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Drug Kingpins Face Justice

The Caremark settlement bodes poorly for drug administrators.

Caremark

(CMX)

could soon pay an industry-high fine to settle a government probe into the business practices of a company it acquired, sources close to the investigation say.

Under the proposed deal, the giant pharmacy benefit manager, or PBM, would pony up $100 million to end a six-year investigation into past conduct of AdvancePCS. In comparison,

Medco

(MHS)

-- Caremark's larger peer -- last year paid less than one-third of that amount to settle a multistate probe of its own operations.

Government prosecutors have long questioned whether the PBM industry in general, and AdvancePCS in particular, violated anti-kickback laws when negotiating deals with drug manufacturers. They have specifically focused on financial incentives that may have led PBMs to improperly favor certain drugs on their recommended lists for customers. They have sought to determine whether PBMs chose the most affordable and suitable drugs for their so-called "formularies" or selected other drugs that maximized their profits instead.

PBMs have always insisted that they operate legally and save their customers money. However, they have come under mounting government scrutiny because of suspicions that they pocket too much of the savings for themselves.

By now, all three major PBMs -- Medco, Caremark and

ExpressScripts

(ESRX)

-- face government investigations. Caremark would remain saddled with considerable legal exposure even after the AdvancePCS deal.

Patrick Burns, a spokesman for Taxpayers Against Fraud, calls the proposed AdvancePCS settlement the first major one involving significant monetary fines to come from the embattled PBM industry. He also portrays the deal as an important victory for James Sheehan, the associate U.S. attorney in the Eastern District of Pennsylvania, who has made a name for himself by cracking down on health care fraud in general and PBMs in particular.

Burns says the big AdvancePCS settlement should serve as a warning to others in the group. Notably, Medco remains a major target of the Philadelphia prosecutor.

"Sheehan is a serious lawyer who builds solid cases," Burns says. "If he's riding on you, you should be worried. ... He's got too many cases to chase bad ones."

Still, PBM stocks have performed well despite all of the regulatory exposure. The two largest PBMs, Medco and Caremark, have seen their stocks jump at least 40% in a year. The third, ExpressScripts, has climbed at about half that pace due in part to concerns over an investigation by crusading New York Attorney General Eliot Spitzer.

Caremark could not be reached Friday morning to comment on the proposed deal.

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Battlefield

If approved, the AdvancePCS settlement would end a long and sometimes contentious battle with Sheehan's office.

AdvancePCS's final quarterly report, filed before the company's 2004 merger with Caremark, offered a glimpse into that probe. In 1999, the filing says, the Department of Health and Human Services subpoenaed an AdvancePCS subsidiary as part of an industrywide investigation led by the Eastern District of Pennsylvania. The company says that it "provided documents responsive to that subpoena" but then goes on to expose a later dispute between the two parties.

Specifically, the company reveals that none other than the head of the Department of Justice -- the U.S. attorney general himself -- stepped in to help the government secure information.

"The Department of Justice did something which is very rare," Burns says. "This is the only case I know of where

Attorney General John Ashcroft used a civil investigative demand to break through the stonewalling of a corporation."

In September 2002, the filing says, a federal court issued a ruling allowing the two parties to work out their differences. Ultimately, AdvancePCS agreed to let prosecutors interview certain of its employees for the case.

But a

Wall Street Journal

"Heard on the Street" column in the summer of 2003 portrayed that process as anything but friendly.

"AdvancePCS is fighting back stoutly in court, saying that it has done nothing wrong and that Mr. Sheehan has no basis for his probe," the

Journal

reported. And "in an unusual and aggressive move, the company is attacking the personal motives and ethics of Mr. Sheehan."

Since then, Medco has also attempted to discredit Sheehan when defending itself in public. Right now, the company faces a 2006 trial that could wind up being the biggest case of Sheehan's career.

In the meantime, Medco has already agreed to change its business practices -- notably promising to be more transparent -- as part of the multistate deal that involved Sheehan's office as well. However, the company continues to deny any wrongdoing while promising to vigorously defend itself against the charges that remain.

Challenges

Meanwhile, Caremark still faces plenty of challenges of its own.

For starters, two former Caremark pharmacists have sued the company under the False Claims Act for allegedly switching, canceling and even reselling prescriptions. Damages in that case could total $100 million as well.

Secondly, the company faces yet another whistleblower lawsuit -- this one alleging Medicaid fraud -- that has attracted strong interest from both federal and state prosecutors. That case, too, could trigger significant damages.

For its part, Caremark has denied the allegations in the first case and declined to discuss the second. It has indicated in court, however, that it believes it has done nothing wrong.