Medco

(MHS)

is keeping too many secrets.

A federal judge this week scolded the pharmacy benefit manager, or PBM, for failing to produce documents requested by prosecutors who suspect the company of engaging in fraud. The judge also labeled at least one Medco argument "disingenuous" and threatened legal sanctions against the company if it continues to violate court orders.

Clarence Newcomer, who is presiding over the case in the Eastern District of Pennsylvania, reprimanded Medco after the company missed a December deadline to supply usable electronic data to federal prosecutors.

"This court finds that defendants have been dilatory in their disclosure of these defective files, costing plaintiffs unnecessary time and expense," the judge wrote. "As a result of Medco's conduct and its resulting prejudice to plaintiffs, this court will grant several extensions to the discovery schedule and will establish additional safeguards to protect against further dilatory discovery production."

Federal prosecutors

complained late last year that Medco had "produced millions of pages of documents in an electronic format and, unfortunately, in no discernable order." They went on to claim that some of the data was actually locked in secret code. As a result, they sought court assistance in obtaining usable information and expanding the discovery period.

The judge ordered Medco to cooperate. However, he did excuse the company from granting five additional depositions that prosecutors had requested.

Medco downplayed the ruling and focused on an earlier -- more favorable -- decision instead.

"While extensions are procedural commonplace," said Medco spokesman Jeff Simek, "we are pleased that, on an unreported but substantive matter, the case against Bob Blyskal -- the sole Medco executive named by the government -- has been dismissed."

In mid-November, Newcomer threw out the case against Blyskal, Medco's former vice president of operations, because he believed the government had failed to sufficiently explain the fraudulent conduct in which the executive had allegedly engaged. He gave the government 20 days to amend its complaint against Blyskal, so the defendant could "muster a defense," but prosecutors opted to focus solely on their case against Medco instead.

The federal government has accused Medco of defrauding government customers by changing, shorting and even canceling their prescriptions. It has spent five years building its case against the company and is now expected to go to trial sometime in 2006.

Medco has denied any wrongdoing. But some believe the company faces a tough courtroom battle and should have sought a settlement instead. They also marvel at the company's alleged misconduct.

"One has to wonder whether the folks at Medco read these orders and understand the implication of their legal team's continuing failure to produce," said Patrick Burns, a spokesman for Taxpayers Against Fraud. "'Medco fatigue' may yet make it into the legal lexicon as a synonym for obstruction."

To be fair, Medco is not the only PBM that likes to keep secrets. The entire industry has long battled against efforts that would force them to disclose more information.

But the group apparently suffered a setback this week. A magistrate in Maine on Wednesday recommended that a "PBM fiduciary-disclosure law" be enforced in the state.

Currently, the law is blocked by a federal injunction -- and a powerful PBM lobbying group wants it to stay that way.

"Yesterday's recommended decision conflicts with two prior federal court decisions preliminarily blocking state PBM fiduciary and disclosure laws from taking effect," said John Aromando, legal counsel for the Pharmaceutical Care Management Association. "PCMA intends to seek a complete review of this non-binding recommendation."

The group goes on to say that Maine's law would threaten competition and drive prescription drug costs up by more than 10% in the state. But Sharon Treat, former majority leader in the Maine Senate, crafted the bill because she believes that added transparency would bring drug costs down instead.

Treat now serves as executive director of a multistate coalition that's forming its own nonprofit PBM due to mounting frustration with the for-profit players. She believes that her state -- or another fighting for the same cause -- will ultimately bring sweeping reforms to the industry.

"We have the political will to change things," she told

TheStreet.com

last year before leaving office. "Nobody is going to give up on this."

For now, however, PBMs remain stock market darlings. Shares of Medco, unchanged at $42.90 on Thursday, have moved within a dime of setting an all-time high.