Medicare Advantage insurance firms accused of data-mining patient records and

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Kathy Ormsby’s work auditing medical case files uncovered an alleged scheme to defraud the federal government: The California health system that employed her was scouring health histories of thousands of elderly Medicare patients, then pressuring doctors to add false diagnoses it found to their current medical records.

The point of larding the medical records with outdated and irrelevant diagnoses such as cancer and stroke — often without the knowledge of the patients themselves — was not providing better care, according to a lawsuit from the Justice Department, which investigated a whistleblower complaint Ormsby filed. It was to make patients appear sicker than they were.

The maneuver translated into millions of dollars in inflated bills to the federal Medicare Advantage insurance program, the government alleged in its false-claims lawsuit filed in U.S. District Court in California.

The case was part of a broader government crackdown on abusive billing practices in Medicare Advantage, the privatized insurance option that by next year is expected to cover more than half of all Medicare beneficiaries. The Justice Department is pursuing civil lawsuits against multiple companies that participate in the privatized system, from huge insurers to prestigious nonprofit hospital systems, alleging they have cheated the system for unfair profit.

Ormsby’s former employer, the Palo Alto Medical Foundation, which has 1,600 doctors, and its parent affiliate, Sutter Health, which runs 24 hospitals in Northern California, settled the case with the government in August 2021 for $90 million. It admitted no wrongdoing or liability.

The government said its investigation confirmed that Palo Alto Medical and Sutter systematically added false diagnoses to patient records. In a sample of hundreds of cases Ormsby audited, the government’s lawsuit said, she discovered 90 percent of diagnoses for cancer were invalid, as were 96 percent for stroke and 66 percent for fractures.

“As we continued to audit, I started to see more things,” Ormsby said in an interview with The Washington Post, the only time she has spoken publicly since reporting the alleged misconduct in 2015. “I couldn’t believe how bad it was.”

In response to questions from The Post, Sutter indicated it was ready to move on. “The agreement brought closure to a long-running dispute and enabled Sutter to avoid the uncertainty and expense of protracted litigation,” it said in an email statement.

Medicare Advantage, which is run by outside companies under contract with the government, was added to traditional Medicare in 2003 with the support of Republicans in an effort to improve care and lower costs through privatization. But it is costing taxpayers increasingly more money to run than traditional fee-for-service Medicare, according to MedPAC, a government watchdog panel. The higher cost, what MedPAC labels “excess payments,” reached $12 billion in 2020 out of total program costs of $350 billion and are projected to top $16 billion next year, MedPAC said in March.

The aggressive billing tactics stem from incentives built into Medicare Advantage.

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