A multimillion-dollar settlement reached this week over alleged overpayments to a Medicare health plan in Long Beach highlights how vulnerable Medicare is to potential abuse even as changes are underway to shore up the massive government program.

Medicare is already hemorrhaging an estimated $60 billion annually to fraud and improper payments, and some experts worry that the problem could worsen as government officials give medical providers and insurers more incentive to exaggerate — deliberately or accidentally — how sick some patients are to boost their profits.

SCAN Health Plan, without admitting wrongdoing, said Thursday that it would pay $3.8 million to settle a whistle-blower’s allegations that the nonprofit plan inflated risk scores — the numbers used by Medicare to categorize patients based on their medical conditions and to set payment rates.

Earlier this year, federal auditors estimated that Medicare Advantage plans were overpaid by as much as $3.1 billion in 2010 due to excessive risk scores, and that the figure was likely to be even higher in 2011 and 2012.


“The increased reliance on risk scoring is opening the door to additional vulnerabilities,” said Wayne van Halem, a healthcare compliance consultant in Atlanta who works with medical providers. “The federal government is getting better, but they are not where they need to be.”

Medicare officials say they have increased audits of Medicare Advantage plans and introduced other measures to ensure accuracy of patient health scores that can drive reimbursement. Government officials estimate that the rate of improper payments for Medicare Advantage plans has decreased from 14% in fiscal 2010 to 11% last year.

“This year we debuted a new audit program for Medicare Advantage that is ensuring the accuracy and integrity of the risk-adjusted data that we use for payments,” Medicare spokesman Brian Cook said. “Our new coordinated-care models use the Medicare Advantage risk scores, but take a more sophisticated approach to ensure accurate payments.”

To be sure, it can be daunting for the healthcare industry to comply with Medicare’s dense and ever-changing rules. David Schindler, an outside attorney for SCAN, said, “The reality is that it is extremely complicated to try to determine what the appropriate risk score is for patients. This has been an ongoing and complicated exercise for the entire healthcare community for years.”


Medicare has rolled out a series of programs and pilots aimed at encouraging doctors, hospitals and insurers to coordinate patient care and help control rising medical costs. The agency is moving away from conventional fee-for-service payments that reward volume rather than quality care or efficiency.

This can be seen in the growth of insurers’ Medicare Advantage plans, which have enrolled more than 11 million Americans, and in accountable-care organizations springing up across Southern California and the country. Medicare generally pays a certain amount per patient enrolled, but that figure is adjusted for health status over time so doctors and insurers aren’t penalized for taking on sicker patients.

The alleged manipulation of those patient risk scores was a key part of the federal whistle-blower suit against SCAN. Separately, SCAN agreed to pay $320 million to resolve allegations that it was overpaid by the state’s Medi-Cal program, which serves the poor and disabled. SCAN denied wrongdoing in that settlement as well.

James Swoben, now a 57-year-old healthcare consultant, worked at SCAN from 2004 to 2006 and filed his federal whistle-blower suit in 2009. According to the suit, SCAN hired outside coding companies to review medical charts of about 10,000 patients with severe illnesses, such as diabetes or congestive heart failure. Overall, SCAN has more than 120,000 Medicare patients in California.


In his suit, Swoben said SCAN then selectively submitted additional data that was “biased in favor of upcoding the patients’ diagnoses” and withheld information indicating lower scores.

“It was auditing fraud,” said William Hanagami, one of Swoben’s attorneys. “They were adding, but not deleting.”

Federal prosecutors didn’t allege any fraud by SCAN. But Susan Hershman, an assistant U.S. attorney in Los Angeles, said investigators concurred with Swoben’s allegations that SCAN didn’t share certain information with Medicare that would have reduced payments. Hershman said other defendants in Swoben’s whistle-blower suit on patient risk scoring remain under seal.

Schindler, the attorney for SCAN, said that there was no evidence to support Swoben’s allegations on coding but that the company decided to settle to avoid the expense of protracted litigation.


Shana Alex Lavarreda, director of health insurance studies at the UCLA Center for Health Policy Research, said government regulators are at a disadvantage because they rely so heavily on insurers and medical providers to supply crucial information.

“Insurance companies have little incentive to properly monitor their own accounting or paperwork when those errors lead to overpayments,” she said.

chad.terhune@latimes.com