Big companies that rely on pharmacy benefit managers to save them money could face an unexpected, and potentially large, past-due bill from the government.

Over the years, PBMs like

Caremark Rx

(CMX)

and

Medco Health Solutions

(MHS)

have saved their clients money by letting Medicaid -- the so-called payer of last resort -- pick up the tab for drugs that should have been covered by private insurance instead. Caremark is, in fact, seeking a court order that would establish its right to keep doing just that.

But a recent opinion issued by the federal government could derail that effort and leave PBMs -- or, technically, their clients -- on the hook for hundreds of millions of dollars worth of unpaid Medicaid bills.

The Department of Labor has found that even PBM customers that operate benefit plans officially governed by the federal Employee Retirement Income Security Act, as many do, must comply with state Medicaid laws.

The advisory opinion, one of just a dozen or so handed down by the department each year, came in response to questions from a Medicaid fraud chief inside the Texas attorney general's office. Recent court documents show that Texas prosecutors -- along with the federal government -- have spent years scrutinizing Caremark, in particular, and could soon move forward with an official investigation of the company.

Caremark failed to comment on the latest development. The company's stock fell 1.4% to $39.05 on Thursday and has been underperforming the PBM group for some time.

Labor Pains

The new federal opinion cannot help.

"DOL opinions are given deference by the courts," explains Janell Grenier, a Philadelphia-area attorney who focuses on ERISA law. "So I think the opinion letter will be pretty persuasive. ... It doesn't mean that PBMs won't continue to try to keep doing

what they're doing, but they will probably have more trouble with it."

Up to now, the letter indicates, PBMs have relied on ERISA -- which normally pre-empts state law -- to avoid Medicaid payments. But the Department of Labor, which itself oversees ERISA, has pointed to clear exemptions in the federal law when it comes to Medicaid programs.

Moreover, the department has specifically cited problems with two common practices used by PBMs to deny Medicaid claims. It determined that PBMs have no right, under ERISA, to reject Medicaid claims simply because they are submitted late. Nor, it said, can PBMs refuse such claims just because pharmacists fail to seek payment from the PBMs, electronically, at the time the drugs are sold.

"The PBM views any state law entitling the state to obtain reimbursement in either of these situations as pre-empted by ERISA," notes John Canary, division chief of coverage, reporting and disclosure in the department's Office of Regulations and Interpretations. "ERISA, however, contains provisions specifically addressing its interaction with state laws authorizing or directing Medicaid programs to obtain reimbursement from ERISA-covered group health plans."

Patrick Burns, a spokesman for Taxpayers Against Fraud, views the opinion as a clear message from the government.

"The Department of Labor is the expert on ERISA, and it has spoken," Burns says. "It has said that what Caremark was doing was basically wrong."

Weighty Opinion

The Department of Labor is simply the latest government agency to hurt Caremark's case. In January, the Centers for Medicare & Medicaid Services sent a letter to Caremark indicating that the company would, in fact, be liable for some of the claims it has been rejecting.

For its part, Caremark is hoping to enforce language in its own contracts that would essentially allow it to override state laws and deny the Medicaid claims. Moreover, the company says that two courts have already issued rulings that support its practices.

"Caremark contends that the plan's 'legal liability' is determined by federal law and the contractual plan design features of its customer benefit plans," the company states in court documents. And "Caremark maintains that all features in the benefit plans of Caremark's customers are enforceable and valid and that there should be no exceptions for Medicaid reimbursement claims."

But the Department of Labor's opinion almost entirely sides with Medicaid instead. Certainly, it raises clear concerns about two specific issues -- filing deadlines and point-of-service payments -- being debated by the government and Caremark.

"In some cases, the State may not even receive a request for payment from a pharmacist until after the deadline set by the other coverage," the department states in its opinion. And "to deny a state's claim to reimbursement from a plan on the grounds that the plan provides only POS (point-of-service) benefits and does not reimburse participants would make the statutory pre-condition that the state have paid for the item or service the very reason for denying the state's claims."

Such statements directly counter the very arguments Caremark has so far offered in court. They also tell Grenier, for one, that "PBMs can no longer use ERISA as an excuse" to deny Medicaid claims in the future.

Ultimately, however, Grenier has yet to figure out who exactly will get stuck paying the old Medicaid claims or any ERISA penalties that arise. It depends, she says, on which party -- Caremark or its client -- is considered the "fiduciary."

Caremark has long proclaimed that it does not operate as a fiduciary under the strict ERISA guidelines. But the company started backing off from that blanket statement a few years ago. In its more recent annual reports, Caremark acknowledges that it could be subject to ERISA "when we have specifically contracted with a plan sponsor to accept limited fiduciary responsibility for claims processing and adjudication or for appeals of denials of claims for benefits."

Ultimately, Burns feels that Caremark should wind up on the hook.

"Who is denying the claims is who pays," he says. "That was Caremark. They were making the rules."

But, 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."