Caremark Probe Goes Postal

Caremark's (CMX Quote - Cramer on CMX - Stock Picks) customers could be opening some unwelcome mail.

Texas prosecutors have started requesting information from Caremark clients as they seek to determine whether the pharmacy benefit manager, or PBM, has engaged in Medicaid fraud. They have already issued a civil investigative demand to at least one major Caremark client -- the city of Austin -- and hope to send out similar letters, without the company's review, going forward.

Caremark has launched a courtroom battle in an effort to keep that from happening. The company submitted the letter that was sent to Austin as an exhibit to support a protective order that would block other letters from going out. The judge has yet to publish a ruling.

In the meantime, however, Caremark did say that the court has asked the government to supply the company with copies of any demand letters sent out to its customers and that it is "satisfied" with that action.

For Caremark, the courtroom saga is the latest part of a sweeping Medicaid fraud investigation that has been building against the company for years. Federal and state prosecutors have accused the PBM of failing to properly reimburse Medicaid -- the so-called "payer of last resort" -- for drugs that should have been covered by the company's clients. The government has estimated damages in the case at $500 million.

Caremark has denied any wrongdoing and insists that it owes the government nothing. Ultimately -- even though Caremark itself rejected the Medicaid claims -- the company's unsuspecting customers could wind up on the hook.

For now, at least, the government seems to have one particular target in mind.

"The city of Austin is not a party to this action," the Texas attorney general stresses in a recent courtroom filing that defends the office's use of civil investigative demands. "The state's action in this case is only against Caremark."

In the meantime, the company's stock continues to perform quite well. Shares of Caremark, while down 19 cents to $49.76 on Friday, have nearly doubled over the past two years.

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