Court Orders Humana to Pay $90M in Groundbreaking Whistleblower Medicare Fraud Case Settlement

A Kentucky judge has ruled that Louisville-based Humana, a major healthcare insurance company that contracts with Medicare to provide Medicare Part D Prescription Drug Plans, must pay law firm Phillips & Cohen LLP $32 million in attorney fees more than a year after reaching a groundbreaking $90 million settlement of a federal False Claims Act whistleblower lawsuit.

Whistleblower Steven Scott, a former Humana actuary, filed the lawsuit in 2016, alleging that Humana was inflating its costs between 2011 and 2017 to get favorable bids with the Centers for Medicare & Medicaid Services (CMS), even though the insurer was providing below the required level of coverage—ultimately leading to substantial overcharges to the government. 

Humana pocketed the difference as profit, which amounted to hundreds of millions of dollars, according to Scott’s suit. 

Scott also alleged that Humana maintained two sets of books to perpetuate the scheme, a practice that ended in 2017 once the government began investigating the case. The U.S. Department of Justice (DOJ) later declined to intervene. 

Scott was a Managing Actuary for the insurer at the time he filed the qui tam lawsuit. As stated in the complaint, he was an insider “with responsibility for modeling the cost of Humana’s Medicare health insurance benefits under different actuarial assumptions.”  

Humana is required to cover the fees, even as a looming appellate challenge raises questions about the future of whistleblower litigation in the United States. The fee award from Judge Greg Stivers in the U.S. District Court for the Western District of Kentucky directed Humana to pay the fees and costs by September 24.  

Humana did not admit liability in the agreement and maintained it had complied with federal rules. The company said it chose to resolve the matter to avoid the expense and uncertainty of prolonged litigation. 

Scott was represented by the firms Phillips & Cohen and Kellogg Hansen. His share of the recovery amounted to $26.1 million, equivalent to 29% of the government’s settlement, according to court filings. 

Attorneys argued they were entitled to fees above the $10.44 million Scott had already paid them under a contingency arrangement. While Stivers permitted substantial additional recovery, he rejected a larger request for $41 million, finding that “shockingly high” rates could not be justified for Kentucky, though he agreed to apply higher national benchmarks. 

Whistleblowers typically receive between 15 to 25 percent of recoveries when the government intervenes, and up to 30 percent if the government declines. In Scott’s case, he had the right to a larger share because the DOJ chose not to intervene. 

“This is the first case of its kind to resolve allegations of fraud in the Part D contracting process,” Phillips & Cohen said in a statement at the time of settlement. 

Summary of the allegations

The government contracts with private health insurers to administer the Part D benefit, which offers prescription drug coverage for more than 54 million Americans on Medicare. 

By law, insurers must offer plans that cover the minimum required amount of drug costs. When plans submit annual bids to the CMS to participate in Part D, they must report their proposed benefits and confirm that those benefits meet Part D’s minimum standard. 

According to the suit’s allegations, Humana submitted false information in connection with its bids to the CMS to secure CMS’ approval for offering Part D plans to Medicare beneficiaries. Humana allegedly kept two sets of books: one with accurate finances, and one with false financial projections, the latter of which it used to secure Part D contracts.  

This created a snowball effect of fraud, leading to the government overpaying claims to Humana and picking up costs for low-income beneficiaries based on this false information. 

The Basic Walmart Plan

Medicare Part D is the voluntary prescription drug portion of the lettered Medicare parts (A is hospital insurance, B is physician coverage, C is Medicare Advantage). Medicare beneficiaries pay a premium for this prescription drug program, administered by private insurers, and federal funds subsidize the cost of prescription drugs.  

When insurers contract with the government to be a Medicare Part D plan sponsor, they must certify that their plans are actuarially equivalent or better than the “defined standard benefit,” though they have some flexibility in how they organize their plans’ deductibles, co-pays, formularies, and other components.  

Scott’s qui tam lawsuit alleged that Humana knowingly and falsely certified that their prescription drug plan called the “basic Walmart Plan” was actuarially equivalent, when in fact it was not.  

The whistleblower also alleged that Humana intentionally designed the Walmart plan to make a profit, paying less than 75% of the costs of drugs and passing the difference onto both Medicare beneficiaries and the government for low-income beneficiaries. 

Volatile Landscape for Health Insurers

Humana’s exposure mirrors wider industry vulnerability. For example, in July, Omnicare, a CVS Health Corp. subsidiary, was ordered to pay nearly $949 million in damages for allegedly billing Medicare, Medicaid, and TRICARE for invalid prescriptions. CVS Health Corp. also was held jointly liable for a portion of the statutory penalties. Omnicare filed for bankruptcy protection on September 22.

The order for Humana to pay Phillips & Cohen $32 million in fees comes as the False Claims Act’s qui tam provisions face a serious constitutional test. Last year, Florida U.S. District Judge Kathryn Mizelle ruled that allowing private citizens to litigate on the government’s behalf amounted to an improper delegation of executive authority. 

The U.S. Chamber of Commerce has urged the Atlanta-based 11th U.S. Circuit Court of Appeals to uphold Judge Mizelle’s finding. The DOJ, by contrast, has defended the law.

 If the 11th Circuit limits or strikes down the False Claims Act’s qui tam provisions, the enforcement landscape would be transformed, reducing exposure to whistleblower suits, but potentially inviting other forms of government oversight. 

Oral arguments are expected in December.  

The outcome matters for insurers and for all sectors that rely on federal reimbursement. Consider this: In FY 2023 alone (October 1, 2022 to September 20, 2023), whistleblowers filed 712 qui tam lawsuits, according to the DOJ. Total recoveries from False Claims Act settlements and judgments reached more than $2.68 billion. Of this amount, more than $2.3 billion was recovered from whistleblower lawsuits, and the government awarded more than $349 million to the whistleblowers. 

And in FY 2024, whistleblowers filed 979 qui tam lawsuits—the highest number filed in a single year since the DOJ began keeping records—which were part of 1,402 new False Claims Act matters filed. More than $2.4 billion of the total recoveries came from qui tam lawsuits.  

Of the whistleblower-filed cases, 575 were in the “non-Health and Human Services” and “non-Department of Defense” category, which includes fraud related to pandemic relief programs such as the Paycheck Protection Program (PPP). The total recoveries under the False Claims Act exceeded $2.9 billion in FY 2024. 

Healthcare fraud has been a leading source of False Claims Act settlements and judgments. These are used to restore funds to federal programs such as Medicare, Medicaid, and TRICARE, the health care program for service members and their families.

For now, the Humana decision ensures a significant payday for the whistleblower’s lawyers, while the larger question of the statute’s constitutionality remains unsettled.