Caremark Rx ( CMX) has failed to cure a mounting legal headache. The giant pharmacy benefit manager had hoped to secure a courtroom ruling with the potential to derail a Medicaid fraud case that has been building against the company for years. However, a federal judge this week rejected the company's arguments and sided with the government instead. Both federal and state prosecutors have accused Caremark of defrauding Medicaid by saddling the program with drug bills that it should have covered itself. Specifically, they claim that Caremark refused to repay the government for claims involving people who qualify for Medicaid -- the so-called "payer of last resort" -- but have private insurance as well. They have estimated damages in the case at $500 million. Caremark's unsuspecting clients, including big corporations and health insurance plans, could wind up on the hook. This week's court ruling came as Caremark lost a major customer -- the California Public Employees' Retirement System -- to competitor Medco Health Solutions ( MHS). Medco has already pledged to change its own business practices as part of a big government settlement and now portrays itself as the most transparent of the major PBMs. With the judge denying Caremark's motion for a summary judgment, the government's case will now move toward trial in Texas. Caremark's stock fell 1.6% to $49.19 on Thursday.
Caremark said it was merely seeking guidance from the court about how it should handle Medicaid claims. And the company stressed that the judge himself recognized that the dispute was "based on a good faith disagreement about a complex area of the law." The government, however, has accused Caremark of intentionally mishandling Medicaid claims. In fact, it has said that the company went so far as to program its computer system with dummy codes designed to reject Medicaid claims automatically. Up to now, Caremark has argued that it rightfully denied the claims because of contract violations. For example, it said, some Medicaid recipients failed to properly identify themselves as Caremark customers when picking up their prescriptions. In other cases, it said, they filled their prescriptions at pharmacies outside the company's network. Then later on, it added, Medicaid sought reimbursement from Caremark after the deadline to do so had already passed.