Humana Pays $90 Million to Settle First-of-Its-Kind Medicare Part D Fraud Case for Fraudulent Bidding

On August 16, 2024, Humana agreed to pay $90 million to settle the first whistleblower lawsuit alleging systematic fraud in Medicare Part D prescription drug program bidding. The case exposed how Humana maintained “two sets of books”—submitting false financial projections to the Centers for Medicare & Medicaid Services (CMS) to win lucrative contracts while internally projecting that patients would pay far more than disclosed. This groundbreaking settlement revealed systematic fraud in the Medicare Part D contracting process, with insurance companies deliberately misrepresenting their bids to secure government contracts while planning to shift costs onto beneficiaries.

The Fraud Scheme: Two Sets of Books

From 2011 to 2017, Humana allegedly submitted fraudulent bids to CMS for Medicare Part D prescription drug plan contracts. The scheme involved maintaining two separate financial projections:

Public Projections (Submitted to CMS): Humana told CMS it would pay approximately 75% of drug costs for Medicare beneficiaries, with patients paying the remaining 25% through copayments and deductibles. These projections made Humana’s bids appear competitive and beneficiary-friendly, helping the company win contracts.

Internal Projections (Kept Secret): Internally, Humana’s actuaries projected the company would cover as little as 64.5% of drug costs, leaving beneficiaries to pay 35.5%—more than 10 percentage points higher than promised to CMS. These internal projections represented Humana’s actual expectations and financial planning.

The gap between public claims and internal expectations constituted fraud: Humana knowingly submitted false information to win government contracts worth billions of dollars, then implemented the actual (higher-cost) plans that shifted expenses onto elderly and disabled Medicare beneficiaries.

How Medicare Part D Bidding Works

Medicare Part D, created in 2006, privatized prescription drug coverage for Medicare beneficiaries through private insurance companies. The program’s structure created opportunities for fraud:

Competitive Bidding: Insurance companies submit annual bids to CMS proposing how much they’ll charge beneficiaries and what coverage they’ll provide. CMS approves plans based on these bids, and beneficiaries choose plans based on promised costs and coverage.

Government Subsidies: CMS provides subsidies to insurance companies based on their bids. Lower patient costs result in higher government subsidies, creating incentives to lowball patient cost projections to win contracts.

Limited Oversight: CMS has limited ability to verify bid accuracy before approving plans. Companies can submit optimistic projections, win contracts, then implement different cost structures that shift expenses to patients. By the time discrepancies become apparent, beneficiaries are locked into annual contracts.

Bait and Switch: The system allows insurance companies to promise low costs to win contracts, then increase patient costs through formulary changes, prior authorization requirements, and cost-sharing adjustments after enrollment.

The Whistleblower: Steven Scott

Steven Scott, a Managing Actuary employed by Humana during the fraud period, filed the qui tam whistleblower lawsuit that led to the settlement. As an insider with access to both Humana’s public bids and internal financial projections, Scott recognized the systematic discrepancies and reported them to the Department of Justice.

Retaliation Risk: Whistleblowers in healthcare fraud cases face substantial risks including termination, blacklisting in the industry, and legal threats from powerful corporations. Scott’s decision to file the lawsuit required sacrificing his career at Humana to expose fraud.

DOJ Declination: The Department of Justice declined to intervene in the case, meaning the federal government chose not to join the lawsuit despite evidence of fraud. This declination is significant—it suggests either insufficient DOJ resources, political pressure to avoid antagonizing the insurance industry, or regulatory capture where DOJ prioritizes industry relationships over fraud prosecution.

Private Prosecution: After DOJ declined to intervene, Scott and his attorneys at Phillips & Cohen LLP pursued the case privately. This required substantial financial resources and legal expertise, demonstrating the barriers to exposing corporate fraud even with strong evidence.

$26.1 Million Whistleblower Award: Scott received $26.1 million as his share of the settlement—29% of the government’s recovery. While substantial, this represents compensation for career sacrifice and the personal and financial risks of challenging a major corporation.

Settlement Without Admission of Guilt

Humana settled the case “without admitting wrongdoing”—a standard feature of corporate fraud settlements that demonstrates systematic corruption:

Avoiding Precedent: By settling without admitting guilt, Humana avoided creating legal precedent that could be used in other cases or by other whistleblowers. This protects the company from future liability.

No Criminal Charges: The settlement covered only civil penalties under the False Claims Act. No Humana executives faced criminal charges for what appears to be deliberate fraud in submitting false bids to a government program.

Business as Usual: Humana’s statement claimed the company “firmly believes that the actuarial assumptions in its prescription drug plan were reasonable and in full compliance with all laws and regulatory requirements, and that the plaintiff’s claims in the case are without merit.” This suggests Humana views the $90 million payment as the cost of doing business rather than acknowledgment of wrongdoing.

Cost-Benefit Analysis: The $90 million settlement likely represents a fraction of the profits Humana generated from fraudulent bids over the six-year period. If the fraud saved the company $200-300 million in drug costs shifted to patients, the settlement is profitable even after penalties.

First-of-Its-Kind Case

This settlement was significant as “the first case of its kind to resolve allegations of fraud in the Part D contracting process.” This designation reveals:

Undetected Fraud: If this is the first case despite Medicare Part D operating since 2006, it suggests systematic fraud by multiple insurers has gone undetected or unprosecuted for nearly two decades.

Weak Oversight: CMS apparently lacked systems to detect discrepancies between insurers’ bids and their actual cost structures, allowing fraud to continue for years before a whistleblower exposed it.

Industry-Wide Practice: The “two sets of books” strategy likely represents an industry-wide practice rather than a Humana-specific scheme. Other Medicare Part D insurers may use similar tactics, with Humana simply the first to be caught.

Template for Future Cases: Scott’s successful lawsuit provides a template for other actuaries and insiders at insurance companies to report similar fraud, potentially opening the floodgates for additional Part D fraud revelations.

Impact on Medicare Beneficiaries

The fraud directly harmed elderly and disabled Medicare beneficiaries who relied on Humana’s Part D plans:

Higher Out-of-Pocket Costs: Beneficiaries paid substantially more for prescriptions than they expected when enrolling. The difference between promised 75% coverage and actual 64.5% coverage could amount to thousands of dollars annually for patients with chronic conditions requiring multiple medications.

Medication Non-Adherence: Higher-than-expected costs forced some patients to ration medications, skip doses, or abandon prescriptions entirely. This non-adherence leads to worse health outcomes, hospitalizations, and premature deaths—consequences that don’t appear in Humana’s financial projections.

Trust Violation: Medicare beneficiaries trusted CMS to approve only honest bids and trusted Humana to honor its commitments. The fraud violated this trust, demonstrating that government oversight is insufficient to protect patients from corporate deception.

Locked-In Patients: Medicare beneficiaries can only change plans during annual open enrollment periods. Patients who discovered mid-year that their actual costs far exceeded projections had to continue paying or go without medications until the next enrollment period.

Systematic vs. Inadvertent Fraud

The “two sets of books” evidence indicates systematic, intentional fraud rather than actuarial errors:

Parallel Systems: Maintaining separate public and internal projections requires deliberate systems to track both versions—suggesting organizational knowledge and approval rather than individual misconduct.

Multi-Year Pattern: The fraud continued from 2011 to 2017, indicating systematic practice rather than a one-time mistake. This six-year pattern suggests corporate culture and incentive structures rewarded fraudulent bidding.

Actuarial Expertise: As a managing actuary, Scott possessed sophisticated understanding of Medicare bidding and financial projections. His recognition of fraud suggests the discrepancies were too large and systematic to be accidental errors.

Corporate Approval: Bids submitted to CMS require multiple levels of corporate review and executive approval. The fraud required knowledge and approval from senior leadership, not just rogue employees.

Regulatory Capture and Enforcement Failure

The case exposed multiple regulatory failures:

CMS Oversight Gaps: CMS approved Humana’s fraudulent bids for six consecutive years without detecting discrepancies, demonstrating that the agency lacks effective systems to verify bid accuracy or lacks resources to conduct thorough reviews.

Delayed Investigation: According to the lawsuit, the fraud scheme ended in 2017 “once the government began investigating the case.” This suggests CMS or DOJ learned of the fraud around 2017 but the settlement didn’t occur until 2024—a seven-year delay that allowed Humana to continue profiting from fraud.

DOJ Declination: The Justice Department’s decision not to intervene despite strong evidence suggests either resource constraints or political reluctance to aggressively prosecute major insurance companies—both indicating regulatory capture.

No Structural Reforms: The settlement imposed no requirements for structural reforms to Humana’s bidding practices, compliance systems, or oversight mechanisms. This means Humana can continue operating with the same systems that enabled fraud, as long as it’s more careful to avoid detection.

Industry-Wide Implications

While Humana settled, the fraudulent bidding practices likely extend across the Medicare Part D industry:

Competitive Pressure: If Humana gained competitive advantages by submitting fraudulent bids, other insurers faced pressure to engage in similar practices to compete for contracts. This creates a “race to the bottom” where honest bidding puts companies at a disadvantage.

Limited Consequences: The $90 million settlement without admission of guilt or criminal charges sends a message to other insurers that Medicare Part D fraud carries minimal risk—at worst, paying back a fraction of fraudulent gains years later.

Actuarial Knowledge: Actuaries at other Medicare Part D insurers likely recognize similar discrepancies between their companies’ public bids and internal projections. Scott’s successful whistleblower case may encourage others to report fraud, or may intimidate them with the risks of challenging powerful corporations.

CMS Audit Gaps: If CMS couldn’t detect Humana’s “two sets of books” for six years, the agency likely cannot detect similar fraud at other insurers, suggesting widespread undetected fraud throughout the Part D program.

Medicare Privatization and Fraud Incentives

The Humana case demonstrates how privatizing Medicare through Part D and Medicare Advantage creates systematic fraud incentives:

Profit Motive vs. Patient Care: Private insurers maximize profits by minimizing payments for patient care. Traditional Medicare operates on a non-profit basis with lower administrative costs and less incentive to deny coverage.

Information Asymmetry: Insurance companies possess far more information about their cost structures and profit margins than CMS or beneficiaries, enabling fraud through information asymmetry that’s difficult for regulators to detect.

Complexity Enables Fraud: Medicare Part D’s complexity—with multiple plan options, formularies, cost-sharing tiers, and coverage gaps—makes it difficult for beneficiaries and regulators to identify when insurers fail to deliver promised coverage.

Regulatory Capture: The insurance industry’s lobbying power ensures weak oversight, minimal penalties for fraud, and continued privatization expansion despite evidence of systematic abuse.

Financial vs. Criminal Penalties

The settlement’s structure reveals unequal justice:

Corporate Civil Penalties: Humana paid $90 million in civil penalties—treated as a cost of doing business and likely tax-deductible as a business expense.

No Executive Accountability: No Humana executives faced criminal charges, personal financial penalties, or industry bans despite overseeing systematic fraud that harmed elderly and disabled patients.

Individual vs. Corporate Treatment: Medicare beneficiaries who make errors on applications or inadvertently receive overpayments face aggressive recovery efforts and potential fraud charges. Corporations that systematically defraud the program for years face negotiated settlements and continue operating.

Deterrence Failure: Without criminal accountability or penalties that exceed fraud profits, settlements like Humana’s fail to deter future fraud. The settlement becomes a business expense rather than a deterrent.

The $90 Million Question: Sufficient Penalty?

While $90 million sounds substantial, analysis suggests it’s insufficient:

Fraud Duration: Six years of fraudulent bids (2011-2017) affecting potentially millions of prescriptions across hundreds of thousands of beneficiaries likely generated far more than $90 million in excess profits for Humana.

Cost-Shifting Scale: If Humana shifted even $20-30 per month per beneficiary from company costs to patient costs, and the fraud affected 500,000 beneficiaries over six years, the total fraudulent cost-shifting could exceed $500 million—making the $90 million settlement represent less than 20% recovery.

Time Value of Money: Humana enjoyed the use of fraudulent profits from 2011-2024, earning investment returns on funds that should have been spent on patient care. The settlement doesn’t recover this time value or opportunity cost.

Deterrence Calculation: For settlements to deter fraud, penalties must exceed expected fraud profits. A settlement that recovers less than 50% of fraud profits makes fraud profitable even when caught, encouraging continued abuse.

Aftermath and Continuing Concerns

The settlement did not resolve fundamental problems with Medicare Part D:

No Systemic Reforms: CMS implemented no new bid verification systems or oversight mechanisms to prevent future fraud, suggesting similar schemes continue at Humana and competitors.

Industry Reaction: Other Medicare Part D insurers made no public changes to bidding practices, suggesting industry-wide confidence that fraud remains profitable and low-risk.

Patient Costs Continue Rising: Medicare Part D beneficiaries continue facing rising out-of-pocket costs despite billions in government subsidies, suggesting ongoing cost-shifting from insurers to patients continues.

Political Protection: The insurance industry’s lobbying power prevents legislative reforms that would increase oversight, impose meaningful penalties for fraud, or return Part D to direct government administration.

Systematic Corruption in Medicare Privatization

The Humana settlement exemplifies systematic corruption in Medicare privatization:

Profit from Public Programs: Private insurers extract profits from taxpayer-funded Medicare by fraudulently lowballing bids, winning contracts, then shifting costs to beneficiaries—converting public healthcare spending into private profits.

Regulatory Capture: Weak CMS oversight, DOJ declination to intervene, and settlements without admission of guilt demonstrate that regulators protect industry interests rather than patient welfare.

Legal Immunity: Corporate settlements without criminal charges give executives immunity for fraud while the corporation treats penalties as business expenses—creating a system where fraud is rational and profitable.

Whistleblower Dependence: Fraud detection depends on insider whistleblowers rather than regulatory oversight, demonstrating that agencies lack capability or willingness to identify fraud proactively.

The case proves that Medicare privatization through Part D creates systematic fraud opportunities while regulatory capture ensures minimal consequences, making fraud a standard business practice rather than an aberration requiring substantial reform to protect Medicare beneficiaries from predatory insurance company practices.