Probes Poke Caremark, DaVita - TheStreet

Two big health care companies are feeling some fresh regulatory pain.

DaVita

(DVA) - Get Report

, a major operator of dialysis clinics, said the U.S. Department of Justice is seeking "a wide range of documents" about the company's operations dating back to 1996. And

Caremark

(CMX)

, one of the nation's largest pharmacy benefit managers, recently disclosed that authorities are examining its Medicaid collections in at least six states.

Both companies have caught the attention of regulators before.

DaVita is now supplying information to federal prosecutors in both Missouri and Pennsylvania. The company said the latest subpoena, received on Friday from the U.S. Attorney's office in the Eastern District of Missouri, has been issued as part of a "joint civil and criminal investigation." Prosecutors are seeking information about DaVita's pharmaceutical services and its relationships with pharmaceutical companies, physicians and joint-venture operations.

"We have worked hard to create and sustain a culture of compliance at DaVita, as well as the policies and systems to support that culture," said CEO Kent Thiry. "We look forward to the opportunity to answer whatever questions the government has."

DaVita's stock dropped 4% to $42.31 on the news.

Medicaid Dispute

Meanwhile, Caremark is answering some questions of its own. In its recently filed annual report, Caremark said it has been supplying information to the Justice Department and several states that have raised concerns about the company's Medicaid claims.

"Issues have been raised by the state of Tennessee, five other states and

Centers for Medicare and Medicaid Services concerning how the company is adjudicating Medicaid third-party liability claims that have been paid by the respective states' Medicaid program when the beneficiary also had coverage under a pharmacy benefit plan administered by Caremark," the filing states.

Medicaid is known as the "payer of last resort," meaning that it should pay for prescription drugs only when no other coverage exists. Caremark is seeking a court ruling that would allow the company to deny coverage of Medicaid claims that have been improperly submitted.

Because Medicaid spends so much money on prescription drugs -- and because it recovers so few overpayments -- the stakes in this case could prove especially high. In a special report published four years ago, the Office of Inspector General estimated that state Medicaid programs were spending hundreds of millions of dollars on prescription drugs that should have been covered by another party instead.

"Almost three-quarters of states report third parties refuse to process or pay Medicaid pharmacy claims," the report states. And "more states had problems with pharmacy benefit management companies than with all other types of third parties combined."

The case against Caremark has been building for some time. In its latest regulatory filing, Caremark disclosed that the Medicaid dispute had triggered a so-called qui tam, or whistleblower, lawsuit that's been pending against the company for some six years.

The suit remains under seal in the Western District of Texas.

"A qui tam lawsuit typically is filed under seal pending a government review of the allegations and a decision by the applicable government authority on whether or not to intervene in the lawsuit," Caremark explained in its annual report. "We have been providing information requested by the United States Department of Justice and several other states mentioned."

Caremark has already been targeted by a separate whistleblower lawsuit in Florida. In addition, it faces a multistate probe of its business practices. Two other giant PBMs --

Medco

(MHS)

and

Express Scripts

(ESRX)

-- have attracted significant regulatory scrutiny as well.

Shares of Caremark inched up 13 cents to $40.32 on Monday.

Industry Woes

Patrick Burns, a spokesman for Taxpayers Against Fraud, expressed little surprise about the latest health care probes.

Burns portrays both dialysis companies and PBMs as repeat offenders that have routinely bilked government insurance programs. He estimates that some 90% of all renal care providers have attracted government probes and points to DaVita and Grambo -- which DaVita is acquiring -- as just two examples. He notes that Grambo recently agreed to settle Medicare fraud charges by paying the year's biggest penalty so far.

But Burns claims that all of the dialysis companies engage in very similar practices.

"What we're seeing here is classic business practice fraud in which some idea was cooked up by one company and then spread like wildfire across the industry," he said.

Burns sees a similar trend in the PBM industry. Thus, he fully expects to see more Medicaid disputes ahead.

"This could be a very substantial fraud

involving more than $1 billion," he said. "If Caremark is doing this, you can be sure the other large PBMs are, too."