Drug firm accused of cheating state

The whistle-blowers, two pharmacists who worked for Merck-Medco Managed Care of Delaware, allege that employees at a Medco-run Wilmington, Mass., mail-order pharmacy discarded prescriptions without filling them, gave patients fewer pills than their doctors ordered, and switched patients to more expensive medicines, all to make money for the company, according to a complaint filed in US District Court in Philadelphia.

Federal prosecutors in Philadelphia have already joined the case, filing suit against the company in September after a four-year investigation of allegations from the same whistle-blowers regarding drug benefits for federal employees. Among other claims of wrongdoing, the federal complaint alleges the company destroyed prescriptions at pharmacies in four states, including the Wilmington facility that handled drug benefits for Massachusetts employees until 2000.

The company, now called Medco Health Solutions, vehemently denies the allegations.

The investigation is just one of many probing the activities of pharmacy benefit management companies, which manage drug benefits for 200 million Americans. The Massachusetts attorney general's office has joined with prosecutors from 25 other states to investigate whether these companies overcharged taxpayers for their services or violated antitrust and consumer protection laws.

In addition, class action lawsuits across the country allege that the companies, hired by states, corporations, and health insurers to help control soaring drug costs, have pocketed savings that could have driven costs lower. The suits claim that the companies sometimes steered patients to higher-priced drugs to meet quotas that earned the companies secret payments from drug makers. Without those switches and payments, the suits allege, drug spending by health plans and employers would have been significantly lower, and patients would have gotten breaks in health insurance costs.

"The pressure is getting pretty intense," said Robert I. Garis, a professor at Creighton University in Omaha, who studies pharmacy benefit management companies. "The current legal climate may be just what the doctor ordered. This industry needs a good cleaning out."

In addition to Medco, three other companies -- AdvancePCS, Express Scripts, and Caremark Rx -- dominate the industry. The four reported a collective 122 percent jump in profits last year, to $1.5 billion on revenues of $66 billion. The companies set up networks of retail and mail-order pharmacies, handle billing for patient prescriptions, manage the preferred drug lists that guide prescriptions, and bargain with drug manufacturers for discounts and rebates. They are poised to pick up 40 million new customers if Congress approves a Medicare drug benefit.

All four of those companies are facing suits or subpoenas, which they dismiss as harassment motivated by trial lawyers, retail pharmacists, and drug makers.

"It's a coordinated outrage campaign designed to discredit the PBM model, which is working well for consumers and employers," said Phil Blando, spokesman for the Pharmaceutical Care Management Association. "We are the last best hope for stemming the rise of prescription drug prices in this country."

In fact, a federal study in January found that the companies saved federal employees about 18 percent on brand-name drugs and 47 percent on generic drugs over retail pharmacy prices, although the authors cautioned that the figures overstated the savings because federal health plans would have negotiated discounts even without the companies.

The General Accounting Office study also found the companies reduced federal employees' drug spending another 4 to 18 percent by negotiating rebates with drug companies and controlling what drugs doctors prescribed. The GAO, however, could not tally the rebates, volume discounts, and markups the companies kept for themselves because they refused to disclose that information.

Some critics, including Garis, estimate the companies could cut another 10 percent from the nation's approximately $200 billion annual drug bill by passing on more of these "secret" rebates and discounts. The estimates, dismissed by company officials as preposterous, have nonetheless piqued legislators' interest. An amendment to the proposed Medicare drug bills pending in Congress would require the companies to disclose all rebates. Lawmakers from nine states, including Massachusetts, are exploring establishing a nonprofit company to manage drugs for state employees and Medicaid recipients.

The whistle-blowers who spurred the Massachusetts investigation allege that Medco defrauded six states, the District of Columbia, and the federal government of millions of dollars each. They sued under federal and state False Claims Acts, which entitles whistle-blowers to a share of any money the government recovers.

They allege that Medco employees at mail-order pharmacies in Massachusetts and elsewhere switched patients from their doctors' prescriptions to similar but often more expensive drugs made by companies from which they got volume discounts or rebates. The complaint alleges that the company made millions of dollars by pushing drugs made by Merck & Co., which owned Medco up until August, and by other drug manufacturers.

In addition, the whistle-blowers say the company shipped medicine bottles containing fewer pills than paid for, and destroyed prescriptions without filling them when workers couldn't keep up with the volume. The complaint alleges that the problems had a "potential life-threatening impact" on patients.

The federal complaint alleges the company used all of those tactics to defraud the government and mounted a coverup when the US attorney in Philadelphia began investigating.

Massachusetts Attorney General Thomas F. Reilly is probing Medco's performance from 1994 to 2000, when it managed drug benefits for many state employees and retirees through the Group Insurance Commission, according to his staff and documents filed in the case. He has requested documents from Medco and is examining the operations of the Wilmington mail-order facility, which closed last year. The state has until February to decide whether to join the whistle-blowers' suit.

Dolores L. Mitchell, executive director of the Group Insurance Commission, said she recalled no major consumer complaints about Medco, which managed about $100 million in benefits for the state annually. She said the state switched to Express Scripts in 2000 because it got a better price.

Medco spokesman Jeffrey Simek said the company had isolated problems with "rogue employees" at a mail-order pharmacy in Tampa which were quickly corrected, but he denied those problems affected drug costs. He said that no patients were shifted to other brand-name drugs without their doctors' consent and that, overall, any switches to more expensive medications were offset by other discounts or by switching other patients to cheaper generics. In addition, he said, there is "no secret pool of money" that skews decisions about patient drugs, because many rebates are shared with clients and may be audited by them.

"In short, each of the allegations is false, overstated, or pertains to unauthorized instances over several years that were identified by our company and corrected with the utmost integrity," he wrote in an e-mail.

Alice Dembner can be reached at Dembner@globe.com.