Melissa Davis

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Loyalty Strained at Caremark

Melissa Davis

Caremark's (CMX Quote) relationships with many of its biggest customers are looking increasingly unhealthy.

The giant pharmacy-benefit manager, or PBM, faces a new probe in the state of Illinois, the Chicago Tribune recently reported. The company is suspected of illegally selling Illinois customers prescription drugs that were returned through the mail and never tested for possible damage. It has also irked Illinois lawmakers by failing to disclose terms of its big state contract.

Caremark faces ongoing problems in Florida as well. There, two former Caremark pharmacists have accused the company of defrauding and endangering state customers. The federal government -- a major Caremark customer -- has expressed interest in that case.

In addition, Caremark faces a broader probe involving attorneys general from 23 states and the District of Columbia. Caremark has yet to identify every state participating in the investigation, but a similar probe targeting Medco (MHS Quote) attracted several big states -- including California -- that conduct business with the PBM. Caremark serves as the PBM for the California Public Employees' Retirement System, or Calpers, a giant organization known for its shareholder activism.

For Caremark, the government contracts are significant. The Illinois contract, which Caremark is currently trying to renew, is valued at more than $200 million a year. The Florida contract is worth about $150 million a year. And the deal with Calpers brings in an estimated $250 million annually.

Still, the federal contract ranks as a far bigger prize. It is expected to generate more than $1.5 billion in revenue this year.

Medco lost the huge contract to Caremark last year after federal prosecutors began investigating Medco's own business practices. But Patrick Burns, a spokesman for the nonprofit Taxpayers Against Fraud, says the federal government may have "jumped out of the kettle and into the fire" when it chose Caremark as its replacement PBM. Going forward, he believes that Caremark -- like Medco -- could lose some government business as a result of the mounting scrutiny.

"Wall Street may only care about the bottom line," Burns said. "But the people who award these contracts don't want their own reputations besmirched by doing business with a company that's not transparent ... (and) under suspicion of fraud."

Caremark has denied any wrongdoing. The company's stock, a favorite among analysts, added 30 cents to $39.20 Monday.

Deep Secrets

By now, all three major PBMs -- Caremark, Medco and ExpressScripts (ESRX Quote) -- have come under government fire.

The companies claim to save their clients large sums of money by using their bulk purchasing power to negotiate deep discounts from drug manufacturers. But a growing crowd of industry critics, pointing to the rocketing cost of prescription drugs, have voiced their doubts. They believe the PBMs are unfairly keeping much of the savings for themselves.

Indeed, a recent survey by Hewitt Associates showed that only 53% of employers believe that PBMs lower prescription drug costs -- and that nearly one-quarter believe the PBMs raise the costs instead.

The industry, citing multiple government reports, insists otherwise. But it also refuses to disclose contract information that could help prove its case. In fact, Caremark is currently seeking a court order to block the release of terms of its contract in Illinois.

The state comptroller has access to the information and believes that it should be made public. Meanwhile, state lawmakers have also expressed concern about what they view as a "secret" government contract.

"This is public stuff," declared Peter Roskam, Senate Republican whip in Illinois. "It is a large contract that affects a lot of employees, and the question just becomes: "If this is such a great deal, why not disclose the information?"

Critics have long complained about a lack of transparency in the industry. They would like to know exactly how much PBMs pay and charge for their drugs. But the PBMs claim they are simply trying to protect trade secrets that help lower prescription-drug costs.

Roskam first began seeking information about Caremark's contract in Illinois late last year. Since then, news has surfaced that the state's top law enforcement official -- Attorney General Lisa Madigan -- is raising questions about the company's "returned goods" practices.

In the Florida case, former Caremark pharmacists Michael and Peppi Fowler have accused the company of shipping returned drugs to its Illinois facility and then reselling the drugs to unsuspecting customers for a second profit.

"Caremark sent those returned drugs from the Florida facility to the Illinois facility in the first instance because Caremark believed it was illegal to re-stock those returned drugs in the state of Florida," the whistleblower lawsuit states. "Indeed, Carlos Gonzales -- a high-ranking member of Caremark's management team at the Illinois facility -- acknowledge[d] that as the basis for such practices."

But the state of Illinois apparently frowns upon selling returned drugs as well. The law there "allows the reselling of returned prescriptions only under very limited circumstances, typically when the drugs have not left the supervision of trained medical staffers," according to the Chicago Tribune.

"Illinois was, like, 'You did what?'" Burns said. "So that's where they're at now."

Risky Business

Caremark has enjoyed kinder treatment in Florida.

There, the attorney general originally declined to join the Fowlers' lawsuit and only changed his mind at the company's own request. Critics quickly raised questions about Caremark's political ties and suggested that the state was less interested in prosecuting the company than it was in derailing the lawsuit. The whistleblowers blocked the attorney general from joining the lawsuit and continue to build their case.

Meanwhile, Calpers has yet to raise any concerns about the Caremark probes. Like the federal government, Calpers switched from Medco to Caremark after Medco came under government scrutiny. But Calpers spokesman Clark McKinley told TheStreet.com last week that the Medco investigation had nothing to do with that decision.

To be fair, Caremark has not attracted a federal-level whistleblower lawsuit like the one pending against Medco. But as first reported by TheStreet.com in July, the federal Office of Inspector General inside the Office of Personnel Management has subpoenaed Michael Leonard -- the Chicago attorney representing the former Caremark pharmacists -- for information about the Florida case. The attorney general of Illinois has now subpoenaed Leonard as well, according to the Chicago Tribune.

The attorney general's office did not return a phone message from TheStreet.com. Meanwhile, Caremark spokesman Gerard Carney declined to comment even when asked about any new subpoenas. So far, the company has not disclosed anything indicating that it has received a subpoena from the federal agency. It also has not mentioned a different subpoena, unrelated to the multi-state probe, from the state of Illinois.

But Burns, for one, sees a company -- and, indeed, an industry -- at risk. He believes that companies like Caremark will eventually lose out to competitors that are more willing to show how they actually make their cash.

"Why would you possibly want to go to a PBM that won't tell you what's going on," he asked, "when there are PBMs that will?"