just hiring them, but preparing them. Prosecutors will attack their credibility, their methodology, their independence. Experts who can withstand that scrutiny while explaining why our clients coding practices were reasonable are crucial. Sometimes that means physicians who can testify about clinical judgment. Sometimes its statisticians who can poke holes in DOJs sampling. Sometimes its former CMS officials who can explain how the agencys own guidance created confusion.

The documentary evidence in these cases is overwhelming.

Millions of pages of medical records, emails, policies, audit reports. Federal attorneys will cherry-pick the worst examples, taking emails out of context, highlighting problematic patient files while ignoring the thousands that were coded correctly. Countering this by presenting the full picture works. Yes, there might be some bad emails, but look at the hundreds showing good faith compliance efforts. Yes, some diagnoses might be questionable, but the vast majority are rock solid.

The endgame in Medicare fraud defense is always about leverage. Trials are rare – maybe 2% of healthcare fraud matters go to trial. But the credible threat of trial is what drives reasonable settlements. DOJ needs to believe were willing to fight, that we have strong defenses, that a jury might side with us. Thats why preparing every case as if its going to trial matters, even though most settle. When trials happen, its a massive undertaking. Healthcare fraud trials can last months. Prosecutors will parade witness after witness – patients who dont remember receiving services, former employees with axes to grind, experts with impressive credentials. Being ready for all of it is essential. Trial teams include not just lawyers but consultants, jury experts, graphics specialists, technology managers. Modern trials are multimedia presentations, and juries expect clear, compelling narratives.

The sentencing phase is where having experienced counsel really matters.

The federal sentencing guidelines for healthcare fraud are harsh. The loss amount drives the guidelines, and in risk adjustment cases, the alleged loss is usually high. A $10 million loss amount puts you at offense level 26 before any adjustments. Thats 63-78 months in prison for a first offender. But theres room to maneuver. Arguing for downward departures based on extraordinary acceptance of responsibility, cooperation, personal circumstances works. Keeping executives out of prison in cases involving hundred-million-dollar losses is possible.

Post-resolution challenges are something clients dont think about until its too late. Settling with DOJ doesnt end your problems. Theres often follow-on litigation – shareholders suing for securities fraud, competitors claiming unfair business practices, employees alleging retaliation. State medical boards might go after physician licenses. OIG exclusion proceedings could bar individuals from federal healthcare programs. Helping clients navigate all of these collateral consequences matters, because winning the main case doesnt mean much if you lose everything else. The compliance burden going forward is massive too. Even without a formal corporate integrity agreement, organizations need to demonstrate theyve cleaned up their act. That means new policies, new training, new systems, new personnel. The cost can run into tens of millions. Designing compliance programs that actually work – not just check-the-box exercises but real cultural change — is critical. Because heres the truth – federal oversight will continue, and if you get caught again, theres no mercy the second time.

For healthcare executives facing these investigations, the personal toll is something we take seriously.

These cases drag on for years. The stress destroys marriages, causes health problems, ruins careers. Executives whove built organizations over decades watch them crumble. Providing not just legal defense but help managing the personal crisis matters. Connecting clients with therapists, financial advisors, PR consultants helps. Because surviving a federal investigation isnt just about avoiding prison – its about having a life worth living when its over.

The future of Medicare risk adjustment fraud enforcement is only getting more aggressive. DOJ has dedicated more resources, CMS has better data analytics, and whistleblowers are more sophisticated. The days of sloppy coding practices flying under the radar are over. Every diagnosis, every HCC, every risk score is potential liability. Organizations need to get serious about compliance now, before they become the next headline. If youre reading this because youre under investigation, every day matters. Federal prosecutors have been building their case for months or years before you even knew about it. Each day of delay gives them more advantage. But with the right defense strategy, executed by attorneys who understand both the law and the industry, you can level the playing field. Dozens of healthcare organizations have navigated these treacherous waters with our help. Acting quickly, thinking strategically, and never underestimating what youre up against – thats what makes the difference between a devastating outcome and a manageable resolution.