Health Law Daily Wrap Up, ARTIFICIAL INTELLIGENCE—D. Ky.: Court parses AI-use causes of action from Medicare Act determinations in Humana class action, (Aug 27, 2025)

By Justin Marcus Smith, J.D.

Where federal preemption did not apply, the administrative exhaustion requirement also did not apply, or the court waived the exhaustion requirement for futility.

Federal preemption applied to some causes of action, but not others, in connection with alleged Humana, Inc. (Humana) use of an artificial intelligence (AI) tool to process Medicare Advantage insurance claims, held the federal district court in Louisville, Kentucky, on a Humana motion to dismiss. For example, federal preemption did not apply to the patients’ common law breach of contract cause of action because they pleaded they did not bargain for an AI to make generic coverage determinations without reference to individual medical needs. The court could determine the patients’ common law causes of action solely by reference to their contract with Humana. The court did not have to interpret the Medicare Act in such instances. The administrative exhaustion requirement likewise did not apply to causes of action that did not facially call for the court to interpret the Medicare Act. The court also found waiver of the administrative exhaustion requirement to the extent the patients showed irreparable harm and futility in pursuing administrative remedies. The court dismissed the patients’ North Carolina unfair competition and “insurance bad faith” causes of action with prejudice. The patients’ common law breach of contract, breach of covenant, fraud, and unjust enrichment causes of action survived dismissal (Barrows v. Humana, Inc., No. 3:23-cv-00654-RGJ-CHL (D. Ky. Aug. 15, 2025)).

Background. Patients brought a putative class action contending that Humana used an AI model instead of real physician recommendations and patient medical records to prematurely end post-acute care without considering individual patient needs. The patients also alleged:

• Humana employees cannot deviate from the nH Predict (AI) decision, and Humana disciplines and terminates those who do;

• Humana denied requests for nH Predict reports;

• there was no way for individual patients to understand Humana refusals to pay or to challenge the systemic aspects of the claims process that led to refusal;

• Even when patients prevailed in a Quality Improvement Organization (QIO) review, Humana and its contractor, naviHealth, allegedly forced patients to restart the appeals process;

• Even when Humana paid claims after a hearing with an administrative law judge (ALJ), it would thus avoid any ultimate HHS scrutiny of how it was using the nH Predict AI Model.

The patients contended Humana would eventually pay contested claims to ensure appeals would never reach the Medicare Appeals Council, and in this way, no one would ever exhaust their administrative remedies with regard to how Humana was allegedly using AI. The patients said they would not have enrolled with Humana had they known about the AI practices or they would not have been willing to pay the premium amounts they paid.

The patients initially asserted eight causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) unjust enrichment; (4) violation of North Carolina’s Unfair Claims Settlement Practice; (5) violation of North Carolina’s Unfair Method of Competition; (6) insurance bad faith; (7) unfair and deceptive insurance practices; and (8) common law fraud.

The patients sought all forms of damages including damages for emotional distress; disgorgement or restitution; declaratory and injunctive relief against Humana for its allegedly unlawful claim handling practices; and costs and interest.

Humana moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction. Humana variously contended it was not the correct defendant; the patients did not exhaust the mandatory federal administrative process; or the Medicare Act expressly preempted the patients’ causes of action. Humana also moved to dismiss under R. 12(b)(6) for failure to state a claim, but it did not make any additional substantive arguments beyond what it argued about R. 12(b)(1) dismissal.

The patients said their causes of action were not subject to the five-step administrative exhaustion process, but even if exhaustion applied, the court ought to waive that requirement. The patients initially denied federal preemption. However, during the dismissal motion hearing, they conceded federal preemption with respect to the North Carolina Unfair Claims Settlement Practice claim (claim 4); the insurance bad faith claim (claim 6); and the Unfair and Deceptive Insurance Practices claim (claim 7).

Federal preemption. The court held federal law did not preempt the patients’ four common law claims because the court could make a determination solely by interpreting the insurance contract itself. See Est. of Lokken v. UnitedHealth Grp., Inc., 766 F. Supp. 3d 835 (D. Minn. 2025) (Lokken). In reaching this holding, the court analyzed and deemed the Humana Explanation of Coverage (EOC) to be a contract. The EOC referred to itself as a part of Humana’s contract, and other courts have found EOCs part of a contract when deciding whether to enforce arbitration agreements articulated in the EOC.

Humana pressed that federal law would still preempt the patients’ claims because the Centers for Medicare & Medicaid Services (CMS) can take enforcement actions against Medicare Advantage Organizations (MAOs), like Humana, for misleading statements made to Medicare Part C enrollees in an EOC. However, the key allegation here was that Humana engineered appeals to preclude CMS from ever reviewing a claim. The court said it must take the evasion allegation as true at this stage of the proceedings.

Likewise, federal preemption did not apply to the common law fraud claim because the court would only have to look at whether Humana materially misled insureds by omitting the alleged fact that it was using AI to make coverage determinations. Common law fraud is also a tort claim, and the Medicare Act did not completely bar tort claims.

As for the unjust enrichment claim, the patients pleaded a belief that Humana knowingly charged the patients and class members insurance premiums for a personalized human service that Humana did not deliver. In contrast with Lokken, the court reasoned federal preemption did not apply to the instant unjust enrichment claim because the court did not need to consider whether Humana violated the Medicare Act. All it needed to do was interpret the Humana EOC.

However, federal preemption applied to the North Carolina statutory unfair competition claim under N.C. Gen. Stat. Ann. § 75-1.1. This was so because the Medicare Act expressly regulates how MAOs are to make claim decisions. The patients here claimed that Humana violated the statute by delegating claim evaluation to the AI model.

Administrative exhaustion. The court concluded the patients’ causes of action, other than unfair competition, were facially distinct from Medicare benefits determinations. Most of the patients’ claims were focused on the insurance claims process, and the insurance premiums allegedly paid in connection with that, not the underlying benefits decision. To the extent the patients sought damages for receiving a lesser product, the court held they did not have to exhaust their administrative remedies.

For example, Humana allegedly breached its contract with the patients because it used nH Predict to make coverage determinations. Essentially, the patients contended they paid insurance premiums for an individualized assessment of their insurance claims, not an AI assessment. The breach of implied covenant of good faith and fair dealing cause of action tracked similarly, it was about Humana’s method for processing insurance claims rather than underlying Medicare coverage determinations. The patients might prove their breach of contract and breach of covenant claims without resort to questioning an ultimate benefits decision. In other words, the breach claims were not inextricably intertwined with the benefits decision.

The same conclusion also applied to the unjust enrichment claim, the common law fraud claim, and the patients’ requests for injunctive and declaratory relief. The requests for injunctive and declaratory relief sought to ensure individual assessment of claims by a medical professional rather than by artificial intelligence. The patients were not seeking a different coverage result in a benefits decision with reference to the Medicare Act.

In contrast, the state unfair competition claim appeared to be inextricably intertwined with underlying benefits decisions. The unfair competition claim went beyond the argument that the patients did not get the benefit of their contract because it asserted that nH Predict resulted in premature denials of benefits or wrongful benefits determinations.

Waiver. The court waived the requirement that the patients fully pursue their administrative remedies on all claims that would ordinarily require exhaustion because the patients showed irreparable harm and futility.

There was no dispute that the patients satisfied the non-waivable element of presentment to the extent they presented their claims to a contractual intermediary of the Secretary of Health and Human Services. On the alleged facts, Humana was the Secretary’s intermediary.

The second, remaining issue was whether the patients satisfied the waivable element that they fully pursue their claims. The court found irreparable harm on the face of the complaint to the extent the patients said they experienced medical setbacks that could not be remedied by a later payment of what they requested. The court found class members had already forgone medically necessary care. Retroactive benefits or ultimate success on appeal could not remedy that.

The court also found that the patients alleged futility because they said Humana would immediately issue a new denial of benefits whenever it suffered a reversal of denial during either the internal appeal process or in a hearing with a federal ALJ.

The case is No. 3:23-cv-00654-RGJ-CHL.

Judge: Jennings, R.

Attorneys: Gary M. Klinger (Milberg Coleman Phillps Grossman PLLC) for Estate of Joanne Barrows. Burt Anthony Stinson (Kaplan Johnson Abate & Bird LLP) for Humana, Inc.

Companies: Humana, Inc.

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