Drug Pushing: Why the FBI, the SEC and every other agency you can think of are investigating a Nashville-based Fortune 500 company
Nashvillescene.com
June 15, 2006
By Susan Drury
"Former employees, federal and state prosecutors, academics and even some former customers say that Caremark has built its success on overly aggressive (some say illegal) business practices and on the unregulated, opaque and secretive nature of its business."
June 15, 2006
Drug Pushing: Why the FBI, the SEC and every other agency you can think of are investigating a Nashville-based Fortune 500 company
By Susan Drury
Everybody loves a jobs announcement, so the news was welcome. It was not, however, a big surprise. It was June 13, 2005, and the Nashville Area Chamber of Commerce was hosting a luncheon honoring Caremark Corp. at the Hermitage Hotel. With Gov. Phil Bredesen and Mayor Bill Purcell up on the dais with him, CEO Mac Crawford announced that Caremark, a pharmacy benefits manager, would be opening a new call center in MetroCenter and would need up to 600 new employees.
Even though it wasn’t born and bred here, Caremark was already well respected by the major players in Nashville’s health care industry. Thomas Frist Jr. and Vanderbilt Nursing Dean Colleen Conway-Welch (who sits on Caremark’s board) had personally pulled out the stops to get the headquarters to move to Nashville in 2003, and the call center announcement made relations all the way around even tighter. Bredesen christened the company “great corporate citizens,” and Mayor Bill Purcell noted that Caremark would add to our “reputation of excellence” in health care.
As far as corporate prestige goes, Caremark has turned out to be a pretty good prize. When the Fortune 500 list came out in April, the highest ranked Tennessee company wasn’t HCA, Federal Express or Dollar General or anybody else you’ve heard of. It was Caremark. In 2005, the company pulled in a stunning amount of cash – just shy of $33 billion in revenues, with almost a billion in profit.
It certainly wasn’t obvious, even a few years ago, that things would turn out this well for Caremark. At the start of 1998, Caremark (then called MedPartners) wasn’t just a small but functional company. It was a sinking ship, weighed down by abysmal leadership, a disastrous business plan and mountains of debt. Fortune magazine called MedPartners “one of the biggest fiascoes of 1998,” and current CEO Mac Crawford has said the company “basically was worthless” then.
In 1998, the company had its hands in a bunch of pots, but its main business was owning and managing doctors’ practices. Crawford, a former CEO of Magellan Health Services, was recruited as a turnaround artist, and he ditched the other divisions and focused on growing the company into a full-service Pharmacy Benefit Manager (PBM). A PBM is kind of like an HMO, but for drugs, and just about everyone who has health insurance has one. PBMs get pharmacies to agree to certain drug prices in order to be “in network” for the employees’ plan. They also manage costs through generic substitutions, by moving people from one drug to another, but requiring authorization for expensive drugs, and by selling long-term prescriptions direct to consumers through their own mail-order pharmacies.
Caremark, the second-largest company of its kind, processed over 500 million prescriptions last year. It covers 4.5 million federal employees, dependents and retirees as well as state employees in Texas, Arkansas and Florida. It has also emerged as one of the bigger players in the new Medicare drug plan, signing up over a million enrollees for the SilverScript drug card. In Tennessee, Caremark covers 57,000 state employees, dependents and retirees. It is also the pharmacy benefit manager for Blue Cross Blue Shield of Tennessee, so if you’ve got Blue Cross, Caremark is probably written on the back of that blue-and-white card. In all, Caremark has over 2,000 institutional customers.
So its success has gotten its share of attention. In January, Institutional Investor Magazine named Caremark CEO Mac Crawford one of the best CEOs in the country, and just last month Business Week ranked Caremark No. 3 on its list of the top 50 corporate performers for 2006. The stock, which traded at under $2 a share in 1998, now trades at around $48.
The story that Caremark tells about itself is a compelling one: it makes money by saving their customers money on their prescription drug bills.
But there are also many other stories about Caremark. Former employees, federal and state prosecutors, academics and even some former customers say that Caremark has built its success on overly aggressive (some say illegal) business practices and on the unregulated, opaque and secretive nature of its business.
It’s clear that Caremark didn’t become such a big player through charm alone. CEO Mac Crawford, a former Auburn football player and accountant, makes Dick Cheney look like a chatty schoolgirl. His PR person warns that he is “intense.” One former Caremark executive says new employees are warned, “this is not the guy you joke around with,” though he allows that “Mac was probably not very friendly because he didn’t know if he’d have to fire you.”
Crawford doesn’t like to explain things. Whether naturally reticent or just disinclined to talk to the press, he seems annoyed by most questions and offers up the briefest of answers. When asked about how he grew Caremark from where it was in 1998 to being one of the two biggest players in a huge industry, he says, “Hard work. Start with a good business. Good people. We made some good decisions.” One of those was to acquire Advance PCS, a rival, in 2004 – a move that dramatically ramped up the company’s earnings. But Crawford’s basic summary of Caremark is this: “It’s not complicated. We buy drugs. We sell drugs.”
It is unquestionably more complicated than that. In the Rube Goldberg machine that is the U.S. health care system, Caremark is drawing increasingly acute scrutiny for its business practices.
Whistleblower Janaki Ramadoss worked for seven years at Caremark’s San Antonio facility. Part of her job was to identify computer problems that resulted in payment and billing errors. Ramadoss claims that from 1997 until her departure in 2000, she informed Caremark management that they were improperly billing federal and state health programs (particularly Medicaid programs) instead of their private clients for thousands of prescriptions. Her allegations involve so-called dual eligibles, people who are covered by both private insurance and Medicaid. Federal law states that Medicaid is always the payor of last resort – private insurance should pay first. But in many cases, Caremark incorrectly billed Medicaid, and then when Medicaid tried to get reimbursed, Caremark routinely rejected the requests. The rejections, according to Ramadoss, were literally systematic, in most cases programmed into the computers. According to the complaint, Ramadoss repeatedly told management that the company was keeping money that belonged to federal and state health programs, but they refused to address the problem.
And a lot of money is at stake: Patrick J. O’Connell, the chief of the civil Medicaid fraud section of the Office of the Attorney General of Texas, has stated that they found half a million prescriptions in Texas alone for which Caremark knew the individual had Caremark coverage but billed Medicaid anyway.
The Tennessee Attorney General’s office also believes we’ve been ripped off. The state of Tennessee has joined this case, though they haven’t yet figured out how much they think Caremark owes TennCare. The federal government has also intervened in the suit, aiming to recoup lost federal Medicaid dollars, and Arkansas, Louisiana and Florida have also intervened in the case under their states’ False Claims Acts. According to Sharon Curtis-Flair, spokesperson for the Tennessee Attorney General’s Office, “they [Caremark] make TennCare the payor of first, and only, resort.” Caremark has countersued Tennessee, seeking “clarity” about its billion procedures and portraying the matter as an arcane billion dispute. (The company lost in federal court and has appealed.) “The bottom line is that we don’t want Tennesseans to foot the bill for people who have private drug coverage,” Curtis-Flair says.
Questions over Caremark’s business practices have extended into areas affecting patient safety as well.
In 2003, two longtime Caremark pharmacists at a mail order facility in Florida filed a whistleblower complaint alleging that Caremark routinely resold returned drugs without testing for safety, documented that the returned drugs were destroyed when they were simply restocked and used “irons or steamers” to remove labels on restocked drugs. KHOU-TV in Houston aired a report earlier this year in which former employees of Caremark’s San Antonio mail order pharmacy made similar allegations, and a suit filed in California in June 2005 alleges that Caremark also illegally resold returned refrigerated products, including blood products, chemotherapy supplies and insulin. Caremark officials have acknowledged reselling some returned drugs legally “in limited circumstances” with no effect on patient safety. Caremark says the company no longer restocks returned drugs. The cases are pending in California and Florida.
It’s not just trial lawyers and whistleblowers Caremark has to worry about. In all, 28 states have notified Caremark that they are looking into the company’s business practices, mostly in connection with charges made in the whistleblower cases. The FBI is also investigating Caremark (including the drug restocking charge), and the SEC is looking into whether the company has been illegally backdating stock options for executives.
The SEC, the FBI, the states and the lawyers are all looking into how the company does its job. But the customers are asking an even bigger question: does Caremark really save us money?
To understand how this can be a mystery, even to some of Caremark’s customers, it helps to understand a bit more about how their contracts work. When, say, a Fortune 500 company contracts with Caremark, the company and Caremark together work out a formulary – an agreement about prices for certain types of drugs. It typically includes “preferred drugs” that Caremark promotes. The two parties negotiate co-pays and rules for substitutions – when Caremark can switch individuals from one drug to another or from brand to generic. So when an individual brings his prescription and his Caremark card to the pharmacy, he may get what his doctor prescribed or he may, depending on lots of factors, get switched to a different brand name drug or to an equivalent generic drug. In addition to this kind of management, Caremark operates mail order pharmacies, particularly for long-term prescriptions. Caremark officials say that through these various means it saves their customers millions off what an unmanaged “anything goes” plan would cost.
And most experts say they’re right about that. The Federal Trade Commission say the big PBMs, including Caremark, offer their customers significant savings (18 percent and up) compared to an unmanaged plan. Critics think this study has various flaws, but Caremark and its peers love this finding.
But here’s the finding they hate: a 2005 survey by the consulting firm Hewitt and Associates found that 47 percent of 500 large private employers thought that PBMs don’t get the best prices on drugs. Almost a quarter of those polled actually thought PBMs are pushing up the price of drugs. Obviously, some of the most important customers remain unconvinced.
There are two big reasons for the skepticism: first, nobody knows what drugs really cost. The actual wholesale price of drugs is not something you can find out like the price of bananas or oil or wheat. There is something called an “Average Wholesale Price” for each drug, but it is like the sticker price on a car – grossly inflated and not what most people pay. You can’t very effectively compare drug prices from store to store or from PBM to PBM. “There are so many lies built into the system” of drug pricing, says Patrick Burns, communications director for the Washington, D.C., nonprofit Taxpayers Against Fraud, a group that supports whistleblowers. Burns explains that nobody knows what a good deal is because nobody knows what Caremark actually pays for drugs, either to pharmacies or to drug wholesalers and manufacturers for its mail order business. Burns says, “It’s like a store where they always have a sign up offering 80 percent off – you gotta wonder – 80 percent of what? It’s like that.”
Rober Garis agrees that Caremark customers are unlikely to fully understand drug pricing. A professor of pharmacy at Creighton University, he has written extensively on PBMs. He also consults with corporations and others contracting with PBMs for pharmacy management services. And he says customers don’t understand how much markup PBMs have built into the system. They don’t know “the spread”; the difference between what Caremark charges the customers and what the company actually pays the pharmacies for the drugs. “The markup, particularly on generics, is remarkable,” Garis says. Thus, the customer is saving money (from what a brand drug would cost), but Caremark is still making a potentially huge cut from each prescription. Burns of Taxpayers Against Fraud says “the markup on generics is more than the markup on crack.”
The second reason for the skepticism is that Caremark (like its rivals) doesn’t just take money from its customers for managing the prescription drug benefit. They also get money from the pharmaceutical manufacturers. Garis says the cash flow from drug makers is significant and takes several different forms. Documents filed by Caremark with the SEC mention receiving “rebates, administrative fees [and] other discounts” from drug makers. Garis says these fees are set up in different ways but all effectively are used to promote the prescribing of certain drugs (say by a particular manufacturer) over others. Rebates for hitting certain sales targets are typically the biggest chunk of money from drug makers.
Caremark’s Crawford doesn’t call them rebates. He calls them “discounts.” Crawford won’t discuss payments from drug makers except to say they amount to “very little.” But in its most recent annual report, Caremark says, “If the payments made by pharmaceutical manufacturers decline, our business and financial results could be affected.”
The problem with payments from drug makers is that they present a “classic conflict of interest,” according to Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices. On the one hand, Caremark negotiates a deal with a company or a health care provider. So the customer assumes that Caremark is working for them to get cheaper prices. But it’s also getting money from the drug makers to promote certain drugs, more expensive drugs, even when they may not be in its customers’ best interest.
These conflicts are not academic for Caremark. In 2005, Caremark paid a $137.5 million fraud settlement with the U.S. Department of Justice for actions committed by Advance PCS, which Caremark acquired in 2004. The case stemmed from a (separate) whistleblower suit that alleged that Advance PCS was illegally garnering kickbacks from drug manufacturers for pushing more expensive drugs under the Medicaid, Medicare and veterans health plans.
Caremark’s CEO says the claim that Caremark is not saving money for its customers flies in the face of the obvious. “We would not have $33 billion in revenue if we weren’t providing value and saving money for our customers.”
But some of the big customers are no longer so sure, and they would like a little more information – “transparency” is the way they put it. Beginning last year, a group of employers (including Caterpillar, IBM, Verizon and Starbucks) developed a new model for PBM contracts, including requirements that PBMs disclose actual costs for both retail and mail order drugs and pass on the rebates they receive from drug makers. Several PBMs agreed to meet the requirements, but Caremark declined.
The refusal to abide by such disclosure and rebate sharing appears to have lost Caremark some business in the public sector as well. In Illinois, Caremark had a $200 million-a-year contract to cover state employees that was due to expire in 2007. In the face of the investigation into the returned drugs case in February 2005, two Republican state legislators and the Chicago Tribune filed Freedom of Information Act requests to get a look at the contract between the state and Caremark. Caremark said the contract was exempt from Freedom of Information Act rules because it included trade secrets. “You have to ask yourself,” one state senator said, “what’s the secret?”
The secrets are the prices. Caremark unsuccessfully sued the state to keep the contract from being released, and in the resulting conflict, the state decided to end its contract with Caremark before its end date. Illinois started a new contract with Caremark rival Medco that requires transparency – the state will be able to track money from drug companies and see what prices Medco is paying for which drugs, and the public will have access to the contract information. Caremark’s unwillingness to allow such openness in its contract took it out of the running, says Dan Long, executive director of the Commission on Government Forecasting and Accountability, who evaluates and monitors such contracts. It wasn’t the returned drugs lawsuit, he says. “Everybody gets sued. It was the disclosure issue.” Illinois estimates it will save $120 million over the next five years by dropping Caremark.
Caremark has taken its fight against transparency to federal court. In 2003, Maine passed a law requiring PBMs to disclose all conflicts of interest, including all financial arrangements between PBMs and drug companies, to its clients. It also requires PBMs to pass rebates from drug makers to customers and to assume a “fiduciary duty,” that is to agree to a legal obligation to put its clients’ financial interests above its own.
Caremark worked with its rivals to fight the Maine law. Crawford sits on the board of the Pharmaceutical Care Management Association, the PBMs’ trade association, which sued Maine in federal court to stop the law. Maine prevailed, and the law finally took effect in April of 2005.
Whatever happens in the state legislatures or the courts, savvy customers with big drug bills are past the point of just asking questions, and the most sophisticated ones are getting more aggressive about negotiating deals.
California is the best example. Caremark manages drug coverage for 300,000 members of California Public Employees Retirement System (CalPers). But Caremark’s contract to cover them will run out at the end of this month. When the contract was rebid last year, the transparency requirements imposed on contract bidders were considered “unprecedented.” Caremark was one of the semifinalists (rival Medco will take over the contract) but that it was in the running is notable given the strict provisions required by the bidders. CalPers required the winning PBM to assume fiduciary duty, much like the Maine law that Caremark and the other PBMs opposed so vehemently. Nonetheless, the bidding was “fiercely competitive,” according to Drug Benefit News, and included Caremark and both its main rivals: Medco and Express Scripts.
Curiously, the state of Tennessee seems happy enough to keep Caremark in place as its dominant drug manager, despite the fact that drug premiums for the PPO (covered by Caremark) doubled between 2000 and 2004. The state says the increase is because older workers (who use more drugs) like the PPO option. The state’s contract with Caremark is indirect; technically the contract is only with Blue Cross, but Caremark is the administrator of the drugs program for the PPO.
Blue Cross Blue Shield’s Chris Ramsey, senior manager of PBM programs, won’t say much about the contract with Caremark, but he does say that they have a 96 percent satisfaction rate with the pharmacy program and that they have a “positive working relationship.” Jim Tucker, head of the Tennessee State Employees Association, says members have expressed “no complaints or concerns” about the Caremark pharmacy coverage.
Our health care executive in chief, Gov. Phil Bredesen, sounded similarly pleased with Caremark at that June 2005 luncheon but noted the irony of honoring Caremark two weeks after the state had sued the company for Medicaid fraud. “Our state is doing what it has to do, which is to look for some opportunity there might be to recover some money,” Bredesen was quoted as saying at the time, when he was busy making TennCare cuts. “But that does not undermine in any way the “enormous regard,” given the financial pressures facing TennCare, but apparently not.
Bredesen says he hasn’t followed Caremark closely over the past years but that “on technical points” his regard for the company hasn’t diminished.
Enormous regard or not, the taxpayers of Tennessee should hope for aggressive bargaining on behalf of the state kitty. The state is currently taking contract bids for the state employees’ health insurance PPO (including the pharmacy program managed by Caremark), and Blue Cross is likely to get a renewal. Blue Cross and the state both say they are looking for some changes from the previous Caremark contract, though they won’t specify what those changes might be. They may take a hint from some other states and big companies that are learning to ask more question, get a better look at the numbers and drive a harder bargain. One former Caremark executive has the same prescription: “Change will come when customers demand what they want. If I carry a big stick…then I can get what I want. I think the day will come when these big customers will say, ‘I don’t mind you making a profit, but tell me what it is and where you get it.’ “
posted by Kathie Bracy at 5:10 PM
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