---
description: CMS proposes excluding unlinked chart review and audio-only telehealth diagnoses from 2027 risk scoring targeting the two-step arbitrage where acquisition-based integrators inflate risk scores through retrospective coding then game MLR through above-market intercompany payments
type: claim
domain: health
created: 2026-02-20
source: "CMS 2027 Advance Notice February 2026; Arnold & Fulton Health Affairs November 2025; STAT News Bannow/Tribunus November 2024; Grassley Senate Report January 2026; FREOPP Rigney December 2025; Milliman/PhRMA Robb & Karcher February 2026"
confidence: proven
related:
- medicare advantage market is an oligopoly with unitedhealthgroup and humana controlling 46 percent despite nominal plan choice
reweave_edges:
- medicare advantage market is an oligopoly with unitedhealthgroup and humana controlling 46 percent despite nominal plan choice|related|2026-03-31
---

# CMS 2027 chart review exclusion targets vertical integration profit arbitrage by removing upcoded diagnoses from MA risk scoring

The CMS 2027 Advance Notice (released February 2026) proposes two changes that structurally alter MA economics:

1. **Chart review exclusion:** Diagnoses from "unlinked chart review records" -- retrospective chart reviews not tied to a specific clinical encounter -- would be excluded from risk score calculations starting 2027.
2. **Audio-only telehealth exclusion:** Diagnoses from audio-only telehealth visits would also be excluded from risk scoring.

These proposals target a specific profit mechanism that acquisition-based vertical integration enables. "Vertical integration" in MA means a single parent company owns multiple layers of the healthcare value chain: insurer + provider network + pharmacy/PBM + analytics. UnitedHealth (UHC + Optum), CVS (Aetna + Oak Street + Caremark), and Humana (insurer + CenterWell) all achieved this structure through acquisition -- buying existing companies and stitching them together.

The arbitrage works in two steps:

**Step 1 -- Risk score inflation through retrospective coding:** The insurer's owned providers conduct aggressive retrospective chart reviews -- not tied to clinical encounters -- solely to identify and code additional diagnoses that inflate CMS risk scores. Higher risk scores mean higher CMS payments. Senator Grassley's January 2026 report, based on 50,000+ pages of internal UHG documents, found UHG directed providers to diagnose opioid dependence, alcohol use disorder, and dementia using lower diagnostic thresholds than standard clinical practice.

**Step 2 -- MLR arbitrage through intercompany pricing:** The insurer pays its owned providers above-market rates. A peer-reviewed Health Affairs study (Arnold & Fulton, November 2025, analyzing 385,434 price observations across 28 metro areas) found UHC pays Optum providers **17% more** than non-Optum providers for identical services, rising to **61% in concentrated markets**. This was preceded by STAT News investigative reporting (Bannow/Tribunus Health, November 2024) finding UHC overpaid 13 of 16 Optum practices by 3-111% above market. The overpayment inflates UHC's reported Medical Loss Ratio -- the ACA requires MA insurers to spend 85% of premiums on medical care, and paying your own subsidiary above-market rates makes it look like you're spending generously on patient care. But the money never leaves the corporate family. Optum is not subject to MLR requirements, so the parent captures the profit. UnitedHealth Group's intercompany eliminations reached **$100.5 billion** for nine months of 2023 -- 36% of revenue (FREOPP, Rigney, December 2025).

**Legal status:** The MLR gaming itself occupies a regulatory gray zone -- exploiting a gap in ACA rules written before the current wave of vertical integration. No one has been charged specifically for transfer pricing arbitrage. However, DOJ has active antitrust and criminal investigations into UnitedHealth (opened February 2024), examining both Optum acquisitions and Medicare billing practices. Congressional response is escalating: the Patients Over Profits Act (September 2025, Ryan/Warren) would ban insurers from owning medical practices entirely; the Break Up Big Medicine Act (Warren/Hawley, 2026) would impose Glass-Steagall-style structural separation. UnitedHealth "strongly refuted" the Health Affairs findings, calling the data "cherry-picked" and arguing they pay Optum "consistent with other providers in the market."

The broader 2027 rate environment compounds the pressure into a three-pronged squeeze: the net payment rate increase is essentially flat at 0.09% (Wall Street had built 4-6% increases into models), far below medical cost trends. V28 risk adjustment is fully phased in for 2026, and CMS proposes recalibrating using 2023 diagnoses to predict 2024 costs, which would reduce MA risk scores by 3.32% relative to 2026. Additionally, CMS proposes **Star Ratings redesign** shifting from administrative/process metrics toward member experience and clinical outcomes -- further disadvantaging incumbents whose quality scores depend on paperwork-based categories and rewarding plans like Devoted and Kaiser with genuine member experience excellence. Incumbent insurer stocks fell 9-13% on the Advance Notice announcement; UnitedHealth dropped an additional ~20% on compounding Optum earnings losses and reduced growth guidance. Multiple large insurers have already replaced CEOs and leadership teams specifically to restore profitability. Since CMS 2027 rate notice creates a three-pronged regulatory squeeze that forces incumbents into margin-protection retreat while Devoteds 9-point cost advantage enables continued growth, the chart review exclusion is one component of a coordinated regulatory strategy, not an isolated policy change.

**Who gets hurt:** Plans that generate significant revenue from retrospective coding rather than genuine clinical encounters. UnitedHealth and Humana, with the largest owned provider networks and the most aggressive chart review programs, face disproportionate impact. UnitedHealth already expects to lose 1 million MA members in 2026 from repricing; the chart review exclusion would further erode the economics of their vertical integration model.

**Who benefits:** Plans whose risk scores reflect genuine clinical encounters rather than retrospective coding. This includes a different kind of vertical integration -- purpose-built full-stack integration like Devoted Health, where the insurer, provider network, and technology were built together on a single platform (Orinoco) rather than assembled through acquisition. Devoted's clinical data flows through Orinoco as part of actual care delivery, not through after-the-fact chart review, so the exclusion has minimal impact. Plans with high star ratings also benefit because quality bonus payments become a larger share of the margin equation when coding arbitrage shrinks.

**The structural significance:** Since [[four competing payer-provider models are converging toward value-based care with vertical integration dominant today but aligned partnership potentially more durable]], the chart review exclusion is a regulatory push away from the acquisition-based integration model where owning providers serves primarily as a coding and MLR arbitrage mechanism. CMS is not penalizing vertical integration as a structure -- it is penalizing the specific profit extraction mechanism that acquisition-based integration enables. Companies that integrated vertically for genuine care coordination (Kaiser, Devoted) are unaffected. Companies that integrated vertically to control coding and intercompany pricing (UHC/Optum, Humana/CenterWell) lose a key revenue lever.

This is a proxy inertia story. Since [[proxy inertia is the most reliable predictor of incumbent failure because current profitability rationally discourages pursuit of viable futures]], the incumbents who built their MA economics around coding optimization will struggle to shift toward genuine quality competition. The plans that never relied on coding arbitrage (Devoted, Alignment, Kaiser) are better positioned.


### Additional Evidence (extend)
*Source: 2026-02-23-cbo-medicare-trust-fund-2040-insolvency | Added: 2026-03-12 | Extractor: anthropic/claude-sonnet-4.5*

(extend) The trust fund insolvency timeline creates intensifying pressure for MA payment reform through the 2030s. With exhaustion now projected for 2040 (12 years earlier than 2025 estimates), MA overpayments of $84B/year become increasingly unsustainable from a fiscal perspective. Reducing MA benchmarks could save $489B over the decade, significantly extending solvency. The chart review exclusion is one mechanism in a broader reform trajectory: either restructure MA payments or accept automatic 8-10% benefit cuts for all Medicare beneficiaries starting 2040. The political economy strongly favors MA reform over across-the-board cuts, meaning chart review exclusions will likely be part of a suite of MA payment reforms driven by fiscal necessity rather than ideological preference.


### Additional Evidence (extend)
*Source: [[2026-02-01-cms-2027-advance-notice-ma-rates]] | Added: 2026-03-16*

The 2027 chart review exclusion is explicitly described as 'the most targeted reform to date against retrospective code-mining' and projects >$7 billion in savings. The rule excludes ALL diagnoses from unlinked chart review records (not tied to documented service), allowing chart review diagnoses only if tied to actual medical encounters. This is more comprehensive than previous incremental reforms.

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Relevant Notes:
- [[four competing payer-provider models are converging toward value-based care with vertical integration dominant today but aligned partnership potentially more durable]] -- the chart review exclusion pushes the landscape toward aligned partnership and away from acquisition-based integration
- [[proxy inertia is the most reliable predictor of incumbent failure because current profitability rationally discourages pursuit of viable futures]] -- UHC's vertical integration arbitrage is the proxy being removed by CMS
- [[value-based care transitions stall at the payment boundary because 60 percent of payments touch value metrics but only 14 percent bear full risk]] -- CMS is tightening the FFS-to-VBC transition by closing profitable FFS-like mechanisms within MA
- [[Devoted is the fastest-growing MA plan at 121 percent growth because purpose-built technology outperforms acquisition-based vertical integration during CMS tightening]] -- CMS tightening specifically advantages Devoted's purpose-built model
- five guideposts predict industry transitions -- rising fixed costs force consolidation and deregulation unwinds cross-subsidies creating cream-skimming opportunities -- CMS chart review exclusion is a regulatory intervention that unwinds the cross-subsidy from upcoded risk scores

Topics:
- health and wellness
