Medco's Talking Cure

Medco (MHS) could be on the verge of chasing away a nagging legal headache.

The giant pharmacy benefit manager has signaled a new willingness to settle a six-year-old government probe of its business practices. A court order issued last week says the parties have temporarily abandoned their original schedules -- which had them headed for a 2006 trial -- "to permit settlement discussions" instead.

The federal government has accused Medco of defrauding customers by shorting, changing and canceling their prescriptions. The government has already forced Medco to adopt different business practices -- a move that has hurt the company's margins -- but continues to seek monetary damages that, some believe, could top $1 billion.

For its part, Medco always has denied any wrongdoing while leaving the door open for a fair settlement that would put the litigation behind the company. Medco told TheStreet.com on Tuesday that it would not comment on "speculation or rumor" about a possible deal.

Still, at least one Medco critic believes that the company could finally make a move.

"Settlement is in Medco's best interest -- and always has been," says Patrick Burns, a spokesman for Taxpayers Against Fraud. "If the Department of Justice joins a False Claims Act case, the facts are generally very bad. ... All in all, there are over 20 frauds listed (against the company), and the laundry list itself is something Medco does not want a jury to see."

In the meantime, Medco already has lost its highly lucrative contract with the federal government. Medco has essentially portrayed the government's case as a fishing expedition carried out by an overzealous prosecutor. Associate U.S. Attorney James Sheehan, who is leading the government's probe, has developed a reputation for pursuing companies suspected of engaging in health care fraud. The case against Medco is among the biggest of his career.