Caremark Suit Gets Noticed

Some officials are taking a new look at the pharmacy benefit manager in light of a big whistleblower suit.
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A Medicaid fraud investigation targeting

Caremark

(CMX)

, one of the nation's largest pharmacy benefit managers, could soon cause more pain.

Already, at least five states have joined with the federal government in an effort to recover money from Caremark that they feel belongs to the Medicaid program. But laws could permit as many as 10 more states, along with the District of Columbia, to demand similar repayments, along with substantial penalties.

Total damages could exceed $500 million, according to a newly expanded whistleblower lawsuit filed just over a week ago. Caremark denies wrongdoing, but the allegations themselves seem to be taking a toll: This month alone, press reports show, county officials in at least two states have questioned whether they should be conducting business with a company suspected of engaging in Medicaid fraud.

"I wish our staff would look into it a bit more," Stony Rushing, a county commissioner in North Carolina, said of the Medicaid probe last week, according to the

Charlotte Observer

. "If we're endorsing

a discount prescription card managed by Caremark, are we endorsing this company?"

Medicaid ranks as the largest spender on prescription drugs in the country. It is also considered the "payer of last resort," meaning that it should legally cover health care costs only when no other insurance exists.

The government believes that Medicaid has paid for drugs used by people with Caremark benefits and should be reimbursed as a result. However, it claims that Caremark has taken deliberate steps to avoid those repayments and has violated the law for years in the process.

For its part, Caremark had little to say about the latest development.

"We cannot comment regarding ongoing litigation," explains Caremark's Kelly Carper Erickson. But "we believe we have meritorious defenses to the claims."

Caremark's stock, long embraced as a Wall Street favorite, slipped 36 cents to $45.62 on Thursday but remains within $2 of its all-time high.

Troubling Tune

In a lawsuit filed under the False Claims Act six years ago -- and finally unsealed this summer -- Janaki Ramadoss formally accuses Caremark of defrauding multiple government agencies and ignoring her pleas to stop.

Ramadoss used to work in the Caremark division that processed every Medicaid claim submitted to the company for reimbursement, the lawsuit states. She personally audited some 6% of all claims -- including those submitted by other government agencies -- that were received by that department, it adds.

On the basis of that experience, Ramadoss claims that Caremark has shortchanged Medicaid, Indian Health Services, the Veterans Administration and military treatment facilities. She also suspects that the company owes money to other government organizations, such as the Federal Employee Health Benefits Program and the Railroad Retirement Trust, as well.

Ramadoss says that Caremark improperly rejected claims from such agencies in order to save money for company clients that should have covered the drugs themselves.

"By refusing to reimburse the federal programs for legitimate claims, Caremark is able to retain more money in a client's fund, keeping the client happy and allowing Caremark to retain and increase its profits and market share," her lawsuit explains. "But it comes at a price for the federal and state governments -- their treasuries are improperly depleted."

Ramadoss then goes on to detail Caremark's alleged strategy.

For example, her complaint states, Caremark lumps Medicaid claims in with so-called paper claims that arrive through the mail and are particularly expensive to process. Many Caremark clients ban their employees from submitting paper claims and order them to use the PBM's mail-order pharmacy or other pharmacies that can send electronic claims instead, the lawsuit states.

Caremark has manually rejected Medicaid claims submitted for those people covered by such plans, the complaint says, leaving no computerized record that those claims ever arrived in the first place. Then, it says, the company has notified the government of the rejected claims with a brief form letter if it offered any notification at all.

"Under this guise," the lawsuit states, "100% of the requests for recoupment submitted under the plan designs of Caremark's 'no paper claims' clients would yield $0 each and every time to the federal programs."

Moreover, the complaint says, Caremark has denied some Medicaid claims even when paper claims were allowed. In those cases, it says, Caremark would reject those claims as "stale" -- due to their late submission date -- even though the company was not entitled to do so.

The complaint portrays such behavior as ongoing. For example, it says, Caremark "continues to reject hundreds of thousands of dollars in claims from the federal programs on the basis of a mere typographical disparity."

Perhaps most sensationally, however, the lawsuits claims that Caremark has deliberately programmed "dummy codes" into its computers that are designed to improperly deny, or at least reduce, legitimate payments to Medicaid.

"For more than 90 of its clients -- including plan providers Amoco,

Allstate Insurance

(ALL) - Get Report

, Geneva Steel, Lilly Industries and Columbia Energy -- Caremark treated Medicaid requests for recoupment as 'out of network' through the use of dummy code '9999991,' which meant that Medicaid requests for reimbursement were either (1) denied and paid $0 in reimbursement or (2) the amount paid was significantly reduced," the lawsuit states.

Similarly, the lawsuit says, Caremark relied on a dummy code to reject Medicaid claims for nursing home patients as well.

"Ramadoss informed Caremark's management of these reimbursement violations for over two years, sometimes on a daily basis," the complaint states. "But the Caremark computer system rejected -- and continues to reject -- reimbursement of these claims."

Disharmony

By now, five states -- Arkansas, Florida Louisiana, Tennessee and Texas -- have already started pursuing Caremark for repayments. Another two, California and Illinois, are still deciding whether they will. And eight more, plus Washington D.C., now have the opportunity to join that effort under state-level False Claims Acts that were enacted after the original whistleblower lawsuit was filed.

In the meantime, Caremark has started to feel some backlash from its legal problems already. Last week, the

Orange County Register

reported, a local government agency rejected a contract from Caremark, in part because of the "rash of lawsuits" facing the company.

Similarly, in New York -- a state with no connection to the Medicaid probe -- a county legislator said he was "bothered" by Caremark's legal problems even though he recently voted to do business with the company, anyway, the

Times Union

of Albany, N.Y., reported.

Meanwhile, back in North Carolina -- a state that's now eligible to join the whistleblower lawsuit -- Rushing is having second thoughts about his own vote in favor of the company. The Medicaid fraud investigation has given him some pause. But a separate whistleblower complaint, accusing Caremark of selling returned blood products, worries him even more.

Rushing says he wouldn't even want his livestock -- let alone his family or neighbors -- to wind up with drugs like that. Thus, he says, he would like to see the commission reconsider its recent Caremark decision so that he can at least vote against the measure even if it passes without him.

"We know about these allegations," he told

TheStreet.com

on Friday. "What's going to happen when somebody includes Union County in a lawsuit? We can't afford that. ... It scares me to death."