What You Should Know:
– Kaiser Permanente affiliates have agreed to a $556M settlement to resolve allegations of violating the False Claims Act by submitting invalid diagnosis codes to inflate Medicare Advantage (MA) payments.
– The settlement, involving multiple Kaiser Foundation and Permanente Medical Groups, addresses a decade-long “data mining” scheme designed to pad the bottom line by manipulating the risk-adjustment model.
The Core of the Conflict: Risk Adjustment vs. Care Delivery
Under Medicare Part C, CMS uses a “risk adjustment” model. It is a simple financial equation: sicker patients require more resources, so CMS pays Medicare Advantage Organizations (MAOs) higher monthly capitated rates for those individuals.
The DOJ alleged that between 2009 and 2018, Kaiser systematically gamed this system by:
- Retrospective “Mining”: Identifying past diagnoses and pressuring physicians to add them to medical records via “addenda” months or even a year after the encounter.
- Incentivizing Upcoding: Linking physician financial bonuses and facility-specific incentives to meeting “risk adjustment” diagnosis goals.
- Ignoring Red Flags: Disregarding internal audits and physician complaints that warned these practices violated the requirement that a diagnosis must be addressed during a face-to-face visit.
For years, large integrated systems like Kaiser have touted their “value-based” model as the gold standard for efficiency. This settlement suggests a cynical reality: when the “value” in value-based care is derived from retrospective coding algorithms rather than actual clinical intervention, it isn’t innovation—it’s just sophisticated billing. The $95M whistleblower payout to two former employees proves that internal compliance cultures are often secondary to revenue targets until the DOJ knocks.
Why This Matters Healthcare Finance Leaders
For CFOs and Chief Medical Officers, this settlement is a warning shot regarding Generative AI and NLP tools currently being marketed for “Risk Adjustment Factor (RAF) Optimization.”
- Clinical Validation is Mandatory: Any code suggested by an AI or data-mining tool must have been addressed during the encounter. Retrospective addenda without a clinical bridge are a False Claims Act magnet.
- Audit the “Queries”: If your organization uses “queries” to prompt doctors to update records, those queries must be clinically supported, not revenue-driven.
- Incentive Realignment: Linking physician compensation directly to RAF scores is now a high-risk regulatory strategy.
The DOJ’s use of the False Claims Act here highlights a growing intolerance for “gaming the system” in Medicare Advantage—a program that now covers more than half of all Medicare beneficiaries.
