Medco's Woes Go Beyond Spitzer Probe

Medco MHS has suffered a relapse.

Like other pharmacy benefit managers, Medco took a hit Tuesday over concerns that problems in the broader insurance sector -- which is targeted by New York Attorney General Eliot Spitzer for alleged bid-rigging -- could prove contagious. Most analysts downplayed the exposure for health benefit companies, especially PBMs. But Medco was quietly nursing a fresh wound of its own.

The company recently lost two court motions in a whistleblower lawsuit being carried out by a federal prosecutor known for his tough stand on health care fraud. Jim Sheehan, a high-profile associate U.S. attorney in the Eastern District of Pennsylvania, has accused the company of defrauding federal customers by only partially filling, switching and even destroying their prescriptions. His case last month survived a motion to dismiss by the company.

For its part, Medco focused on the charges that were denied.

"Under court rules, a motion to dismiss requires the court to assume the facts alleged in the complaint are true -- a high legal threshold, which makes even partially successful motions to dismiss rare," Medco spokeswoman Ann Smith says. "This motion is a starting point in what will continue to be a vigorous defense against these charges, and we are pleased with the outcome."

Continuing its fight, Medco recently sought -- but failed -- to obtain courtroom permission to depose federal prosecutors. Medco also found itself unable to block new testimony from a former employee who, prosecutors feel, may have been previously influenced by company attorneys.

Patrick Burns, director of communications for Taxpayers Against Fraud, portrays Medco's recent setbacks as significant. Most notably, he says the court's ruling means that Sheehan will continue to prosecute the case.

Medco had asked to question the U.S. attorney's office about, among other things, its interviews related to the lawsuit. The government argued that Sheehan could wind up disqualified if that happened. The court ultimately sided with the government, saying that Medco is not entitled to the government's "work product and trial strategy."

Burns senses desperation in Medco's approach.