Caremark

(CMX)

could owe hundreds of millions of dollars if new allegations about its dealings with government health insurance are borne out.

As reported Friday, the pharmacy benefits manager is now the subject of federal and state investigations into whether it avoided reimbursing the government for drugs that programs like Medicaid purchased for patients who Caremark simultaneously covered.

Prosecutors have accused Caremark of refusing to repay the government for claims involving so-called "dual eligibles," people who qualify for government insurance but have private insurance as well. Among other smoke screens, they allege, the company intentionally programmed its computer system with "dummy code 9999991" to reject claims submitted by the Medicaid program.

"This company schemed to avoid responsibility for its health care obligations to members who were paying premiums," Texas Attorney General Greg Abbott said on Friday. "We intend to send Caremark a past-due bill for its conduct."

The government has estimated total damages in the case at $500 million.

For its part, Caremark has portrayed the government's complaint as misguided. Company spokesman Gerard Carney said the government is "seeking to impose payment obligations on Caremark that are neither appropriate nor required by law." Thus, he said, the company will "vigorously" defend itself going forward.

Caremark's stock inched up 19 cents to $44.40 on Tuesday.

Blowing the Whistle

The government's case is based upon information supplied by Janaki Ramadoss, a Caremark insider who worked in the department that processes the company's Medicaid claims.

Ramadoss claims that Caremark intentionally defrauded Medicaid and other government insurance programs -- including Indian Health Services and Veterans Affairs -- while operating under a Corporate Integrity Agreement that required the company to comply with government rules. Moreover, she says, Caremark ignored and even rebuffed her when she tried to correct the problem.

Ultimately, Ramadoss sued Caremark on behalf of the federal government and eight states. The Feds and four of those states, led by Texas, have officially joined the case.

"Defendants have systematically defrauded the United States for at least the last three -- and possibly six -- years," states the complaint, which was filed in August 1999. "These acts are the more egregious because they were performed with knowledge by middle and senior staff while under the terms of a five-year CIA."

The complaint goes on to detail an elaborate scheme that allegedly enabled Caremark to save money for its customers -- and keep their business -- and, at times, even pocket the money for itself.

For starters, the complaint says, Caremark intentionally programmed its computer system to automatically deny Medicaid claims for at least 34 of its clients. Moreover, it says, Caremark manually rejected claims from Indian Health Services in a manner that would leave no audit trail.

In addition, it says, Caremark rejected other government claims by improperly saying that either the claims were stale or that no coverage was in force. Indeed, it says, Caremark would cite a number of flimsy reasons -- such as missing information and out-of-network limitations -- when denying the government claims.

The complaint says that Ramadoss "has been informing management of these reimbursement violations for over two years, sometimes on a daily basis." However, it says, the company ignored the whistleblower's proposed solutions to the problem and continued to engage in improper behavior instead.

As a result, it says, Caremark managed to take advantage of federal insurance programs with little investigative resources.

"Under these circumstances, Caremark has been able to retain the monies of clients in their respective funds with few challenges," the complaint states. "Caremark is motivated to keep the balances in the clients' funds high because that performance measure is the most important factor in retaining and generating new clients. For clients that have a 'capitation' plan with Caremark, it means that those funds are retained by Caremark directly."

Dismissing the Case

So far, however, Wall Street sees little reason for concern.

J.P. Morgan analyst Lisa Gill was quick to dismiss the case as immaterial on Tuesday. Ultimately, Gill believes that Caremark -- her top stock-market pick -- will escape exposure.

"Caremark only serves as an administrator of the plan on behalf of its customers," she explained. "As we do not believe CMX was involved in any risk-sharing arrangements with managed care customers responsible for dual-eligible patients, we believe the ultimate responsibility falls on their customers, thus limiting any potential liability."

Similarly, Caremark itself has said that the Texas attorney general, in particular, has made comments that "fundamentally mischaracterize the role of a pharmacy benefits manager in processing Medicaid claims."

But Patrick Burns, a spokesman for Taxpayers Against Fraud, feels that Caremark should be held accountable. Still, he says, even if Caremark somehow escapes -- and makes its clients pony up instead -- the company will still suffer in the end.

"It would be bad for renewing contracts," he says. "There's no question it would leave a pretty big stain."