Understanding the $76 Billion Medicare Advantage Payment Issue

By Elena Pak, Credentialing Department, WCH

As we wrote in our early March analysis, “$76 Billion and Counting: The Medicare Advantage Reckoning Has Begun,” the debate around Medicare Advantage (MA) has entered a new phase. What was once dismissed as a technical dispute over coding practices has become a central policy question: whether the program’s payment structure itself is driving systematic overpayments.

The CMS 2027 payment proposal — and the industry response that followed — only sharpened that question. At this point, the existence of overpayments is no longer seriously contested. What remains unresolved is more fundamental: can those overpayments be meaningfully reduced without altering the economic logic of the Medicare Advantage model itself?

The scale is well established. Medicare Advantage is projected to cost the federal government approximately $76 billion more in 2026 than traditional Medicare would for the same beneficiaries. But the persistence of that gap, despite years of audits, enforcement actions, and incremental policy reform, points to a deeper issue.

The uncomfortable reality is this: upcoding is not an anomaly in Medicare Advantage. It is a predictable outcome of how the model is designed.

Not a Compliance Failure — a Payment Design Outcome

At the core of Medicare Advantage is risk-adjusted capitation. Plans are paid more for sicker patients and less for healthier ones — a structure intended to align reimbursement with expected cost.

In practice, it creates a powerful secondary incentive: not only to manage care, but to maximize the capture and documentation of diagnoses that drive payment.

This distinction is critical.

Framing the issue as one of “bad actors” understates the systemic dynamic. When revenue is directly linked to documented disease burden, coding intensity becomes a primary lever of financial performance. Organizations that invest in identifying, documenting, and defending more diagnoses generate higher risk scores — and therefore higher payments.

This is not inherently fraudulent behavior. It is incentive optimization within a system where documentation directly determines revenue.

Why Chart Reviews Became Central — and Why Targeting Them Isn’t Enough

CMS’s proposal to exclude diagnoses derived from “unlinked” chart reviews targets one of the most visible mechanisms of risk score inflation. But chart reviews are not the root problem — they are a logical extension of the model.

They exist because:

past diagnoses drive future payments
documentation, not treatment, determines revenue capture
retrospective analysis can identify missed coding opportunities

Chart reviews operationalize this logic by allowing plans to revisit records and surface additional diagnoses — often without requiring new clinical interaction.

Regulators have increasingly challenged this practice, particularly when diagnoses are not tied to documented encounters. CMS estimates that excluding such diagnoses could reduce overpayments by more than $7 billion in 2027.

But even if unlinked chart reviews are restricted, the underlying incentive remains intact:

ensure that every possible diagnosis is captured within a framework that satisfies regulatory requirements.

The tool may change. The economic motivation does not.

Incremental Reform Meets Adaptive Behavior

The current regulatory approach reflects a familiar pattern: targeting specific manifestations of coding-driven inflation while leaving the broader structure in place.

As a result, each intervention produces adaptation:

Exclude unlinked diagnoses → link them to encounters
Increase audit activity → strengthen documentation workflows
Scrutinize certain conditions → shift coding focus

This is not a failure of policy. It is a predictable outcome in a system where:

payment is highly sensitive to coding
and coding remains largely under the control of the entity being paid

The result is a continuous feedback loop between regulation and optimization.

Enforcement Has Limits — Even When It Expands

Recent developments — including congressional investigations and Department of Justice scrutiny — have intensified focus on Medicare Advantage practices. Reports based on tens of thousands of internal documents suggest that risk score optimization has, in some cases, been pursued at industrial scale.

These findings are significant. They move the conversation beyond isolated compliance failures toward systemic behavior.

But enforcement, even when aggressive, has structural limits.

It can address:

unsupported or weakly supported diagnoses
clear patterns of noncompliance
extreme outliers

It cannot fully eliminate the baseline incentive to maximize documented disease burden.

As long as marginal revenue is more sensitive to coding than to measurable improvements in care efficiency or outcomes, organizations will continue to invest in capabilities that increase risk scores.

Why the $76 Billion Gap Persists

The persistence of overpayments reflects deeper structural conditions:

1. Information Asymmetry

Plans operate with more granular and timely insight into coding opportunities than regulators can replicate.

2. Retrospective Enforcement

Audits and investigations occur after payments are made, often years later, limiting their deterrent effect.

3. Economic Dependence

A meaningful share of MA plan margins is tied to risk score optimization. Removing that revenue quickly creates real financial pressure — regardless of whether it reflects clinical reality.

A Program Expanding Under Constraint

At the same time, oversight is tightening, Medicare Advantage continues to grow, now covering more than half of all Medicare beneficiaries.

This creates a structural tension:

Expansion increases the fiscal exposure of the payment model
Reform efforts seek to constrain one of its key revenue drivers

Policymakers are effectively attempting to do both simultaneously: expand the program while correcting its cost structure.

Whether that balance is sustainable depends on a question that remains unresolved:

Is Medicare Advantage fundamentally a cost-control mechanism — or a market-based system whose economics depend on coding-driven revenue expansion?

What This Means for the Industry

For payers, providers, and compliance leaders, the implication is not simply that “rules are tightening.”

It is that the direction of change is structural, even if implementation is incremental.

Organizations most exposed are those that:

rely heavily on retrospective coding strategies
separate documentation workflows from care delivery
depend on risk score growth as a primary margin driver

Conversely, organizations that:

align documentation with clinical activity
reduce reliance on retrospective diagnosis capture
invest in defensible, encounter-based coding

will be better positioned as scrutiny increases.

The current reform cycle signals a shift — but not a resolution.

Medicare Advantage is not being dismantled. It is being recalibrated under competing political, fiscal, and operational pressures.

The $76 billion gap is not just excess spending. It is the measurable outcome of a system in which financial performance and clinical reality are not fully aligned.

Closing that gap will require more than targeting specific practices. It will require confronting the underlying design choices that made those practices profitable.

Until then, the system will continue to behave as designed.

Sources

Centers for Medicare & Medicaid Services (CMS), CY 2027 Medicare Advantage Advance Notice (January 26, 2026)
Medicare Payment Advisory Commission (MedPAC), Report to Congress: Medicare Payment Policy (2025; January 2026 update on MA overpayments)
Healthcare Dive, “CMS receives record comments on controversial Medicare Advantage payment proposal” (March 4, 2026)
Healthcare Dive, “CMS proposes excluding chart reviews from MA risk scoring in 2027 payment rule” (January 27, 2026)
U.S. Senate Judiciary Committee, Majority Staff Report, “How UnitedHealth Group Puts the Risk in Medicare Advantage Risk Adjustment” (January 12, 2026)
U.S. Department of Justice, enforcement actions and investigations related to Medicare Advantage billing practices (2025–2026)
Kaiser Family Foundation (KFF), Medicare Advantage financial and enrollment analysis (January 2026)
Medicare Rights Center, comments on CMS 2027 Advance Notice (February 26, 2026)