Caremark's Medicaid Mess

A state prosecutor takes aim at rival pharmacy benefit managers.
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days as an independent company are numbered, but its legal problems appear to be far from over.

Last week, a federal appeals court ruled that Caremark should be picking up bills that it has been leaving for Medicaid, the federal program that by law is the so-called payer of last resort.

The ruling came just days before shareholders approved a huge merger between Caremark and drugstore chain


(CVS) - Get Report

. When the merger closes in the next week or so, CVS will be on the hook for any Caremark liabilities. Some say damages could reach into the "hundreds of millions of dollars" as states line up to collect on disputed back claims.

Peter Coughlan, a state prosecutor who has been pursuing Caremark for the past four years, says he "could not be happier" with the recent court ruling.

"It says, once and for all, 'Caremark, you're wrong on the law,'" explains Coughlan, senior counsel for the Tennessee attorney general. "We've believed that all along. ... Now, with the AG's approval, I'm going to try to go after some of these other

pharmacy benefit managers just to see what's out there."

Coughlan singles out



, the nation's largest PBM, as a likely target.

Medco said it won't comment on litigation involving other parties. Caremark declined to comment, and CVS wasn't immediately available for comment.

Meanwhile, the case against Caremark continues to move along. An earlier decision, now upheld by the appeals court, had already indicated that Caremark should be paying disputed Medicaid claims. Thus, Coughlan says, Tennessee and other states have been sending loads of bills to Caremark. Tennessee is seeking reimbursement for $61 million worth of old Medicaid claims.

"I'm sure that Caremark is being inundated with demands for reimbursement," Coughlan says. "They're probably fairly overwhelmed."

To be fair, even Coughlan admits that Caremark could rightfully deny a lot of those old claims. After all, he says, states are scrambling to send any Medicaid claims -- dating back to 1994 -- that might trigger repayments. In some cases, he says, the claims might even belong with another company entirely.

Still, Coughlan feels Caremark will likely face some sizable bills in the end.

Moreover, Caremark could be slapped with penalties for any claims that the company improperly rejected on purpose. Coughlan's own case against Caremark is part of a bigger whistleblower lawsuit, filed by federal prosecutors in Texas, that calls for triple damages under the False Claims Act.

Lorinda Holloway, a Texas attorney at Brown McCarroll who is assisting federal prosecutors with that case, believes that the recent court ruling will help out.

"We have to go further and prove that the claims were false" and that Caremark knew as much, Holloway admits. "But on the flip side, if the Sixth Circuit

Court of Appeals had come back and said that what Caremark was doing was lawful, that obviously would have undermined our claims."

Coughlan, for one, believes that the court has sent a strong message with its decision. In an unusual move, he says, the court actually published its opinion for everyone to see. Moreover, he adds, the court relied on simple language -- which everyone can understand -- to clear up a seemingly complex situation.

"It all came down to four or five words," Coughlan marvels. "Medicaid is the 'payer of last resort.' Why did we have to spend a year per word to make that clear?"