Medco Unit Saw Scrutiny

As the government probes Medicaid billings, a past study of payment practices tells a tale.
By Melissa Davis ,

Caremark Rx

(CMX)

isn't the only pharmacy benefit manager, or PBM, that has been accused of bilking Medicaid.

Granted, the company has become the first major PBM to be investigated by government authorities for alleged Medicaid fraud, as

TheStreet.com

reported last week.

But official documents going back some years suggest that another big industry player has come under scrutiny as well. Paid Prescriptions, a subsidiary of industry leader

Medco Health Solutions

(MHS)

, has been portrayed in government studies as the biggest offender in the group.

To be sure, Medco hasn't been charged with any wrongdoing. The company defends its business practices and says it has done its best to comply with Medicaid laws. By now, though, the government has displayed a lasting interest in the entire PBM industry.

By law, Medicaid pays for prescription drugs only when its recipients have no other health care coverage available. But the government program -- which ranks as the nation's biggest spender on prescription drugs -- has often paid for medications used by Medicaid recipients with PBM benefits. And it routinely has gotten nowhere when seeking reimbursement from the giant companies that process the vast majority of prescription drug claims in this country.

Government authorities have spent nearly a decade searching for ways to recover Medicaid overpayments for prescription drugs. They identified the problem as a big one -- costing taxpayers hundreds of millions of dollars annually -- in a study dating back to 1996. They followed up with a public report, published by the Office of Inspector General in 2001, highlighting many of the same challenges that still exist today.

They offered a telling observation in the process.

"States have encountered an increase in reimbursement problems," the first study says, "which occurred simultaneously with the advent of PBMs."

That same study singles out Paid Prescriptions in particular. The study notes that many states listed Paid Prescriptions -- acquired by Medco years earlier -- as the most difficult third-party payer they had encountered.

The follow-up report by the OIG continues to mention problems with a specific PBM "identified as the biggest problem for states in the 1996 study."This report stops short of actually naming the company, but it does list some damaging complaints by its critics.

"Two states said the company has not paid them foryears," the report says. "Another state said they had'talked with

the PBM's attorneys and gotten acomplete runaround.' The same state reported losing'tens of millions' of dollars because of thiscompany."

For its part, Medco questioned the relevance ofthe original study in particular.

"This report is approximately eight years old,"said Jennifer Leone, manager of public affairs for thecompany. "I'm a little unclear about why you arewriting about such ancient documents. Nevertheless,Medco has a great working relationship" with the federal Medicaid program.

Still, the Justice Department investigated Medco for years before officially joining a different whistleblower lawsuit that's still pending against the company. State regulators jumped into that same probe, securing a settlement from Medco, before moving on to target others in the sector as well. So Medco itself has shown just how long investigations can drag on before they finally blow wide open and just how many targets -- beyond the original one -- can surface in the end.

The government's past reports, while dated, indicate clear problems with Paid Prescriptions. And the government's more recent actions, notably its focus on Caremark, signal an interest in gathering additional information to resolve the entire Medicaid issue.

Shares of Medco, lifted by a new analystrecommendation, rose 1.3% to $46.95 on Tuesday. Thestock has long been a favorite by Wall Street analystswho downplay regulatory risks facing the industry.

Punching Bag

Meanwhile, the government continues to throw freshswings.

Most recently, both federal and state officials expressed an interest in pursuing Caremark for alleged Medicaid fraud. Going forward, some industry critics now expect the government -- armed with information from the Caremark probe -- to naturally target other big PBMs, like Medco, as well.

Patrick Burns, a spokesman for Taxpayers AgainstFraud, says that whistleblower cases -- like the onepending against Caremark -- can often lead toindustrywide investigations.

"Whistleblowers are a little bit like bird dogs,"he said. "They make hunting for fraud easier and more efficient. But the Department of Justice and U.S. attorneys can then initiate their own cases. ... They do it all the time."

To be fair, Medco claims it is not at fault. The company says it is often unaware when its customers improperly submit claims to Medicaid. It also says that it covers many claims for Medicaid beneficiaries itself. In a nutshell, it says it has tried its best to comply.

"Medco has spent considerable time and effort over the years working with the Centers for Medicare and Medicaid Services (CMS), individual states and the vendors hired by a number of state agencies to improve the efficiency of the processing and accuracy of this process," Leone said.

Still, Medco has already made some enemies.

The company's embattled subsidiary, PaidPrescriptions, sure took a lot of heat in thegovernment's 1996 study. Of 40 states surveyed, 17said they faced more difficulty obtaining Medicaidrepayments from Paid Prescriptions than from any other individual company.

Paid Prescriptions also came under fire for its communications record. Eight states specifically complained that the company, or parent Medco, had failed to return their phone calls. Only two said the same about Caremark. State programs went on to cite a lack of response from third-party payers in general.

"South Dakota and Virginia do not receive anyresponse on over 50% of their claims submitted to Paid Prescriptions," the study says. And "the most significant factor resulting in nonpayment was that third parties often do not respond to the submission of claims by the state."

But those parties apparently should respond to atleast some of those claims. One state participating inthe 1996 government study estimated that a significantnumber -- some 24% -- of its Medicaid recipients haveinsurance through private parties.

Ultimately, the study portrayed repayment as aclear priority.

"Medicaid beneficiaries are often covered by otherthird parties that have a legal obligation to paypharmacy claims before Medicaid pays," the study says.But "millions of dollars in Medicaid expenditures arenot being collected from primary payers."

In the follow-up 2001 report, 32 states estimatedthat their Medicaid programs had paid for $440 millionworth of prescription drugs that should have beencovered by somebody else. But they had recovered just$73 million -- or 17% -- of that total. The remaining18 states could not even calculate how much their ownMedicaid programs might be owed.

Burns, for one, sees the need for more governmentaction. Thus, he hopes the Caremark probe will, infact, expand.

"You have a situation here involving corebusiness-plan fraud," Burns said. "If Caremark isdoing this, you can be pretty sure that the otherlarge PBMs are doing it as well."

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