A long, secret investigation of


( CMX) is about to blow wide open.

After six years of work, government prosecutors have signaled their intent to pursue the pharmacy benefit manager, or PBM, for alleged Medicaid fraud. The

Justice Department

is expected to officially intervene in the case, which has attracted interest from at least two states, as early as this month.

Joe Brown, the magistrate judge presiding over a recent court hearing in Tennessee, essentially warned the company to be prepared, according to court transcripts recently reviewed by



"I don't think there's any way you're going to keep the United States out," Brown said. "They do pay the lion's share of

Medicaid, and they've got a big -- a big -- stake in it."

Medicaid ranks as the largest spender on prescription drugs in the country. But it is also considered the "payer of last resort," meaning that it should legally cover health care costs only when no other insurance exists. Based on court filings, the government believes that Medicaid paid for medications used by people with Caremark benefits and should be reimbursed as a result.

Caremark has sought a court ruling in Tennessee establishing its right to enforce contract language that allows it to deny certain Medicaid claims. The company declined to comment for this story.

Caremark's stock, while up for the year, has failed to keep pace with its biggest competitors --




Express Scripts


-- since news of the probe first surfaced. The shares fell 1.2% to $40.12 on Tuesday.

Going Public

So far, Caremark itself has yet to even see the whistleblower lawsuit, currently pending in Texas, on which the government's case is based. But the Texas attorney general's office, which has been heavily involved in the probe, pledged during the March 29 court hearing to unseal the lawsuit within 30 days. The state also made clear that it feels "very strongly" about its case against the company.

Texas has made a name for itself in recent years by cracking down on Medicaid fraud. It hopes to see the current litigation in Tennessee transferred to its home base. Caremark is fighting that effort.

Meanwhile, officials in Tennessee -- which hopes to recover Medicaid overpayments as well -- indicated that recent evidence has already bolstered the government's case against Caremark. Specifically, Tennessee Assistant Attorney General Peter Coughlan said that the Centers for Medicare and Medicaid Services has issued an opinion that essentially denies Caremark's right to turn down claims when customers use their Medicaid card -- rather than their Caremark card -- at the pharmacy.

"The CMS letter supports us greatly; we are very glad to get that letter," Coughlan said. "All we're trying to do is get the money back that we've paid out on behalf of somebody that Caremark should have paid for in the first place."

For its part, Caremark claims that two courts have already ruled in its favor on the same issue. The company is hoping that a decision in Tennessee, specifically addressing its contract rights, will set a precedent for the rest of the country and finally put the issue to rest.

Brown seemed to give that strategy little chance of succeeding. In the meantime, federal prosecutors have attempted to block the company's plans by officially intervening in the case.

"What we said was, 'Let them,'" Caremark attorney Paul Davidson says, "as long as they don't try to go to Texas."

Blame Game

The federal government has already

come under fire -- by the Tennessee judge himself -- for waiting six years to decide whether to intervene in the case still pending in Texas. But the government has blamed Caremark for that long delay.

During last month's hearing, Texas prosecutor Bill Moss -- who has worked extensively on the case -- portrayed the company as uncooperative.

"We've been strung along in good-faith negotiations for quite some time," he said. "And we have gotten data that has been inaccurate and incomplete, to put it in the best light. ... We frankly have the feeling that we have been misled."

Such complaints carry a familiar ring. Earlier this year, a judge scolded Medco for allegedly failing to cooperate with authorities. The PBM industry, as a whole, has been accused of being far too secretive.

But Caremark is the first major PBM to face a likely Medicaid probe. Federal prosecutors are planning to make their move at a time when Medicaid programs all over the country are struggling to make ends meet. In the meantime, states have hired outside firms -- like

Health Management Systems

(HMSY) - Get Report

-- in an effort to recover government overpayments and bring their skyrocketing health care costs under control. HMS has already secured $2.7 billion in overpayment for its clients so far.

"The states are turning to us more and more," said HMS spokesman William Hall. And "the good news is that we've been able to ease the pain for some of these programs."

HMS has fared pretty well itself. The company, which says it pockets "a small percentage" of the money recovered, saw its profits more than double last year alone.

The company counts 24 states among its customers. But some states -- like Texas -- have decided to pursue Medicaid overpayments on their own. During last month's court hearing, Moss issued a harsh warning to Caremark in particular.

"The eyes of Texas are upon you," he said. "And you won't escape them. We will seek you out."

But the judge pointed out that Tennessee -- rather than Texas -- moved against the company first. And he indicated that even Tennessee had probably waited long enough.

"If Caremark is still withholding money and people think that's the wrong thing to do, I can see where Tennessee would like to go ahead and have a ruling on that and have Caremark pay it up," Brown concluded.