Sutter Health Medicare Advantage Fraud Case Shows the Power of Whistleblowers

In August 2021, Sutter Health and several affiliated medical foundations agreed to pay $90 million to settle allegations that they submitted inaccurate diagnosis data to inflate payments under the Medicare Advantage program. The case is one of the largest Medicare Advantage fraud settlements on record, and it began with a single whistleblower, a former employee of the Palo Alto Medical Foundation who recognized what was happening and came forward.

How Medicare Advantage fraud works

Medicare Advantage, also known as Medicare Part C, is a privately administered alternative to traditional Medicare. Private insurers and health systems receive a fixed per person payment from the federal government to cover each enrolled beneficiary’s care. Those payments are not uniform. They are adjusted based on the beneficiary’s age, demographics, and health status. A patient with more serious or complex diagnoses generates a higher payment to the plan.

This structure creates an incentive to make patients appear sicker than they are. When a provider submits diagnosis codes that are not supported by the patient’s medical records, the plan receives a larger payment than the government intended to make. That is the core of risk adjustment fraud, and it is what the government alleged Sutter Health had done.

What Sutter Health was accused of doing

The government alleged that Sutter Health knowingly submitted unsupported diagnosis codes for certain patient encounters, causing inflated payments to flow to Medicare Advantage plans and to Sutter Health itself. The complaint also alleged that once Sutter Health became aware that unsupported codes had been submitted, it failed to take sufficient corrective action to identify and remove inaccurate codes from its records.

That failure to act is an important detail. Under the False Claims Act, liability may attach not only to the original false submission but also to a provider’s deliberate failure to correct known errors and return the resulting overpayments.

Sutter Health did not admit liability as part of the settlement. However, as a condition of resolving the case, Sutter Health and its affiliated foundations entered into a five year Corporate Integrity Agreement with the HHS Office of Inspector General. Under that agreement, Sutter Health was required to implement a centralized risk assessment program and retain an independent review organization to annually audit a sample of its Medicare Advantage patients’ medical records and associated diagnosis data.

The whistleblower’s role

The case was initiated by Kathleen Ormsby, a former employee of the Palo Alto Medical Foundation. She filed a qui tam complaint on behalf of the United States under the False Claims Act, which allows private individuals with knowledge of fraud against the government to file suit and receive a share of any recovery.

The government intervened in the portion of the case involving Palo Alto Medical Foundation claims. For the claims involving the remaining Sutter affiliates, where the government did not intervene, Ormsby continued to pursue the case on her own. Both sets of claims were resolved through the $90 million settlement.

Her case is an example of how whistleblowers with direct knowledge of billing and coding practices are often in a better position than outside investigators to identify and document risk adjustment fraud. The conduct at issue involved internal diagnosis data and coding decisions that would not be visible to regulators without an insider coming forward.

What this means for people working in Medicare Advantage

Risk adjustment fraud remains one of the government’s primary healthcare enforcement priorities. The Office of Inspector General and the Department of Justice have shown through repeated enforcement actions that they will pursue providers who manipulate diagnosis codes to inflate capitated payments, whether through affirmative false submissions or deliberate inaction after overpayments are identified.

If you work for a health system, physician group, or managed care organization and have observed coding practices that appear designed to inflate risk scores rather than accurately reflect patient health, you may have grounds to file a qui tam complaint under the False Claims Act. A successful case can result in the government recovering inflated payments and additional damages, and you as the relator may be entitled to a percentage of that recovery.

Speak to a whistleblower attorney at Keller Grover

The attorneys at Keller Grover have experience handling False Claims Act cases in the healthcare space, including Medicare Advantage risk adjustment fraud. If you have concerns about billing or coding practices at your organization, contact our legal team today for a confidential consultation.