Whistles Toot in New Medco Suit

Updated from 1:44 p.m.

The whistles keep blowing on Medco Health (MHS Quote - Cramer on MHS - Stock Picks).

In a regulatory filing on Thursday, the giant pharmacy-benefits manager -- already the target of a big government probe -- revealed that it faces yet another whistleblower lawsuit. The company now stands accused of cheating Medicare and Medicaid participants in addition to federal employees.

Medco revealed the new lawsuit just days after its Medicare discount drug card -- designed to significantly expand its Medicare business -- was activated. The lawsuit accuses Medco of failing to properly pass on rebates to government programs and engaging in a kickback scheme with third parties. The case was filed in late September, three days before federal prosecutors officially joined two other so-called qui tam lawsuits against Medco on behalf of government employees.

Medco, which continues to stand by its business practices as legal "in all material respects," has since lost its huge federal contract to rival PBM Caremark (CMX Quote - Cramer on CMX - Stock Picks). Still, even Caremark -- and the PBM industry in general -- has fielded criticism for allegedly defrauding customers.

Last month, the Boston Globe called for strict oversight of the loosely regulated industry as sweeping Medicare reforms begin to take effect.

"When Congress last year passed its prescription bill with a ban on bulk purchasing of drugs by Medicare, it opened the door to profit-making companies that do group drug purchasing for health care plans and employers," the Globe stated in a May 23 editorial. "They are called pharmacy benefit managers, and a recent settlement with federal prosecutors and 20 states over questionable practices by the largest firm, Medco, demonstrates that law enforcement officials need to monitor them closely."

Taking Aim

Just weeks ago, Medco agreed to pay $29 million to 20 states that were investigating the company for possible wrongdoing. As part of the deal, Medco also agreed to change its business practices to settle one count of a federal whistleblower lawsuit that accuses the company of costing -- rather than saving -- customers money by, among other things, changing and even canceling their prescriptions.