No Labor of Love at Medco

Just when Medco (MHS Quote) finally cured a stubborn legal headache, it's starting to feel serious labor pains.

The giant pharmacy-benefit manager announced a long-awaited settlement with the federal government when posting strong first-quarter results on Friday. The PBM also insisted that it continues to operate normally despite a labor dispute that, union officials claim, could threaten a big chunk of the company's business.

"The threat is going to turn into reality," Jack Hammond, an international representative for United Steelworkers, told TheStreet.com on Friday. "Let's just put it this way. Union clients represent 25% of Medco's business -- and a lot of those companies are very friendly with us."

United Steelworkers has been fighting against benefit changes for 500 employees who have been locked out of Medco's big facility in Las Vegas and replaced with temporary workers. The union plans to oppose similar changes at two other Medco facilities -- employing more than 1,000 workers total -- when contracts expire there later on this month.

Meanwhile, after years of legal wrangling, Medco has opted to settle a high-profile federal complaint that was headed for a courtroom trial this summer.

The company took a charge of $163 million to cover its plan to settle allegations that it improperly switched, shorted and canceled prescriptions for federal employees. Under terms of the proposed agreement, the company will admit no wrongdoing, even though it has already changed many of its business practices as a result of the investigation. In addition, the company must operate under a so-called corporate integrity agreement -- meant to prevent future misconduct -- that has yet to be inked.

"I definitely think it's interesting that the company has been in this 'deny, deny, deny' mode," says Derek Brandt, an attorney for SimmonsCooper who assists corporate clients who rely on PBMs. "Then on a Friday morning, a month before the trial, they suddenly announce a settlement."