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 last year , extends its portrayal of Caremark -- the nation's second-largest PBM -- as a company that has taken deliberate, and sometimes extreme, steps to boost 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 of defrauding 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 targeted for refill elimination patients who are quadriplegics and who had therefore been prescribed prescription drugs on a long-term or lifetime basis," the complaint states. "The fraudulent practices ... are at the very least the indirect result of the fact that Caremark financially incentivized its employees to engage in such conduct."

The plaintiffs have accused Caremark of, among other things, changing, canceling and even illegally reselling prescriptions in order to maximize profits. The complaint, featuring testimony from multiple insiders, continues to grow more detailed in nature.

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

Contacted by on Thursday, Caremark continued to maintain its innocence. The company says it has "always been in compliance with applicable state regulations" -- and has even invited Florida, in particular, to review its activities.

"We're in regular contact with the state of Florida regarding the issues raised," said Caremark spokesman Gerard Carney. "From the outset, we have welcomed any formal review or audit of our services on the state's behalf as we are confident about the outcome of any such proceedings."

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

Damage Control

Caremark fans have taken comfort in the fact that Florida 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 up statistics. He said that just 6% of whistleblower lawsuits carried out independently, without support from government prosecutors, actually trigger settlements. And even those settlements, he said, tend to fall below the $1 million range.

Leonard has estimated damages in the Caremark case at a far higher $100 million. He also told this week that the state of Florida has shown tremendous interest in the case.

"They're basically sitting on the sidelines right now," he acknowledged. "But the Department of Management Services, which administers the Caremark contract, has been very helpful. Their legal department has provided thousands of pages of legal documents for us."

One industry source was quick to scold Wall Street for overlooking the slew of whistleblower lawsuits now facing the PBM industry in general.

"If analysts dismiss this potential liability -- and focus only on immediate returns -- they're not really assessing the companies' business models accurately and fairly for their shareholders," he stated. "That's short-sighted and irresponsible. ... It's the biggest mistake in the world."

Target Practice

Attacks against PBMs, particularly industry leaders Medco ( MHS) and Caremark, are nothing new.

Both companies have been accused of improperly changing and filling prescriptions to boost their bottom lines. Medco is suspected of favoring expensive drugs manufactured by former parent Merck ( MRK), for example. And Caremark faces the more sensational charge of actually reselling returned prescriptions, without first testing them for damage, and then double-booking the profits.

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 eventually get involved. They insist that the Caremark case has grown considerably stronger over the past several months.

To be sure, the latest amended complaint is peppered with new details. It continues to make the same basic allegations, of course. It claims that Caremark intentionally changed and canceled prescriptions -- then destroyed damaging evidence of its practices -- in pursuit of "turnaround" bonuses. It also states that Caremark threatens its employees with financial penalties if they fail to meet aggressive quota targets. But it offers new examples to support its allegations.

For instance, the latest complaint outlines a corporate strategy that requires hourly workers to seek permission -- often from mere receptionists -- to change or cancel patient prescriptions so the company can collect bonuses for saving its clients money.

"These non-pharmacists are paid on an hourly basis and are subject to disciplinary action if their conversion success ratio is not maintained at appropriate levels," the lawsuit states. "The term 'conversion' has been derisively referred to by some of Caremark's employees ... as 'perversions' because the manner in which conversions are brought about are not on the up and up."

Furthermore, the complaint says, Caremark canceled many subscriptions that should have been filled up to a month earlier.

"Caremark did not notify the patients that they had decided to unilaterally cancel their prescription drug orders," the lawsuit states. "Instead, Caremark did nothing."

Ultimately, the lawsuit claims, customers would call to complain about their unfilled prescriptions. The company would then re-instate the orders with the date 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, Caremark engaged in "an even simpler, more direct and old-fashion way of committing fraud" by canceling prescriptions entirely. The lawsuit goes on to state that Caremark specifically targeted chronically ill patients -- particularly those requiring expensive treatments -- for drug changes or cancellations.

The complaint has grown so detailed that it even describes the specific tools allegedly used to restock returned drugs and send them back into the stream of commerce.

"Caremark's employees ... utilized red blow dryers or blowers to remove the patient labels off of those returned goods," the lawsuit states. The company then "created a fraudulent paper record, namely 'RGM memos' or 'returned goods memos' indicating that those returned 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 in supporting the complaint's overarching theme: Caremark's actions "were taken at the expense of patient safety and were committed by a company that placed 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 of defending 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 after prosecutors in both Massachusetts and Nevada indicated they may soon settle with the company. The Massachusetts Attorney General's office failed to answer questions about the case. But the Nevada office promised "a major announcement on Monday" 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 negotiate individual settlements with various states before it finally tackles the bigger case filed by the feds. In the end, he believes, the whistleblower lawsuits could prove powerful enough to change the fundamental business model of the entire PBM industry.

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

Right now, the Caremark whistleblowers are suspended with pay for reasons even they -- and their lawyer -- don't understand. Caremark has also sued one of the whistleblowers for taking corporate documents that help substantiate claims against the company, the amended complaint states. In addition, the lawsuit alleges, the company has warned its workers against speaking to the whistleblowers and has even started recording employee conversations.

For its part, Caremark describes its actions as justified.

"The actions taken against the plaintiffs were not based upon their lawsuit," Carney said. "Caremark received information from an employee that led to an internal investigation. While that investigation is ongoing, Caremark has determined there is reason to believe that the whistleblowers violated company policy, state pharmacy law and federal law."

In the meantime, Caremark now faces allegations that it violated the antiretaliation provisions of the Florida False Claims Act. And some believe the company -- and its PBM peers -- could face a tough road ahead.

"In the short term, the analysts might be right" about PBM stocks, one industry source said. "But if these cases succeed, the companies will have to reinvent themselves. And that's going to change everything."