Caremark ( CMX) insiders are whistling a scary tune.

In an updated complaint filed this month, Caremark employees have bolstered fraud allegations levied against the giant pharmacy benefit manager. The amended whistleblower lawsuit, filed by two Caremark pharmacists on behalf of Florida customers, suggests that the company has routinely "placed profits and expediency in front of patient safety, ethical and honest business practices and false claims laws."

The lawsuit, originally filed lastyear, extends its portrayal of Caremark -- thenation's second-largest PBM -- as a company that hastaken deliberate, and sometimes extreme, steps toboost its bottom line. Specifically, the complaint accuses the company of failing to properly fill prescriptions and then snagging bonuses, instead of penalties, for its performance.

Citing new insider testimony, the complaint even accuses Caremark ofdefrauding some of the company's sickest customers. It claims the company improperly canceled refills for chronically ill patients who found themselves saddled with additional co-payments as a result.

"Incredibly, Caremark's employees even targetedfor refill elimination patients who are quadriplegicsand who had therefore been prescribed prescriptiondrugs on a long-term or lifetime basis," the complaintstates. "The fraudulent practices ... are at the veryleast the indirect result of the fact that Caremarkfinancially incentivized its employees to engage insuch conduct."

The plaintiffs have accused Caremark of, amongother things, changing, canceling and even illegally resellingprescriptions in order to maximize profits. The complaint,featuring testimony from multiple insiders, continuesto grow more detailed in nature.

"We have done extensive investigations anddiscovery," said Michael Leonard, the Chicago attorney representing Caremark pharmacists Michael and Peppi Fowler. "It has been quite fruitful so far."

Contacted by TheStreet.com on Thursday,Caremark continued to maintain its innocence. Thecompany says it has "always been in compliance withapplicable state regulations" -- and has even invitedFlorida, in particular, to review its activities.

"We're in regular contact with the state ofFlorida regarding the issues raised," said Caremarkspokesman Gerard Carney. "From the outset, we havewelcomed any formal review or audit of our services onthe state's behalf as we are confident about theoutcome of any such proceedings."

Caremark's stock -- which has nearly doubled overthe past year -- slipped 33 cents Friday to hit $34.40.

Damage Control

Caremark fans have taken comfort in the fact thatFlorida prosecutors have so far declined to join the whistleblower lawsuit against the company. Earlier this month, at least two analysts -- among the many who recommend buying Caremark shares -- specifically dismissed the case as an immaterial threat at best.

SG Cowen analyst Kemp Dolliver even offered upstatistics. He said that just 6% of whistleblowerlawsuits carried out independently, without supportfrom government prosecutors, actually triggersettlements. And even those settlements, he said, tendto fall below the $1 million range.

Leonard has estimated damages in the Caremark caseat a far higher $100 million. He also told TheStreet.com this week that the state ofFlorida has shown tremendous interest in the case.

"They're basically sitting on the sidelines rightnow," he acknowledged. "But the Department ofManagement Services, which administers the Caremarkcontract, has been very helpful. Their legaldepartment has provided thousands of pages of legaldocuments for us."

One industry source was quick to scold Wall Streetfor overlooking the slew of whistleblower lawsuits nowfacing the PBM industry in general.

"If analysts dismiss this potential liability --and focus only on immediate returns -- they're notreally assessing the companies' business modelsaccurately and fairly for their shareholders," hestated. "That's short-sighted and irresponsible. ...It's the biggest mistake in the world."

Target Practice

Attacks against PBMs, particularly industryleaders Medco ( MHS) and Caremark, arenothing new.

Both companies have been accused of improperlychanging and filling prescriptions to boost theirbottom lines. Medco is suspected of favoring expensive drugs manufactured by former parent Merck ( MRK), for example. And Caremark faces the more sensational charge of actuallyreselling returned prescriptions, without firsttesting them for damage, and then double-booking theprofits.

Federal prosecutors have officially joined the whistleblower case against Medco. But state officials in Florida, at least, last year declined to intervene in the Caremark lawsuit.

Still, some expect the government to eventuallyget involved. They insist that the Caremark case hasgrown considerably stronger over the past severalmonths.

To be sure, the latest amended complaint ispeppered with new details. It continues to make thesame basic allegations, of course. It claims thatCaremark intentionally changed and canceledprescriptions -- then destroyed damaging evidenceof its practices -- in pursuit of "turnaround"bonuses. It also states that Caremark threatens itsemployees with financial penalties if they fail tomeet aggressive quota targets. But it offers newexamples to support its allegations.

For instance, the latest complaint outlines acorporate strategy that requires hourly workers toseek permission -- often from mere receptionists -- tochange or cancel patient prescriptions so the companycan collect bonuses for saving its clients money.

"These non-pharmacists are paid on an hourly basisand are subject to disciplinary action if theirconversion success ratio is not maintained atappropriate levels," the lawsuit states. "The term'conversion' has been derisively referred to by someof Caremark's employees ... as 'perversions' becausethe manner in which conversions are brought about arenot on the up and up."

Furthermore, the complaint says, Caremark canceledmany subscriptions that should have been filled up toa month earlier.

"Caremark did not notify the patients that theyhad decided to unilaterally cancel their prescriptiondrug orders," the lawsuit states. "Instead, Caremarkdid nothing."

Ultimately, the lawsuit claims, customers wouldcall to complain about their unfilled prescriptions.The company would then re-instate the orders with thedate the call occurred, the lawsuit adds,enabling it to meet new turnaround deadlines instead of being penalized for the old deadlines it had already missed.

In addition, the complaint states, Caremarkengaged in "an even simpler, more direct andold-fashion way of committing fraud" by cancelingprescriptions entirely. The lawsuit goes on to statethat Caremark specifically targeted chronically illpatients -- particularly those requiring expensive treatments -- fordrug changes or cancellations.

The complaint has grown so detailed that it evendescribes the specific tools allegedly used to restockreturned drugs and send them back into the stream ofcommerce.

"Caremark's employees ... utilized red blow dryersor blowers to remove the patient labels off of thosereturned goods," the lawsuit states. The company then"created a fraudulent paper record, namely 'RGM memos'or 'returned goods memos' indicating that thosereturned drugs had actually been destroyed. ... Thus, Caremark's employees created thousands of fraudulent records supporting their purported 'destruction' of returned drugs that had not been destroyed but had instead been re-stocked by Caremark."

The new specifics simply go a step further insupporting the complaint's overarching theme:Caremark's actions "were taken at the expense ofpatient safety and were committed by a company thatplaced profit and earnings in a paramount position."

Another Target

When it comes to such allegations,Caremark has company, at least.

Medco, its larger peer, is in the process ofdefending itself against multiple government lawsuits accusing it of similar transgressions. This week, however, Medco CEO David Snow told investors the company hopes to put the litigation behind it -- perhaps as early as this year-- in an annual shareholder meeting covered by Reuters.

Snow's comments came less than two months afterprosecutors in both Massachusetts and Nevada indicatedthey may soon settle with the company. TheMassachusetts Attorney General's office failed toanswer questions about the case. But the Nevada officepromised TheStreet.com "a major announcement onMonday" about the Medco situation. ( See related story.)

In the meantime, however, a huge federal case drags on. The U.S. attorney in Philadelphia last year officially joined a whistleblower lawsuit that accuses Medco of defrauding government customers. For its part, Medco has dismissed the merits of the case and even attacked the whistleblowers behind it.

"After more than four years of investigation," the company stated late last year, "the assistant U.S. attorney's principle witnesses are comprised of a convicted felon, a pharmacist who left Medco Health one step before he could have been fired for poor performance and a tax evader who has renounced his American citizenship but is nonetheless asking to cash in on any possible recovery by the government."

One industry source takes the charges against Medco very seriously, however. He predicted that the company will negotiateindividual settlements with various states before itfinally tackles the bigger case filed by the feds. Inthe end, he believes, the whistleblower lawsuits couldprove powerful enough to change the fundamentalbusiness model of the entire PBM industry.

Currently, he said, PBMs rely on a businessstrategy that favors speed over patient safety. And, he added, it has cost some good pharmacists their jobs.

Right now, the Caremark whistleblowers aresuspended with pay for reasons even they -- and theirlawyer -- don't understand. Caremark has also sued oneof the whistleblowers for taking corporate documentsthat help substantiate claims against the company, theamended complaint states. In addition, the lawsuitalleges, the company has warned its workers againstspeaking to the whistleblowers and has even startedrecording employee conversations.

For its part, Caremark describes its actions asjustified.

"The actions taken against the plaintiffs were notbased upon their lawsuit," Carney said. "Caremarkreceived information from an employee that led to aninternal investigation. While that investigation isongoing, Caremark has determined there is reason tobelieve that the whistleblowers violated companypolicy, state pharmacy law and federal law."

In the meantime, Caremark now faces allegationsthat it violated the antiretaliation provisions ofthe Florida False Claims Act. And some believe thecompany -- and its PBM peers -- could face a toughroad ahead.

"In the short term, the analysts might be right"about PBM stocks, one industry source said. "But ifthese cases succeed, the companies will have toreinvent themselves. And that's going to changeeverything."

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