Melissa Davis

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Whistles Toot in New Medco Suit

Melissa Davis

Updated from 1:44 p.m.

The whistles keep blowing on Medco Health (MHS Quote).

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). 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.

During negotiations with the government, Medco had asked federal prosecutors to partially unseal any qui tam lawsuits pending against the company in the Eastern District of Pennsylvania overseen by U.S. Attorney Patrick Meehan. Meehan's assistant, James Sheehan, is leading the investigation of Medco and has become well-known for his tough stance against health care fraud.

In response to Medco's request, Meehan said the company could simply disclose the lawsuit in regulatory filings without discussing it further. He refused to unseal the case, offering details of the basic allegations in a two-page letter instead, and kept the whistleblower unnamed.

Medco has attacked the credibility of whistleblowers involved in the two other qui tam lawsuits, which -- unlike the latest -- have already attracted government intervention.

"The United States Attorney's office has not indicated whether it intends to intervene in the matter, and has not yet requested any information from the company with regard to the complaint," Medco's 8-K filing states. "Accordingly, the company is not in a position to evaluate the complaint or speculate on the timing of any related proceedings in the matter."

Medco's stock tumbled 1.3% to $34.94 on Thursday. The stock, publicly traded since a spinoff from giant drugmaker Merck (MRK Quote) last year, peaked near $40 per share in February but has since suffered a series of downgrades due to the company's loss of big contracts like the one covering federal employees.

The In Crowd

Still, the PBM industry itself remains popular on Wall Street. And it has scored big fans in the political arena as well.

Last month, the Associated Press calculated that companies offering new Medicare discount drug cards spent at least $35 million lobbying the Bush administration ahead of the Medicare reforms. The AP singled out Medco, in particular, for hosting a $100,000 fund-raiser for President Bush -- headlined by Health and Human Services Secretary Tommy Thompson -- just weeks after Medco won approval for its Medicare card.

For its part, Medco vigorously denies there's any link between the Medicare cards and any political activities. "The event was not a Medco-sponsored event," the company said Thursday. "One member of our management team, Dr. Alan Lotvin, co-chaired the fundraiser for Secretary Thompson as a private citizen. It was not organized by Medco; however, it was legal, appropriate and properly disclosed. Dr. Lotvin is the President of our Specialty Pharmacy group; his responsibilities do not include Medco's Medicare Discount Card program."

"Medco services more than 10 million members over age 65, more than any other pharmacy benefit manager, and 2 million Americans currently use one of our non-Medicare drug discount card programs," Medco adds. "We suggest that is a far more likely reason that Medco was chosen as one of the Medicare-approved card sponsors than any political activity on the part of Medco employees."

More recently, Medco snagged the former head of Medicare himself to provide the keynote address at a company-hosted symposium on Medicare reform. Thomas Scully, until recently charged with policing the Medicare program, expressed no concern about oversight of the PBM industry in excerpts from his speech.

"More regulation is not the answer," Scully stated in a press release issued last month by Medco. "More market consolidation, more patient information and patient purchasing of Medicare -- which is the real key missing ingredient -- is what we think is going to drive change."

In the end, Scully predicts that the reforms will prove significant.

"This is going to have a much bigger impact on your lives than a lot of people realize," Scully stated in the release. "We really didn't look at this as Medicare reform. We looked at this as health care reform. It's designed to be a much more sweeping bill than a lot of people realize."

So far, however, the program is off to a shaky launch. The Medicare discount drug cards -- which represent the introduction of Medicare reforms -- have so far received a cool welcome at best. The Miami Herald, headquartered in a state with a huge Medicare population, reported this week that only a fraction of those who inquired about the cards actually signed up for them.

"They found them confusing," a volunteer told the Herald.

Scully was nevertheless upbeat even after the tepid response from Medicare recipients.

"We are hoping that a lot of individuals were window-shopping during the month of May," he said in a news conference covered Tuesday by the Herald. "This [card] is a very good deal."

But Medpin, a nonprofit agency catering to the California poor, had warned in advance that the new cards would stir confusion and, in fact, should be delayed pending further examination. The group conducted a study on behalf of seniors that determined some Medicare cards would actually cost, rather than save, existing Medicare customers money.

"A large portion of our patients are enrolled in Medicare, and nearly all are low-income," said Marty Lynch, executive director of a California clinic that works with Medpin. "They already have significant difficulties understanding their health benefits, and the Medicare drug discount cards are simply going to compound the problem."