FBI Probes Caremark

Sources say the agency is looking at the company's handling of returned drugs.
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The FBI is probing

Caremark's

(CMX)

business practices.

Two people who have worked with the company say the FBI has questioned them about Caremark's mail-order delivery of controlled drugs. Sources say two other government agencies, including one that hunts for fraud against federal programs, have been seeking information about the company's delivery of other prescription drugs as well.

All three agencies have focused on the company's alleged former practice of reselling prescriptions returned through the mail.

John Rose, a former materials supervisor for Caremark, says agents from the Labor Department and the Office of Inspector General inside the U.S. Office of Personnel Management interviewed him two months ago about Caremark's restocking practices. The personnel management office "investigates allegations of waste, fraud and abuse within the federal employees health benefits program," according to its Web site.

"The agents I spoke with spent about three days going over the company's processes with me," Rose says. "It was pretty aggressive."

A person familiar with the company who spoke on the condition of anonymity said he has been questioned by agents from the FBI on similar matters.

"In 2005, FBI agents from Chicago questioned me about Caremark's practice of restocking controlled drugs returned by customers to Caremark's mail-order pharmacy," says the source.

A Chicago attorney who represents two former Caremark pharmacists in a whistleblower lawsuit against the company spoke of an FBI probe as well. When questioned by

TheStreet.com

last week, attorney Michael Leonard said he "was asked to -- and did -- provide a briefing regarding certain of Caremark's business practices to representatives of the FBI." But Leonard, who is restricted by a gag order from discussing his own case against the company, declined to offer any details about the matters he discussed with the agency.

Caremark itself said even less. The company failed to answer a question from

TheStreet.com

about whether it has ever restocked controlled drugs. And it neither confirmed nor denied any knowledge of an FBI probe.

"Caremark's policy is to make disclosures regarding litigation and investigation matters, as appropriate and necessary, in its securities filings," a Caremark spokesman said.

Ross Rice, a spokesman for the FBI's office in Chicago, says the agency typically doesn't comment on investigations unless charges have been filed or arrests have been made. He says he is unaware of any such actions regarding Caremark.

Oklahoma City-based securities attorney William Federman says companies must disclose any government subpoenas they have fielded. However, he says, they have no obligation to share information about less formal questioning.

But Massachusetts investment strategist Peter Cohan insists that investors would like to know more. And Cohan goes so far as to question big stock sales by Caremark's top executive, CEO Edwin "Mac" Crawford. Last week alone, Crawford cashed in options for 2 million shares that netted him more than $90 million.

Shares of Caremark, which peaked at $53.90 last month during Crawford's recent selling spree, rose 66 cents to $52.10 on Wednesday.

Return to Sender

Caremark serves as the pharmacy benefit manager, or PBM, for the federal government under a $1.5 billion contract that belonged to rival

Medco Health Solutions

(MHS)

until last year. Caremark won the business away after Medco -- its largest competitor -- came under fire for

alleged misconduct of its own. The company stands accused of misrepresenting its performance in order to avoid penalties from the federal government. It must defend itself in a big whistleblower lawsuit headed for trial in June. It has denied any wrongdoing.

To be fair, rival Medco also was once accused of endangering patients by selling them drugs that had been returned through the mail by others. But Medco has always denied that allegation, which has since been dropped from the whistleblower case against the company.

"Many of these prescriptions have limited shelf lives, have dosage unit and packaging requirements, have special handling needs or are subject to significant product degradation as a result of exposure to heat, cold, light, moisture and/or lack of refrigeration," the original whistleblower lawsuit states. "Defendants' policy of restocking returned drugs is in reckless disregard of the health and safety of state and federal health plan patients, and renders the overall quality of care afforded to state and federal health plans well below the standard of care expected by the state and federal governments."

Rose remembers Caremark changing its own restocking policies after the allegations against Medco first surfaced.

"The decision was made at the top," Rose says. "We didn't want to increase our liability. That was the reason we were given."

Even before that, Rose says that he worked at a Caremark facility in Phoenix with strict rules against restocking drugs. However, he says, the company regularly restocked returned drugs at its Chicago facility under an Illinois law that it considered more lenient.

Caremark, which has since come under scrutiny by the Illinois attorney general over its restocking policies, claims that it no longer sells returned drugs at all. Moreover, the company says that it previously restocked drugs under very limited circumstances -- involving "less than one-half of 1% of the prescriptions processed" -- and did so in accordance with applicable laws even then. It says it abandoned the practice altogether in 2003 to "eliminate any potential concern."

But some believe the company should have never resold the drugs in the first place.

"They should have never, ever, ever restocked any of those medications," insists former Caremark pharmacist David Estrada. "But as far as I know, it was done with all of the different medicines" that were returned.

If so, that would include controlled substances and expensive specialty drugs. While the FBI seems to be focusing on the first type of drug, Estrada feels worried about the second type as well.

As a clinical counselor for Caremark, Estrada says he heard troubling stories from customers who received their drugs from sweaty drivers in un-air conditioned mail trucks. And he says he always wondered how those drugs -- especially if they were returned under similar conditions -- could ever be safe.

"Would you really want to trust that medicine?" he asks. "Maybe in the fall or the spring, when it's cool -- maybe."

A Numbers Game

Some former Caremark employees accuse the company of taking dangerous shortcuts as well.

Before she transferred to the specialty pharmacy unit -- and then left the company completely last year -- Natalie Maltese says she struggled to "make (her) numbers" as a translation technician in Caremark's regular mail-order pharmacy. She says that Caremark required technicians to work so fast that they had little time to verify whether customers were even receiving the right prescriptions. Estrada spoke about company quotas as well.

"They call them 'standards,'" Estrada says. "If they get caught enforcing quotas, the state kind of looks down on that as unethical."

Nevertheless, Estrada insists, Caremark essentially did just that. He says the company expected pharmacists to check 90 prescriptions an hour and complained when they requested additional information.

For its part, Caremark acknowledged that its customers focus heavily on turnaround times for mail-order prescriptions. But the company portrayed its performance standards for employees as "reasonable." It also claimed an "extremely high" accuracy rate on mail-order prescriptions of 99.995%.

Yet like Maltese, Estrada found himself unable to make his numbers. So he began working in the company's clinical counseling division instead. He found that job more enjoyable, since he had more time to do it, but he still encountered practices that bothered him even there.

Specifically, he worried that customer service representatives -- faced with quotas of their own -- were fielding calls that only higher-paid pharmacists were qualified to take. He expressed grave concern about a potentially lethal situation that, he says, was documented in a company email. Specifically, he said a customer service representative once told a patient she could go ahead and use a time-release pain patch even though the patch appeared to be damaged.

"The woman insisted that she needed to speak with a pharmacist ... which is a good thing," Estrada says. "If one of those patches has broken open -- and all of the sudden it dumps all of the medication into a patient's system -- it can cause this nasty little side effect called death."

After Caremark won the big federal contract, with its huge volumes and strict turnaround deadlines, Estrada says the situation grew even worse. He says he finally gave up last year and went to work at a retail pharmacy chain instead.

"It was suicide to set up a contract like that," he says.

To be sure, Medco struggled to meet the government's mandates -- coming under intense scrutiny for the tactics it allegedly used -- and then lost the contract in the end. The company's stock took a hit after that high-margin business disappeared, although it has since risen to fresh highs along with the rest of the PBM group.

Meanwhile, Caremark's CEO continues to cash in on the company's own stock run. Beginning last November -- after going nearly a year without a single stock sale -- Crawford started selling huge blocks of stock through a series of multimillion-dollar options transactions. All told, he has netted $140 million through the recent sales.

Caremark said that Crawford executed the sales -- most of them planned in advance -- for "financial diversification and tax- and estate-planning reasons," and that he continues to hold a significant equity position in the company. But Cohan, for one, sees reason for alarm.

"This is a significant change in his historical pattern of trading," notes Cohan, who has no position in the stock himself. "This is kind of telling me that something out of the ordinary is going on. ... If I were an investor in that company -- and I knew about an FBI investigation -- I would probably get out of the stock fast, too."