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CareMark and MedPartners

A HealthSouth Protégé

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This page examines the two companies Caremark, a major part of the early 1990's fraud scandal, and MedPartners, a company closely tied to HealthSouth. MedPartners purchased Caremark. The page also documents the rise and fall of the Physician Management Industry of which both were a part. It documents MedPartners reemergence as Caremark, a pharmaceutical services company making vast profits as a Pharmacy Benefit Manager. Caremark finally buried itself inside another giant CVS.


The story is well told in the press and I have told the story by using extracts from these articles. A new book "Critical Condition" published in November 2004 is a source of additional information about the adverse consequences of physician management.

Word has been getting around Wall Street this week about just how close that Birmingham, Ala.-based pharmaceutical services company (Caremark) was to Richard Scrushy, the guy who fraudulently built HealthSouth Corp. into a major company using the underhanded tricks of the accounting trade.
At that time, a number of HealthSouth executives besides Scrushy were on the MedPartners (now Caremark) board of directors. At one point both companies had Ernst & Young as their auditors.
Lucky for Caremark that Scrushy wasn't pulling the stunts at Caremark/MedPartners that he began in 1997 at HealthSouth.



Caremark and MedPartners are part of a murky past in which HealthSouth and its directors played a major part. There were also links to Integrated Health Services (IHS), a troubled nursing home company which entered Chapter 11 bankruptcy. Scrushy was a director of IHS. Edwin M. Crawford once a director of HealthSouth and also of IHS is the current chairman and CEO of Caremark. Charles W. Newhall III, a founder of HealthSouth was also a director of IHS and MedPartners. Two of those pleading guilty to fraud in 2003 were once part of MedPartners.

Integrated Health Services, Inc. (NYSE: IHS) today announced that George H. Strong (also a HealthSouth director) and Edwin M. Crawford have resigned from the IHS Board of Directors. - - - - -Mr. Crawford, Chairman and CEO of Caremark Rx, has been a director since 1995 and has resigned due to his time commitments now required in running Caremark Rx.
Two Directors Resign From IHS Board of Directors PR Newswire October 8, 1999, Friday

Mr. Newhall
(Original director and financier of HealthSouth) is also a director of Integrated Health Services, Inc., MedPartners, Inc. and Opta Food Ingredients, Inc., all of which are publicly-traded corporations.
Mr. Martin
(HealthSouth treasurer and one of those pleading guilty to fraud) is a Director of Capstone Capital, Inc. and MedPartners, Inc. and is a principal of 21st Century Health Ventures.
HealthSouth SEC reports HRC directors March 31, 1998

She (C. Sage Givens, long time director of HealthSouth and Scrushy fan) quickly became a star partner at First Century (part of Smith Barney) and went on to make a number of other lucrative investments in companies with ties to HealthSouth, including Integrated Health Services in 1988 and MedPartners in 1995.
Questions About Investor on Board of HealthSouth The New York Times April 17, 2003

HealthSouth and MedPartners bought up the rump of Caremark in 1995/6 after an extensive fraud settlement by Caremark. When the Physician Management business in which both were involved collapsed MedPartners folded and changed its name to Caremark. It continued as a pharmaceutical business and is still managed by a previous HealthSouth director. Scrushy and HealthSouth are no longer involved.

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Caremark was one of the companies involved in an extensive early 1990 wave of exposures of fraud. It was accused of paying kickbacks to doctors. This occurred during the late 1980's and early 1990's. In 1995 Caremark paid the third highest ever criminal settlement of US $161 million. National Medical Enterprises had paid US $379 million and Smith Kline Beecham US $325 million.

This was one of several attempts to deter health care fraudsters by what were then considered massive fraud settlements. The payments had gone up from a previous high of half a million dollars in 1990 and $10 million in 1991. When these large fines failed to stop fraud there was an escalation of health care settlements reaching US $1.7 billion paid by Columbia/HCA in 2002. HealthSouth with an admitted US$4 billion fraud promised to be even higher - but that did not happen. At some stage the US will be forced to actually address the problem instead of trying to frighten it away.

Caremark also signed an integrity agreement. It was during the early 1990's that Corporate Integrity Agreements became part of criminal and civil fraud settlements - the latest "fix it" for problems. They allowed the company to escape the Medicare requirement that they be barred from payments. Great store has been set on these agreements. Essentially they are agreements which depended on the integrity of people who have previously displayed none.

Bankrupt corporations which have defrauded Medicare and misused citizens have been allowed to pay token settlements which allowed them to trade out of Chapter 11 bankruptcy. These integrity agreements are claimed to protect the system and citizens from a repeat of the offences. Recent experience with Tenet/NME seems to confirm that integrity agreements with dishonest corporations are not worth the effort. This is hardly surprising.

The law began reaping results among healthcare providers in the early 1990s. A series of big-dollar settlements with companies such as SmithKline Beecham, Beverly Enterprises, Caremark and other national chains drew attention to endemic healthcare fraud.
Fighting fraud Modern Healthcare July 23, 2001



Caremark was spun off from Baxter, a pharmaceutical business in 1992. It was Baxter's home-infusion subsidiary. The allegations suggest that the fraud commenced in 1986 prior to this and it may be that the spin off from Baxter was part of a negotiated settlement or alternately an attempt to distance Baxter from the looming fraud investigation. I do not know when the fraud investigation commenced.

In this spin off Baxter was following Dow Corning which was caught in the massive operation labscam in the early 1990's. It spun off its fraud ridden laboratory subsidiaries as Quest Diagnostics, a company now providing services in Australia.

After the criminal settlement Caremark negotiated a settlement for $42.3 million with insurers who claimed they were defrauded. The insurers were not satisfied with this and they came back after MedPartners had purchased Caremark. MedPartners refused to negotiate and 23 insurers sued for US $3.3 billion. I do not know the outcome but it may be that this contributed to MedPartner's ultimate demise. I have not seen any comment about this by those who analysed MedPartner's misfortunes.

Caremark rapidly moved into other businesses and then sold its infusion business to Coram Healthcare Corp. Coram subsequently claimed that Caremark had overvalued the business. It sued Caremark.

One really wonders how any intelligent community of citizens could allow the care of their frail citizens to become trapped in an environment like this.

The multi-agency investigation of Caremark, led by the Inspector General of the U.S. Department of Health and Human Services, the FBI and the Department of Justice, focused on whether the company disguised kickbacks to doctors as research grants or payments for legitimate work (Chicago Tribune, June 1995).
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

The Caremark case, involving kickbacks to physicians for ordering home infusion products, was settled for $ 161 million.
DOJ and states keep escalating fraud enforcement The National Law Journal March 29, 1999

Caremark is a 3 1/2-year-old company that resulted from a November 1992 spinoff by Baxter International Inc. Like MedPartners, Caremark is a major player in the management of doctors' practices, particularly in Southern California.
Caremark has had a stormy existence even from the time it was part of Baxter. Caremark previously operated a home-infusion business in which it administered intravenous antibiotics, medicines and nutrition to patients at their homes.

That part of Caremark's business was the focus of a criminal investigation by the Federal Bureau of Investigation and the inspector general's office of the U.S. Department of Health and Human Services that dealt with alleged payoffs to doctors for steering business to the company. Ultimately, Caremark pleaded guilty to federal felonies in connection with the inquiry and agreed to pay civil damages and criminal fines of $161 million to settle the case.

Caremark later sold that home-infusion business to Coram Healthcare Corp. but continues to be embroiled in litigation with Coram over whether Caremark mischaracterized the value of the home-infusion business. At issue is whether Caremark failed to disclose the depth of the federal inquiry. Caremark has denied these allegations.

MedPartners Proposed Buy of Caremark Would Be the Latest in a Series of Acquisitions The Wall Street Journal Europe May 15, 1996

The most recent example of piling on against a provider company was the whopping $3.3 billion lawsuit that 23 insurers filed March 2 against Caremark International in U.S. District Court in Chicago (March 9, p. 8).

The lawsuit, which alleges Caremark submitted false claims for medical care between 1986 and 1995, comes nearly three years after the Northbrook, Ill.-based healthcare company's June 1995 payment of $161 million in criminal and civil fines to settle a federal kickback and fraud investigation of its former home infusion unit.
MODERN HEALTHCARE has learned the firm also settled on behalf of at least 10 insurers in a 1996 Caremark settlement. Neither the law firm nor Caremark would reveal the names of the insurers.
The group of 10 insurers successfully obtained a $42.3 million settlement with Caremark in early 1996 without even going to court.- - - - But MedPartners has refused to settle with other insurers since it took over Caremark, which led to the lawsuit filed two months ago.

Caremark had rapidly branched out into other areas in order to build value and business after it spun off from Baxter. I do not have a time line for this but it was well established by the time of the fraud settlement in 1995. If other investigations of the time are a guide then the fraud investigation would have taken at least 3 years and started in 1992 or earlier.

What is interesting is that the insurance companies sued Caremark then owned by MedPartners and not Coram, which now owned the infusion business. What's more they claimed they had been defrauded up to 1995. It seems possible that there was ongoing fraud in other sections of the business even during the government investigation?

By the time MedPartners and HealthSouth bought up Caremark it was also into the current fashion of the moment, Physician Management. They had also set up a chain of rehabilitation services, were involved as a middleman in a pharmacy business, and also provided home care. They were competing with both HealthSouth and MedPartners. They also sought to establish international holdings with a home care service in Europe, Japan, and Canada. I am not clear whether this happened before or after the fraud or after Caremark's purchase by MedPartners.

One of the strategies employed by companies like Tenet/NME, Columbia/HCA, and Sun Healthcare when threatened by fraud exposures in the USA was to migrate rapidly. They established subsidiaries overseas, so protecting income, assets and capital. One wonders if Caremark was doing the same.

Caremark had $2.37 billion in 1995 revenue. Increasingly, that revenue is coming from a relatively new business for Caremark, the management of physicians' practices. During the past three years, Caremark has begun to make itself over into a company that emphasizes that business and has aggressively acquired such practices around the U.S.
In addition, the company has a pharmacy-benefits-management business and is involved in care for hemophilia patients. Caremark also distributes the human growth hormone Protropin, made by Genentech Inc.
MedPartners Proposed Buy of Caremark Would Be the Latest in a Series of Acquisitions The Wall Street Journal Europe May 15, 1996

Modern Healthcare recently examined the global expansion strategy of Caremark International, a company which specialises in providing home-based care for complex medical problems which traditionally required hospitalisation. France, Germany, Japan, the Netherlands and the UK are the main focus of Caremark's foreign investment ambitions. Though the company aggressively markets its home care services as a 'lower cost' alternative to institutional services, - - - - .
The corporate health care invasion Pub Ser Internat 22/10/98

HealthSouth bought Caremark's 120 rehabilitation facilities in 1995 and MedPartners acquired the rest of Caremark in 1996.

Healthsouth Corp., Birmingham, Ala., said it will purchase, for $127.5 million, more than 120 out-patient rehabilitation clinics from Caremark International Inc., in the latest of a year-long spree of acquisitions
Business Brief -- HEALTHSOUTH CORP.: Plan Is Made to Purchase Over 120 Caremark Clinics The Wall Street Journal October 17, 1995

The deal will expand Healthsouth's operations to more than 700 centres, including those that will soon be acquired from Sutter Surgery Centers, Inc. and Surgical Care Affiliates, Inc. in recently announced agreements.
Healthsouth to buy 120 Caremark centres Reuter October 17, 1995

Caremark was to survive Medpartners' collapse and continue as an independent company when MedPartners assumed the name Caremark in 1999. Even in 2003 some of its practices are being criticised but I will deal with that later.

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MedPartners was HealthSouth and Richard Scrushy's attempt to get in on the latest fad, physician management. Scrushy and his close associates started MedPartners in 1993 and floated the company on the sharemarket in 1995/6. HealthSouth's Larry House became chairman and CEO. HealthSouth bankrolled it with the first US $1 million. MedPartners subsequently bought Caremark.

The article, "Vulgarians at the Gate," (Fortune magazine June 1999) described MedPartners as "a onetime Wall Street darling that has cost investors billions."
Scrushy hand-picked House, then chief operating officer of HealthSouth, to run MedPartners and placed himself on the board of directors.

While House is credited for building the company to its Fortune 500 status, albeit on the back of Scrushy, he is clearly blamed for turning the "promising enterprise into one of 1998's biggest Wall Street fiascoes."
According to Corporate Research Group, MedPartners went from $1.2 million in revenue in 1993 to $6.3 billion in 1997.

The company went public in 1995 at $13 a share and hit $36 a share in less than a year.

Then, MedPartners CEO House's 6 percent of the company was worth $72 million, and Scrushy's personal stake was worth $29 million
(Fortune, 1999)
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

Scrushy helped found Caremark Rx (ie MedPartners) in 1993, when it was known as MedPartners, and was closely associated with the company through most of its history. At Caremark, Scrushy handpicked a management team and board members from the executive ranks of HealthSouth, served as a board member himself from 1993 to 2001 and chairman from 1998 to 1999, and acted as CEO for two months in 1998.
Larry D. Striplin Jr., a member of the HealthSouth board's compensation and audit committees, was a compensation committee member at Caremark
(ie MedPartners).

Malcolm McVay was senior vice president of investor relations at Caremark
(ie MedPartners) before joining HealthSouth in September 1999 (becoming treasurer and later pleading guilty to fraud). - - - - Charles W. Newhall III was a director of HealthSouth and a director and compensation committee member at Caremark (ie MedPartners).

Michael Martin, the former HealthSouth chief financial officer who has agreed to plead guilty to conspiracy charges, was also a director of Caremark(ie MedPartners).
- - - MedPartners, a company that would evolve into Caremark Rx, a middleman between drugmakers and pharmacies. He (Scrushy) directed HealthSouth to provide the first $1 million in seed money for MedPartners, according to several published reports.
Scrushy Is Part of Caremark's Story April 10, 2003

Until last year, MedPartners/Mullikin was a little-known offshoot from Healthsouth Corp., a Birmingham-based healthcare company, where MedPartners's chairman and chief executive, Larry R. House, had been a top officer. Currently, MedPartners/Mullikin is affiliated with about 6,000 physicians in 23 states and provides health care to more than 800,000 health maintenance-organization participants. In 1995, the company reported total revenue of $725.7 million.
MedPartners Proposed Buy of Caremark Would Be the Latest in a Series of Acquisitions The Wall Street Journal Europe May 15, 1996

To a degree, House is trying to do with physicians what Richard Scott of Columbia/HCA Healthcare Corp. is doing with hospitals: create a national, brand-name, profit-driven delivery system.

Mr. Newhall is also a director of Integrated Health Services, Inc., MedPartners, Inc. and Opta Food Ingredients, Inc.
Mr. Martin is a Director of Capstone Capital, Inc. and MedPartners, Inc. and is a principal of 21st Century Health Ventures.
HealthSouth SEC reports HealthSouth directors March 31, 1998

I have not previously dealt with the USA's attempt to corporatise doctor's practices - the equivalent of GP corporatisation in Australia. Phycor and MedPartners are excellent examples of what happened. By the time Australia jumped on the bandwagon the bubble had already burst in the USA but once again Australian business jumped in insisting on experiencing the financial pain themselves.

Almost 5 years before the same scam was played out on Australian General Practitioners, Wall Street identified the vulnerability of US doctors disempowered by managed care. It enticed them into these arrangements. Gullible investors put up their money and doctors sold their practice accepting inflated shares in part payment. Behind much of this was Benjamin Lorello, the eccentric banker from Saloman Smith Barney (now Citigroup). Soon the company was a US $6 billion a year business with a network of 13,000 doctors.

Senior staff became enormously wealthy. Credibility was enhanced by a process of backslapping. Ernst & Young, the accountants who so effectively looked past HealthSouth's nearly US $4 billion fraud hailed Larry House as the regional Entrepreneur of the year. Two corporate jets flew him and his family from their newly built "21 bedroom, 22 bathroom mansion:" to the black tie presentation.

The mathematics are simple and the model is flawed. Most funding is capped, whether by employers, insurers, or Medicare. Physicians need time to see their patients. They need secretarial and nursing assistance. They simply charge for the consultation. There is little room for economies of scale. The only way to make money is to get the doctors to see more patients, to do more tests and to provide more referrals using company facilities. None of this is good for care.

Doctors are independent and largely focused on their patients. As is now well illustrated doctors can only be induced to adopt business practices which impact on care if they are very well rewarded for doing so. They will not remain poor in order to enrich the company. These companies could not generate the income needed to do this.

Not surprisingly given the way market analysts operate there was excessive hype and massive investment leading to growth. Doctors practices were purchased for large sums. The doctors who were now employed to do the same work could not generate the income to justify this. There were mergers and takeovers. An example of the folly is the takeover of Talbert Medical Management, which managed 282 physicians for US $200 million. To recover the cost before making any profit each doctor would need to find the time to generate more than an additional US $700 thousand over the years by caring for more patients.

Share prices peaked. The economic realities eventually asserted themselves and it all fell in a heap. Original founders may have reaped the benefit of their investment and sold. Shareholder who had responded to analysts' up-beat reports by buying the shares were left with large losses. Exactly the same thing happened in Australia a few years later (eg.
Foundation Healthcare).

Buying aggressively in the California market and later paying $2.5 billion for Caremark International, MedPartners was on an aggressive acquisition track offering more cash for practices than its competitors.

It quickly became not only the largest physician group practice company in the country, but also one of the largest Alabama companies and a member of the exclusive Fortune 500, eclipsing HealthSouth at one point.
Not long after the MedPartners purchase of Caremark, C.A. Lance Piccolo, Caremark's chairman and CEO, moved on to the MedPartners board.

Though Caremark was the bigger firm, it was seeking a new image. Piccolo's company pleaded guilty in 1995 to two counts of mail fraud for paying doctors for patient referrals and defrauding government medical programs.
The multi-agency investigation of Caremark, led by the Inspector General of the U.S. Department of Health and Human Services, the FBI and the Department of Justice, focused on whether the company disguised kickbacks to doctors as research grants or payments for legitimate work (Chicago Tribune, June 1995).
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

Pioneer Hospital is the original facility operated by Mullikin Medical Enterprises, which MedPartners acquired in 1995 for $414 million.

MedPartners/Mullikin Inc., one of the U.S.'s leading physician-management firms, is in talks to buy another such major company, Caremark International Inc., of Northbrook, Illinois.
The transaction would also be the latest in a furious series of acquisitions by Birmingham, Alabama-based MedPartners/Mullikin. Since going public last February, at $13 a share, MedPartners has grown into the dominant player in physician management -- one of the hottest sectors of health care.

It has done so by aggressively acquiring both smaller physician groups and, in recent months, its larger competitors. Its purchases include acquisitions late last year of Pacific Physician Services Inc. and Mullikin Medical Enterprises L.P., in transactions valued at $332 million and $412 million, respectively.
MedPartners Proposed Buy of Caremark Would Be the Latest in a Series of Acquisitions The Wall Street Journal Europe May 15, 1996

Mr. Lewis - - - often finds hidden value in "underappreciated" business lines of multiproduct companies. He also has a special interest in physician-practice-management companies.- - - - .

At the moment, Mr. Lewis likes two such companies, Caremark and MedPartners. The two are scheduled to merge next month, with MedPartners as the surviving entity.
One of his favorite stocks is Nashville-based PhyCor, a leader among the physician-management companies that he says are giving doctors a chance to regain control of health care from HMOs.

All-Star Analysts 1996 Survey: Hospitals & HMOs The Wall Street Journal June 20, 1996

Huge firms such as Nashville-based Phycor are buying medical practices, replacing administrative staff and centralizing purchasing for everything from tongue depressors to computers. Alabama-based MedPartners Inc. has been on a doctor-buying spree of its own and now runs thousands of physicians' offices nationwide.
The Doctor's In, the Stocks Aren't :: Investing in the Changing Health Care Sector Isn't for the Squeamish The Washington Post April 6 1997

MedPartners has agreed to acquire Talbert Medical Management Holdings Corp. in a $200 million cash deal. Costa Mesa, Calif.-based Talbert manages 282 physicians at 52 clinics in Arizona, California, Nevada, New Mexico and Utah.
MedPartners to buy Talbert Modern healthcare Aug. 14, 1997

FIVE LARGEST DEALS OF 1997 (millions)
1. MedPartners acquired InPhyNet $ 442
3. MedPartners acquired Talbert Medical Group $ 193
Size does matter; healthcare industry mergers and acquisitions; Hospitals & Health Networks June 20, 1998

MedPartners reached agreements and alliances with groups like Tenet and Columbia/HCA to set up integrated services which they claimed would benefit everyone including their customers, the patients. These were hospital corporations which would benefit from referrals by MedPartner's doctors. Market analysts knew who would benefit. It is interesting that MedPartner's Californian subsidiary which entered a deal with Tenet was later forced into bankruptcy.

In what could be the start of a budding relationship, the nation's largest physician practice management company and second-largest for-profit hospital chain agreed last week to form a provider network serving major markets in Southern California.
The immediate deal will place in one contracting network 33 Tenet hospitals in Southern California and more than 4,000 physicians managed by MedPartners. The area covered under the agreement includes Los Angeles and Orange counties.
Likewise, MedPartners Chairman and CEO Larry House said, "Patients get greater coordination in healthcare services, physicians get expert management services and greater access to contracts, and payers get . . . simplified administration."

But industry experts say Tenet and MedPartners will be the big winners.


Big physician practice management companies start to cut deals with big providers. MedPartners agrees to form a provider network serving major markets in Southern California with Tenet Healthcare Corp.
NOVEMBER -- In a stunning departure from its market-by-market growth strategy, PhyCor announces it will buy chief rival MedPartners. The $8 billion merger will give Nashville-based PhyCor affiliations with 35,000 physicians, or nearly 6% of nonfederal U.S. doctors, making it by far the nation's largest physician manager.
1997: THE YEAR IN REVIEW Modern Healthcare Dec. 22, 1997

By the end of 1997 the future did not look good. Strongly supported by Richard Scrushy MedPartners tried to sell itself to Phycor which planned to buy MedPartners for US $8 billion. The deal fell apart and MedPartners was forced to report a massive loss. There seemed to be concerns about hanky panky in the deal. One source describes it as creative accounting, something in which Citigroup has specialised - calling it "structured finance" to make it sound legitimate. Phycor sued MedPartners for misinformation and House resigned. He was replaced as chairman by Scrushy himself.

The questions about financial stability arising out of PhyCor's due-diligence process centered around allegations of overstated earnings and the ability of MedPartners to deliver on projections for future earnings (Managed Care, February 1998).

The merger was called off, and the street had a field day as MedPartners shares plunged in 1997 by 45 percent
Having been stung once, Piccolo was no stranger to corporate governance liability, and when interviewed in Fortune about House's assertion that he knew nothing about the company's financial troubles in California, Piccolo said the board did not buy it.

"It's inexcusable to say he (House) didn't know. He was paid a hell of a lot to know. ... You can't run a business just by buying. You've got to manage it," Piccolo said.
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

A class-action lawsuit has been filed against MedPartners, Birmingham, Ala., alleging the company and its officers made misleading statements about its financial condition to promote a pending merger with PhyCor. The deal with PhyCor was called off Dec. 7, the same day MedPartners announced it would not meet earnings projections. - - - - MedPartners said it believes several lawsuits have been filed, but it hasn't received official notification.
MedPartners facing lawsuits Modern Healthcare Jan. 16, 1998

MedPartners founder Larry House resigned as chairman and chief executive officer after a proposed multibillion-dollar acquisition by rival PhyCor collapsed. Many industry observers had questioned the deal, noting key cultural and operational differences - - - - -

When the PhyCor deal unraveled, MedPartners also announced it would take a $145 million fourth-quarter charge, caused partly by losses on West Coast operations, and that 1998 earnings would fall below projections. Wall Street, not surprisingly, battered the stock, and shareholder suits followed.
In this case it was Richard Scrushy, HealthSouth Corp.'s chairman and CEO, longtime business ally to House and a major MedPartners shareholder. Scrushy was named interim CEO until a permanent successor is chosen.


The job was open because a guy named Larry House had just stepped down in the middle of a securities fraud case, said Lehman, which has an "overweight" rating on Caremark's stock.

In fact, the books showed that MedPartners' performance had been enhanced by creative accounting. On the day the merger was announced, MedPartners released its third-quarter earnings, reporting income of $54.4 million on revenue of $1.61 billion, up 23% over a year earlier. By the time the accountants got through deciphering the numbers, MedPartners's mythical profit had vanished into a loss of $840 million.
ritical Condition: How Health Care in America Became Big Business & Bad Medicine by Barlett & Steele published by Doubleday, Nov 2004 page 111.

The writing was now on the wall. Profits and stock prices were falling. MedPartners tried to move its focus by merging with ASG, a profitable provider of health care services to prisons but the deal also fell through.

Many physician practice management stocks have tanked, prompting some investors to question whether PPMs are a legitimate business that adds value. Shares of Birmingham, Ala.-based MedPartners, which lost $840.8 million in the fourth quarter of 1997 and $25.7 million in the first quarter of 1998, now trade in the $2.50 range, far off a 52-week high of $32. San Diego-based FPA Medical Management filed for Chapter 11 reorganization July 17.

Michael Catalano, ASG's new president and CEO, says the company's biggest struggle this year was the aborted deal with Birmingham, Ala.-based MedPartners. ASG planned to merge with the physician practice management company in a deal worth $59 million at the time. But in January, ASG called off the deal when MedPartners' stock price started to slide (Jan. 26, p. 12).

Scrushy realised that it was time to get out. He resigned as chairman and brought in Mac Crawford, a turnaround expert to chair the company and take MedPartners out of the business of running physician practices. Crawford had become a board member of HealthSouth earlier in 1998. Physician management had not been a financial success and doctors had not enjoyed being part of MedPartners. By 1998 it was clear that the commercial model had not worked. It was fatally flawed. MedPartners had been moving its focus by building up the pharmacy business run by its subsidiary Caremark and it moved in that direction.

- - - HealthSouth Chairman and Chief Executive Officer Richard Scrushy said Friday he's stepping down as MedPartners chairman effective Dec. Scrushy, 45, will remain a director of MedPartners, - - - . Replacing Scrushy as MedPartners chairman is MedPartners President and CEO E. Mac Crawford, 49. Scrushy, who had taken the helm of MedPartners in January, recruited Crawford from Magellan Health Services earlier this year - - - .
Modern Healthcare Nov. 2, 1998

MedPartners' decision to quit the physician practice management business last week gives hospitals a golden opportunity to cozy up to doctors.
Many of MedPartners' affiliated physicians welcomed the news that the PPM is leaving the business. MedPartners quickly grew to become the nation's largest PPM firm, with nearly $6 billion in annualized revenues. But according to doctors, the company failed to meet capital commitments to affiliated groups, lacked a clear direction and lost experienced staff after announcing its merger with PhyCor last year-a deal that ultimately flopped.

MedPartners shoulders debt of $1.7 billion. Its stock, which traded as high as $36 in January 1996, was about $4 last week.

"I don't think there are any groups in the greater MedPartners community that are happy with the company," said one physician leader - - - .
MedPartners President and Chief Executive Officer E. Mac Crawford assured doctors last week that they would have a say in the disposition of their practices.
Condit, who became MedPartners' chief medical officer for the Southwest and supported the company's strategy of linking physicians nationally, said he now has "serious doubts" about the model.
Santa Barbara, Calif.-based Tenet Healthcare Corp., which has a contracting partnership with MedPartners groups in Southern California, said it was too soon to know whether it would consider acquiring MedPartners practices. Tenet does not consider managing physician practices to be part of its core strategy, spokesman Lance Ignon said.

MedPartners will keep its growing pharmaceutical benefits management subsidiary, Caremark, in Northbrook, Ill. - - - - Caremark filled 22 million prescriptions through a network of more than 53,000 affiliated pharmacies and mail-order distribution centers in the first nine months of 1998.

Modern Healthcare Nov. 16, 1998

We can't work things out, said physician practice management companies PhyCor and MedPartners as they scrapped their proposed marriage. MedPartners also announced it would not meet earnings expectations - - - - - The news sent the PPM industry into a tailspin that would last all year.

MedPartners interim Chief Executive Officer Richard Scrushy said later in the month that he wouldn't consider selling all or part of the company despite integration problems on the West Coast. Scrushy called MedPartners "financially the strongest company in the PPM business." In November, MedPartners pulled out of the business altogether.

YEAR IN REVIEW 1998 Modern Healthcare Dec. 21, 1998

There was also trouble for companies that bought the practices of physicians. Medpartners Inc., once a high-flying player in physician practice management, left that business, casting doubt on the ability of physician groups to meet Wall Street demands for quarterly earnings growth.
HEALTH CARE H.M.O.'s Are Set for Many More Mergers The New York Times January 4, 1999

It seemed like a good idea: Physician practice-management firms (PPMs) would buy or manage thousands of doctors' operations, gaining vast efficiencies and negotiating muscle to fight health-maintenance organizations (HMOs).

But the PPM model proved fatally flawed. The industry leaders did manage to affiliate with 40,000 physician practices by this year. But after massive losses, MedPartners said in November that it would quit to focus on its pharmacy unit. Its biggest rival, Phycor, took a $ 93 million charge and said it might go private. Smaller PPMs have also foundered.

PPMs crashed, in part, because they lacked the actuarial expertise to predict medical costs. More important, doctors didn't react well to becoming employees -- especially of remote national companies. MedPartners and Phycor proved adept consolidators, but they couldn't efficiently manage operations.
ADJUSTING THE PRESCRIPTION Business Week January 11, 1999

Since managed care became a dominant factor in the healthcare industry, physicians have tried to tie their services to a vehicle that would give them more control. However, any hope of PPMCs being the right approach was derailed in November 1998 when MedPartners Inc. (Birmingham, AL), the nation's largest physician management company, announced it was leaving the business to concentrate on pharmacy benefits management.

MedPartners loses big again. MedPartners posted a net loss of $1.26 billion, or $6.64 per share, on revenues of $2.6 billion last year, compared with a 1997 loss of $821 million, or $4.33 per share, on revenues of $2.4 billion, - - - - - - the physician practice management business, which MedPartners is divesting. - - - - - its remaining operations, including pharmacy benefit manager Caremark, made a profit.
FOR THE RECORD - MedPartners loses big again. Modern Healthcare Feb. 15, 1999

MedPartners' surprise decision highlighted PPMCs' fall from grace and capped a year that saw many management companies lose money or exit the business.
Florida Hospitals Shedding Doc Practices :: PHYSICIANS DEAL WITH ANOTHER BLOW IN THEIR QUEST FOR CLOUT IN THE HEALTHCARE INDUSTRY Medical Industry Today February 16, 1999, Tuesday

In November 1998, the biggest of the physician-practice-management companies, MedPartners, announced it was quitting the practice-management business to focus on its more profitable pharmaceutical subsidiary. Its stock price was down by 79 percent from the previous year. After a planned merger with its largest rival, Phycor, fell through, both companies announced quarterly losses. Several smaller companies, such as Physicians Resource Group of Dallas, a manager of eye care practices, and AmericaPath of Rivera Beach, Florida, also experienced severe financial setbacks. Doctors Health, a Maryland firm that manages 374 primary care physicians' practices in Baltimore and Washington, D.C., filed for Chapter 11 bankruptcy.
The American Health Care System -- Wall Street and Health Care Robert Kuttner The New England Journal of Medicine -- February 25, 1999

MedPartners was in such poor shape that its Californian operation was forced into bankruptcy by the state government. A US $200,000 lobbying endeavour rescued the company. While there are no allegations that MedPartners adopted the same accounting practices as HealthSouth, its rapid rise and fall, the discrepancies in its accounting, and its close association with Scrushy and those involved in the HealthSouth fraud must raise this question. The lobbying effort probably saved its books from close scrutiny by an administrator.

Darius Anderson, a lobbyist for Platinum Advisors. - - - Of that total, $200,000 (of $546,994) came from MedPartners Inc., an Alabama company whose California subsidiary was placed into bankruptcy by the Davis administration on March 11. Within two weeks after Anderson was hired, the state returned control of the subsidiary to the parent company instead of leaving it in the hands of an independent conservator.
Davis' Trip Mixes Trade, Politics Economic results hard to gauge from mission to Europe, Mideast Chronicle Staff Writer October 25, 1999

The market rewarded MedPartners when it moved away from physician management and home care, and sold off US and foreign subsidiaries. It sold its home care international business in Europe and Canada to Fresenius Kabi, a German multinational giant. Fresenius continued to operate these home care services under the name Caremark until it changed this to Calea in 2001.

MedPartners' stock rose as it began divesting its physician management companies so it could get out of the business. Its stock closed on June 30 at $ 7.50, up 43% for the six-month period.
MedPartners operated U.S. FamilyCare, Friendly Hills and Talbert clinics in the Inland Empire. It recently agreed to sell all of them and other Southern California clinics to KPC Global Care, based in Riverside.
Health care; Health care stocks mostly ailing in first half of year THE BUSINESS PRESS/CALIFORNIA July 19, 1999

Earlier this year, MedPartners sold all but 7% of its Knoxville, Tenn.-based physician staffing firm, Team Health, for $335 million, far less than some analysts had projected

Birmingham, Ala.-based MedPartners, the nation's largest physician practice management company, said it has agreed to sell its Caremark International subsidiary's Canadian and overseas home-care operations to Fresenius AG of Germany in a cash deal for undisclosed terms. Caremark provides home-care services through about 14 locations in the United Kingdom, Germany, the Netherlands and Canada representing $80 million in annual revenues.

MedPartners, Fresenius in deal
Modern healthcare Tuesday, Aug. 26 1999


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MedParners' Collapse and the Aftermath

Two Pulitzer prize winning investigative journalists, Donald Barlett and James Steele published a landmark book "Critical Condition: How Health Care in America Became Big Business & Bad Medicine" in November 2004. Very unusually for a credible US publication, they put the blame for the US disaster exactly where it belongs, on a competitive share market and on the Wall Street Financiers who operate there. They don't try to patch the system to make it more market like.

Among the examples they use to illustrate their thesis and the disastrous consequences for patients and doctors are the Physician Practice Management Companies (PPMs). They describe the collapse of these corporations, using MedPartners in California as an example. I include only a brief overview here.

Smith Barney's Benjamin Lorello played a key role in this fiasco. In addition to MedPartners another of Lorello's PPM startups PhyMatrix was enthusiastically marketed by Smith Barney analysts only to dive into bankruptcy. We have no information about how much Smith Barney, or for that matter the various PPM's CEOs and directors made in profits from the PPM exercise.

In retrospect PPMs never made much sense to anyone other than Wall Street investment bankers. With health insurers continuing to squeeze doctors, PPMs had little chance to become going concerns. Doctors resented the high fees they had to pay PPM administrators - usually 15 percent of their revenue. Meanwhile the stock they had received in the companies in exchange for selling their practices soon was worthless.
The industry swiftly imploded, swept by waves of bankruptcies, liquidations, downsizing, and sales wreaking havoc on thousands of doctors and their patients, wasting hundreds of millions of dollars that could have been spent on health care. The speed of the collapse was astonishing.
Medical Economics wrote the epitaph for the industry in 2001: "PPMs will be remembered years from now for their sheer destructiveness."
Critical Condition: How Health Care in America Became Big Business & Bad Medicine by Barlett & Steele published by Doubleday, Nov 2004 page 112-3.

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 The Collapse of the MMP's and MedPartners

Powerful HMOs bargained with MMP's for contracts to provide care to their patients. Fees were cut to a minimum. To keep their costs down the MMP's in turn contracted with other groups to carry out investigations, provide treatment, or to provide medical specialist services.

The consequence of this was that there was insufficient money getting to the end of the system. Companies were unable to pay their bills. Suppliers of essential equipment, who were owed large sums stopped delivering. Specialists with large unpaid bills resigned and refused to attend the patients owned by some companies. No one else was prepared to take up their contracts.

With the introduction of "Just in Time" inventories there was no margin for error. Radiology material, therapeutic substances, simple cleaning materials and other consumables were often out of supply, particularly for those who had not paid their bills.

Primary Care physicians and Emergency Departments were unable to find specialists willing to attend to patients. There are suggestions that some patients may have died as a result. Tests for cancer were delayed and the results not filed because the staff who did so had been fired.

A Third World medical situation was created in a first world country. The patients and the care they had paid for were the losers.

The managed care companies who held disproportionate power did very well in this competitive marketplace. PPMs were founded to counter this disproportionate power but were unable to do so. Large and small they folded across the country.

The collapse of MMPs disrupted long standing clinical relationships between doctors and patients. Doctor/patient relationships were shredded across the country.

Even by the chaotic standards of California health care, the MedPartners catastrophe was breathtaking. Profit driven free market medicine had been creating untold financial carnage among California physician management groups for years. More than one hundred PPMs had collapsed leaving patients to scramble for doctors and doctors to scramble for new associations with ties to the HMOs.
Critical Condition: How Health Care in America Became Big Business & Bad Medicine by Barlett & Steele p131

Barlett and Steele document the collapse of MedPartners in California and the chaos that followed. This brief outline is based on their description and the figures they supply.

MedPartners entered California in 1995 by buying Mullikin Medical Enterprises, a well established privately owned practitioners group with 350,000 HMO enrollees. The capitation fees paid by the HMOs did not cover the costs of care and the new company spiraled towards bankruptcy. Doctors were owed large sums and care was compromised.

The sudden collapse of another large market listed national PPM, FPA Medical Management, had created havoc in California. The state was left struggling to find doctors for thousands of insured patients. To prevent a second crisis the state stepped in early to take control of MedPartners 4000 physician and 1.3 million patient network, sending the company's state business into bankruptcy.

The search for someone to take over the business ended with a charismatic and apparently successful entrepreneur, orthopaedic surgeon, Dr Chaudhuri. His company was KPC Global Care and with the acquisition of MedPartners this one man company came to control one thousand doctors and one million patients. Doubts about his abilities were dispelled by support from Merrill Lynch who were MedPartners' banker at this time.

In retrospect Dr Chaudhuri seems to have been more con man than businessman - even able to con himself with an impractical technological ideal and a blindness to facts. He was repeatedly able to persuade others that things were getting better and that each rescue package would see the company making a profit. At the same time the business disintegrated and the financial situation got worse.

Chaudhuri's first step was to close a large number of clinics and fire 70 doctors and 500 staff. Money was in short supply from the start and clinics were continuously short of consumables. There were no staff to answer phones. Patients could not make appointments or contact their doctors. Even the water supply at one clinic was shut off due to non- payment of bills.

HMOs cancelled their appointments and specialists resigned because of non-payment leaving patients in limbo. Dr Chaudhuri simply ignored doctors concerns about the collapsing system promising that new technology would replace current infrastructure.

Losing money the company wrote out cheques but never posted them as the sum owed blew out to US $18 million. Specialists refused to see KPC patients, and anaesthetists to give anaesthetics. Technical staff resigned so that less well trained staff took over and it seemed that errors occurred as a result.

Vaccines were unavailable, results of medical tests were not filed and doctors saw patients without charts because there were no staff to retrieve them - or because the bills to storage centres where they were held had not been paid. Medical equipment for treatment was not delivered. White coats were taken from doctors backs by a company which had not been paid for providing them. Cleaning services and basic mechanical servicing of infrastructure ceased.

Cat scan corporations refused to service KPC's units when they broke down. Other providers of CAT scans refused to provide this service to KPC patients. This was now a marketplace and financial considerations trumped the humanitarian needs of the sick.

Despite repeated bail outs the situation remained unchanged. Large numbers of doctors resigned because of the quality of care. HMOs started to move their patients away and Quest Diagnostics announced that it would no longer provide diagnostic services.

Dr Chaudhuri promptly closed most of his clinics, firing 2000 health care workers and disrupting health care for 300,000 citizens. He then filed for bankruptcy leaving $200 million in uncovered debt. Debtors sent unpaid bills to patients demanding payment. This was exactly the chaotic situation Californian authorities had tried to prevent when they took control of MedPartners.

After the bankruptcy there was a major problem for patients and new doctors, when patients found them. This was the non-availability of past medical records. Initially locked down and inaccessible, they were transferred to large storage barns when new tenants moved into the premises.

Without an inventory of where the records had come from some 11.7 million records were scrambled, as were X-rays and other separate items. These came from multiple practices as well as from multiple different corporations, relics of MedPartners and Chaudhuri's takeover trail. It would have taken many years to sort and return all the records. Postage alone would have cost $3 million.

The bankruptcy court paid $2.4 million and insurers another $2 million to a storage firm to index the records and return them to those who lodged requests, then eventually destroy the remainder.

Some patients did get their records back but all too often this was long after they were needed.

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 Latest Jan 2005: Chaudhuri Rides Again

Tenet Healthcare, also involved in a massive scandal since 2002 struggled to raise capital by selling hospitals. It was fighting to stave off bankruptcy consequent on impending fraud settlements. White knight Chaudhuri, only recently under bankruptcy protection, came to the rescue agreeing to buy four Tenet hospitals in California.

Some authorities were concerned enough about his track record to initiate an inquiry. All too often these matters are decided by who you know rather than the appropriateness of the decision. Chaudhuri had plenty of support before. Ultimately a formula was found which allowed access to this operator of a recently bankrupt company's, money while excluding him from management!

The state Senate Health Committee will take testimony from noon to 3 p.m. today at the Anaheim City Council chambers, and the Board of Supervisors will hold a hearing at 1 p.m. Tuesday in Santa Ana.

The hospitals are being sold by Tenet Healthcare Corp. of Costa Mesa to Integrated Healthcare Holdings Inc. of Costa Mesa. The buyers' largest single investor is Hemet surgeon Dr. Kali P. Chaudhuri, who bought and then sought bankruptcy protection for a chain of medical clinics in 2000, closing 38 clinics that served tens of thousands of patients across Southern California - including 56,000 in Orange County.
Hearings on Sale of 4 Hospitals Start Today, Los Angeles Times January 20, 2005

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Caremark re-emerges

In September 1999 Crawford dropped the name MedPartners and the company continued to operate its pharmacy business as Caremark. It gradually began to separate itself from HealthSouth. Scrushy remained a director and held on to his 4 million shares until the stock had recovered in late 2000 when he sold. He resigned as director in 2001.

Medpartners/Caremark was a protege of HealthSouth with many shared staff including those who have pleaded guilty to fraud. When the HealthSouth fraud was exposed in 2003 the press turned its focus on Caremark. Crawford was quick to deny any remaining link with HealthSouth or its directors. Caremark was performing well.

Adopting the name of one of the companies it had earlier acquired, MedPartners was renamed Caremark Rx in 1999. Scrushy remained on the MedPartners/Caremark Rx board until 2001.
While press reports say that all board directors and executives with dual relationships have since left Caremark Rx, other HealthSouth-spawned companies with the same type of governance crossover and executive profitability are coming to light daily - Capstone Capital Corp., Marin Inc., GG Enterprises, Source Medical Solutions, and HealthTronic Surgical Center, to name a few.
The only thing worse than fraud is ignoring it Birmingham Business Journal - April 21, 2003

In an interview Wednesday, Caremark Chairman and CEO Edwin M. "Mac" Crawford said there is "absolutely no current relationship" between his company and HealthSouth. Crawford, who was a HealthSouth board member in 1998 and 1999, also said Caremark bears little resemblance to the one that Scrushy helped create 10 years ago.

Still, HealthSouth and Caremark share some similarities and many executive-suite connections, though there is no evidence of any improper activity at Caremark.
MedPartners' stock eventually bounced back to its merger highs. In September 1999, the company changed its name to Caremark Rx as part of a major operational revamping by Crawford. Under Crawford, the company discontinued MedPartners' physician-practice management business to focus on buying drugs directly from their makers and distributing them through pharmacies. In February 2001, Scrushy resigned as a Caremark director to pursue other ventures, according to Caremark.

Scrushy didn't file required insider trading forms on time with the SEC in August through December 2000 after selling Caremark stock in several accounts he beneficially owns or controls, according to a company's proxy statement in 2001. (The appropriate forms were subsequently filed, according to Caremark.) In 1997, Scrushy owned or controlled through HealthSouth roughly 4 million Caremark shares, or 2% of the company at the time.
Scrushy Is Part of Caremark's Story April 10, 2003

It seems that all was not what it seemed and that there were some questions about the way in which HealthSouth vacated MedPartners in 2001 - $19.3 million in question.!

HealthSouth also allegedly failed to report a $19.3 million gain from a 2001 sale of Caremark stock and allegedly falsified Medicare cost reports.
HealthSouth tentatively settles U.S. civil charges Modern Healthcare December 22, 2004

Press reports raise some issues about some of Caremark's current accounting practices which are not illegal but which are frowned on by many. It is claimed that Enron, the subject of the USA's largest corporate fraud employed some of these practices.

Caremark Rx has employed a legal but thorny bookkeeping practice known as off balance sheet accounting, which was obscure until it surfaced at Enron. - - - - - Crawford said the practice at Caremark is known as "receivable financing" and is used by thousands of companies.
Caremark Rx recognizes hundreds of millions of dollars a year in revenue from patients' co-payments to druggists, while increasing liabilities for little net effect but to boost revenue. Again, Crawford notes that the practice is common, and that the revenue-recognition policy conforms to generally accepted accounting principles and is what regulators like to see. - - - - but some investors frown on the behavior. Competitors like AdvancePCS - - and Express Scripts - - - do not recognize co-payment proceeds as revenue.

Caremark's recent earnings were fueled by recognizing a deferred tax asset; the company has a long history of losing money, largely in connection with merger write-offs, and recorded losses of $1.75 billion to date. (The first year it had taxable income was 2001.)
Scrushy Is Part of Caremark's Story April 10, 2003

Caremark continues to perform well in the market. It makes claims to both high quality services and to low costs which appeal to its customers who are the HMO's and other funding agencies, but not the patients they care for. It boasts of its accreditation by the National Committee for Quality Assurance. I do not know this organisation but given the concerns about accreditation bodies in the USA its ownership and relationships should be explored before accepting this at its face value.

After thorough review, Caremark achieved a score of 100 percent for all programs submitted and in all accreditation categories including program content, patient service, practitioner service, clinical systems, measurement and quality improvement and program operations.
"In step with our commitment to improving the quality of life of our participants, the success of our disease management programs has allowed us to provide for significant costs savings on overall medical costs," Mr. Stine added. "Furthermore, this capability, combined with our ability to provide for lower prescription drug costs via our suite of clinical pharmacy management programs, translates to even greater savings for our clients and leaves Caremark uniquely positioned against both stand-alone disease management vendors and other PBMs.
Caremark is a leading pharmaceutical services company providing comprehensive drug benefit services, disease management programs, and specialty therapeutic services and programs to over 1,200 health plan sponsors and holding contracts to serve approximately 24 million participants throughout the U.S. Caremark's clients include managed care organizations, insurance companies, corporate health plans, unions, government agencies, and other funded benefit plans. The company operates a national retail pharmacy network with over 55,000 participating pharmacies, three state-of-the-art mail service pharmacies, three participant call centers including a dedicated disease management call center, the industry's only FDA-regulated repackaging plant and 21 specialized therapeutic mail service pharmacies for delivery of advanced medications to individuals with chronic or genetic diseases and disorders. Additional information about Caremark Rx is available on the World Wide Web at
Caremark Inc. Awarded Disease Management Accreditation by The National Committee for Quality Assurance Caremark Rx, Press Release Sept. 18, 2002

The agreement (settlement of patient care court claim for damages) calls for the $8.4 million to be paid by Kelsey-Seybold Medical Group P.A., Caremark Inc. and the two physicians to Cooper, her husband and their son.
Malpractice Lawsuit Brings $8.4 Million :: Mother Injured In Surgery Settles Case Houston Chronicle Jan16, 2003 (note events occurred in 1998)

Caremark Rx Update August 2007

It must be stressed that Caremark has vigorously denied and contested the many allegations and law suits lodged against it and referred to in this section. Some have not been resolved and the outcome of others is unknown. Where settlements have been reached they have been done without admitting fault.

We are left with a number of unresolved allegations and whistle blower actions -- to wonder whether the company is the victim of greedy or malign opportunists or whether all was not as it should have been but that proving this was difficult against skilled defence. What is clear is that without whistleblower employees most of these issues would not have been aired.

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  A Success Story
Caremark continued to go from strength to strength. It became one of the largest and most successful Pharmacy Benefit Managers. These reaped rich rewards from George Bush's so called reforms to the pharmacy industry. The drug industry reaped huge profits but it was hugely unpopular.

Caremark's profits grew and its market value climbed until it was able to sell itself in 2007 for US $26 billion.

Following significant volume growth in mail and retail prescriptions, Caremark reported net revenues of $2.4 billion for the fourth quarter of 2003, a 32% increase over the same period of the prior year.
Caremark expects 2004 revenues to increase by 15 to 20%, as compared with 2003.

Caremark Rx, Inc. Announces Record Q4 2003 and Full Year Results Business Wire February 3, 2004

Caremark Rx Inc. (CMX) on Tuesday said that its first-quarter profit rose on increased mail-order business during the quarter with its Medicare prescription drug benefits plan.
Caremark 1Q Up On Increased Mail-Order Business Dow Jones News Service May 3, 2006

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  The Business
Caremark acted as an intermediary between drug companies which sold the drugs and those who dispensed them. It negotiated bulk discounts for its clients and reaped huge profits. It had a huge mail order business. The US drug industry has been heavily criticised for their greed and their corrupt practices.

Caremark Rx, Inc. is a leading pharmaceutical services company, providing comprehensive drug benefit services through its affiliate Caremark Inc. to over 1,200 health plan sponsors and their participants throughout the U.S. Caremark's clients include corporate health plans, managed care organizations, insurance companies, unions, government agencies and other funded benefit plans. The company operates a national retail pharmacy network with over 55,000 participating pharmacies, four state-of-the-art mail service pharmacies, the industry's only FDA-regulated repackaging plant and nineteen specialty distribution mail service pharmacies for delivery of advanced medications to individuals with chronic or genetic diseases and disorders.
Caremark Rx, Inc. Announces Record Q4 2003 and Full Year Results Business Wire February 3, 2004

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CEO Mac Crawford
Its CEO and Chairman Mac Crawford received accolades from the industry and huge bonuses and profitable options from the company.

Caremark Rx Inc. (CMX) Chief Executive Edwin "Mac" Crawford received a $4 million bonus last year on top of his salary that was over $1.6 million, according to a company proxy statement filed with the Securities and Exchange Commission. He also received other compensation.
Crawford also received more than $113,800 for personal use of a company plane, temporary housing and car allowance, the report said. He also received a restricted stock award, tied to performance goals related to a recent acquisition, that was valued at $974,700 on the June award date and at nearly $1.2 million at year end.

The chief executive of the large pharmacy benefit management company also received more than $2.3 million in additional compensation for benefits including insurance coverage.
Caremark CEO Got $4M Bonus, $1.6M-Plus Salary In 2004 Dow Jones News Service April 7, 2005

Caremark Rx Inc. (CMX) disclosed Friday that Chief Executive Edwin M. Crawford realized $63.84 million from options exercises in 2005.
Caremark Rx CEO Got $3.2M Bonus For 2005, Vs $4M For 2004 Dow Jones Corporate Filings Alert April 8, 2006

Amid the success of big pharmacy-benefit managers, the chief executive who has prospered the most is Edwin M. "Mac" Crawford of Caremark Rx Inc. Aside from a bonanza in stock options, he has also received some unusual perks -- including $2.9 million for relocation even though his family has yet to leave his old house after more than two years

For Caremark's Chief Executive, Outsize Rewards The Wall Street Journal May 9, 2006

According to the AFL-CIO Executive Paywatch, David Snow, CEO of Medco earned $7,873,820 total compensation in 2005; Caremark CEO Edwin Crawford banked $15,683,444 in total compensation that year; while Express Scripts CEO George Paz pocketed a mere $3,967,750 in compensation for 2005.

"These bloated salaries prove PBMs do not lower drug costs but add millions of dollars to public and private drug expense with the goal of enriching themselves and their shareholders at the beneficiaries' expense," remarked Mike James, Vice-President, Governmental Affairs, ACP*CN. "It is astonishing PBMs are allowed to apply their free-wheeling business practices to Medicare Part D completely unchecked by Congress, as seniors in the doughnut hole or no coverage period forage for dollars to buy prescriptions," added James.

CEO Edwin Crawford of Caremark Rx Inc., one of the country's largest Medicare D providers, earned $15,683,444 in compensation in 2005, which would hire 178 pharmacists. This is 178 times the average salary of a pharmacist, which according to Drug Topics was $89,723 in 2004. The value of his previous years' exercised and unexercised stock options alone would hire over 3,780 pharmacists.
CEOs of Nation's Top Medicare Drug Providers Earn Millions in Salary While Seniors and Taxpayers Pick Up the Tab; Profits Rain Upon Pharmacy Benefit Managers, as Seniors Tread Water in Doughnut Hole PR Newswire (U.S.) October 6, 2006

One of its analysts said the merger(with CVS 2006/7) could trigger a total $287 million payout to Caremark Chairman Mac Crawford, depending on how one reads "change of control" provisions in his contract.
Wall Street pills have questions about CVS-Caremark merger The Chicago Sun-Times November 5, 2006

Caremark Rx, Inc. (NYSE: CMX) today announced that its Chairman, Chief Executive Officer and President Mac Crawford has been named the top-performing healthcare technology & distribution CEO by Institutional Investor magazine, based on its survey of more than 1,000 analysts and portfolio managers at 486 of the country's largest money management firms. Investors were asked to name the best CEO in each of the sectors where they invest. This marks the third year that Crawford has received this recognition.
Caremark Chief Executive Mac Crawford Named a Top-Performing CEO By Institutional Investor Magazine Business Wire January 26, 2007

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Buys AdvancePCS Inc.
Caremark expanded by acquisitions including the purchase of Advance PCS for US $6 billion.

Two of the largest pharmacy benefit management companies have agreed to merge in a transaction in which Caremark Rx Inc. would purchase rival AdvancePCS Inc. for about $5.6 billion in stock and cash
The deal would give Birmingham, Ala.-based Caremark Rx a market capitalization of $13 billion.
Caremark Acquiring Rival AdvancePCS THE ASSOCIATED PRESS September 3, 2003

Despite a campaign by independent pharmacists and chain drug stores to derail the $6 billion deal, the Federal Trade Commission is expected within the next few weeks to clear Caremark Rx Inc.'s acquisition of AdvancePCS Inc.
Caremark-AdvancePCS: Smooth sailing Daily Deal February 4, 2004

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Lawsuits and Investigations
Caremark and its competitors in the sector were not free from controversy or criticism. They were the subject of a number of whistleblower suits, of government investigations and of settlements.

Last June, the U.S. attorney's office in Pennsylvania charged Medco Health Solutions, Inc. of defrauding the federal employees' health plan. At about the same time, Express Scripts, Inc., based in St. Louis, announced that the New York attorney general had subpoenaed the company's billing records.

And last March, the American Federation of State, County and Municipal Employees and a watchdog group accused the four largest drug benefit managers -- Advance PCS, Caremark, Express Scripts and Medco, which control 80 percent of the market -- of inflating drug prices. The companies have dismissed the complaints as frivolous.
Caremark suit raises concerns about company's role in Medicare drug benefit Gannett News Service April 9, 2004

Critics contend that drug benefits managers have deceived clients because they are not required to reveal the discounts they negotiate with drug manufacturers. The Maine legislature passed a law last year designed to make the dealings more open, but a federal judge has intervened.

A June 2003 report, based on a study by Creighton University researchers Robert Garis and Bartholomew Clark, found that pharmaceutical benefits managers frequently failed to pass on all of the drug savings, increasing their profits.

Such reports and the existing lawsuits paint an unflattering picture of the industry and suggest fraud is systemic, said Michael Leonard, a Chicago attorney who represents the plaintiffs suing Caremark.

"It's troubling when you look at it from that perspective," Leonard said. "It seems to be an industry wide problem."
Caremark suit raises concerns about company's role in Medicare drug benefit Gannett News Service April 9, 2004

Caremark Rx Inc (NYSE: CMX) announced that on 7/1/04 it received Civil Investigative Demands from the Office of the State of Washington Attorney General seeking information, pursuant to consumer protection statutes, relating to business practices conducted by Caremark Rx, Inc., Caremark Inc. and AdvancePCS, separately, as pharmacy benefit managers.
CAREMARK RX INC - CMX: Receives Civil Investigative Demands from AG of WA Knobias July 2, 2004

The Washington state official indicated that attorneys general in 18 other states also will issue civil investigative demands, or administrative subpoenas, Caremark said.
The firm (Merrill Lynch & Co) noted that another PBM, Medco Health Solutions Inc. (MHS), settled various issues with 20 state attorneys general earlier this year for $29.3 million, without admitting wrongdoing.
Probes Of Caremark May Not Hurt Company Much Dow Jones News Service July 3, 2004

The administrative subpoena focuses on "consumer protection statutes and business practices" relating to Caremark and its recently acquired AdvancePCS unit, the company said.
Caremark reveals probe in 19 states The Baton Rouge Advocate July 3, 2004

Critics charge that the companies switched patients to different prescriptions without their knowledge for financial incentives from drugmakers.

Washington, 18 other states probing pharmacy-benefits manager Caremark The Seattle Times July 3, 2004

In a filing with the Securities and Exchange Commission on Monday, the Nashville, Tenn., company said it is now being investigated by four additional states and the District of Columbia. That brings the number of states investigating the company's business practices to 23.
Caremark Rx Gets Information Requests From 4 States, D.C. Dow Jones Business News August 12, 2004

The Department of Justice is joining Arkansas, Florida, Tennessee and Texas in a whistleblower lawsuit against pharmacy benefit manager Caremark Rx that alleges the company sometimes improperly reimbursed state Medicaid and other federal health insurance programs, the AP/Jackson Clarion-Ledger reports. The lawsuit, filed by former Caremark employee Janaki Ramadoss in U.S. District Court in San Antonio, accuses Caremark of knowingly avoiding or decreasing reimbursements for medications when beneficiaries were dually covered by Medicaid and Caremark.
DOJ Joins Lawsuit Alleging PBM Filed False Claims American Health Line June 1, 2005

The complaint describes alleged practices used by Caremark to systematically deny payment of or to reduce the amount of legitimate claims for reimbursement to various state Medicaid and other programs.
Specifically, Caremark allegedly created code 9999991 to be used exclusively for the processing of all Medicaid claims. Ramadoss says this resulted in denial of claims submitted by at least 34 Medicaid clients.
The plaintiffs argue that Caremark has essentially gotten away with such behaviors because the subject of a claim is for a relatively low dollar amount and that it is not cost-effective for plans to routinely investigate each claim. Ramadoss estimates that these practices resulted in more than 150,000 denied or falsely certified claims that remain unpaid, translating into more than $500 million that Caremark potentially could pay based on maximum statutory civil penalties.
The complaint also charges Caremark with violating a Corporate Integrity Agreement entered into with HHS in 1995 that requires the company to review its billing practices and procedures to make sure all government payers are billed appropriately for claimed services.
All Caremark Suit Focuses on Liability In Handling Third-Party Claims Drug Benefit News June 6, 2005

Shares of Caremark Rx Inc., the second-biggest U.S. manager of pharmacy benefits, fell as much as 4.2 per cent after a report that the FBI is probing the company's mail-order delivery of controlled drugs.
FBI probe chills Caremark Montreal Gazette January 20, 2006

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AdvancePCS's Fraud
Caremark paid $137 million to settle a whistle blower initiated Qui Tam lawsuit related to the conduct of AdvancePCS prior to its purchase.

Under the terms of the settlement, AdvancePCS will pay the Federal Government $137.5 million to settle disputed claims and has agreed to adhere to certain business practices. AdvancePCS also has agreed to maintain a compliance program in accordance with a corporate integrity agreement. Caremark, which has voluntarily agreed to abide by the terms of the corporate integrity agreement, will have oversight of AdvancePCS' compliance obligations.
Caremark Rx, Inc. Subsidiary AdvancePCS Settles With U.S. Government With No Admission of Wrongdoing Business Wire September 9, 2005

Robins, Kaplan, Miller & Ciresi L.L.P. represented two former executives of AdvancePCS, Inc. and one former executive of Advance Paradigm.
The complaints, the first of which was filed in 2002, allege the PBMs knowingly solicited and received kickbacks from pharmaceutical manufacturers. These kickbacks were allegedly paid in exchange for favorable treatment of the manufacturers' products under contracts with government programs, including the Federal Employees Health Benefit Program, the Mailhandlers Health Benefit Program and Medicare+Choice programs. The lawsuits also allege that improper kickbacks were paid by AdvancePCS and Advance Paradigm to existing and potential customers as an inducement to their signing contracts with the PBMs. The government also incorporated in the Settlement Agreement allegations involving flat fee rebates which were allegedly received for inclusion of certain heavily utilized drugs.
Robins, Kaplan, Miller & Ciresi L.L.P. Settles Whistleblower Suit Against Caremark for $137.5 Million Landmark Settlement Comes as States and DOJ Scrutinize Pharmacy Benefits Management Industry Practices PR Newswire (U.S.) September 9, 2005

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One group of Whistleblowers
Caremark was the subject of a series of whistle blower suits lodged by the same whistle blowers in multiple states. These related to the relabeling and resale of drugs returned to the company- drugs whose potency could no longer be guaranteed. They also alleged deceptive practices associated with this. Caremark strenuously denied all allegations made about it. Caremark responded by firing the whistle blowers, suing them and lodging complaints with state authorities abut their professionalism. They attempted to vilify them.


Two pharmacists who work for Caremark's mail-order unit allege in the lawsuit, filed in state circuit court in Leon County, Fla., that Caremark routinely resold medications that other patients had returned. A recent deposition of a Caremark manager also suggests that the company had set up a plan to avoid the pharmacy laws of certain states that prohibit such a practice.
"The problem is you don't know where the patient has stored it," says Carmen Catizone, executive director of the National Association of Boards of Pharmacy, the umbrella organization for state pharmacy boards. He adds that even in sealed bottles, exposure to "extreme temperatures could cause a chemical reaction" that would render a medication either ineffective or harmful.
Suit Alleges Caremark Resold Returned Prescription Drugs Dow Jones Business News April 5, 2004

The Fowlers (whistleblowers) allege not only that Caremark illegally resold returned medications but that it also defrauded the state of Florida by charging the plan twice for the same medications and for lying about how quickly it sent prescriptions, among other charges
Last month Caremark sued Mrs. Fowler, accusing her of inappropriately taking and giving to her attorney internal memos, e-mails and manuals that describe Caremark's business practices. During an eight-hour January deposition, Mrs. Fowler cried when Caremark's attorney asked her an explicit question about her sexual relationship with a boyfriend from 10 years before.

The Fowlers were suspended from their jobs last week and escorted by security to their car at the Florida facility, according to their attorney, Michael Leonard of Meckler Bulger & Tilson in Chicago. They were given a letter that told them they were being suspended "pending the completion of an administrative compliance investigation into certain possible inappropriate and or unlawful activities in which you appear to have been involved." Caremark says the current probe of the Fowlers has nothing to do with the Fowlers' lawsuit against Caremark, but comes as a result of information received from an employee. The Fowlers' lawyer, Mr. Leonard, says, "Caremark won't tell us what the subject matter of the investigation is."
Lawsuit Claims A PBM Resold Returned Drugs The Wall Street Journal April 5, 2004

In an unusual move the whistleblowers resisted Florida attorney general's attempt to join their action and Caremark supported it. Whistleblowers normally welcome government support. One wonders what was really behind this? The judge sided with the whistleblowers.

Caremark Rx, Inc. (NYSE:CMX) said that it supports a motion filed today by the Florida Attorney General to intervene in a Qui Tam lawsuit filed against the company.
In the motion, the Department indicated that the State of Florida had received information arising from the relators' employment relationship with Caremark which causes the Department to believe that it, and not the relators, should direct the litigation of this matter on behalf of the State of Florida. The Department also indicated that there is a strong possibility that one or more of the relators and the Department could soon be adversaries in an administrative proceeding involving professional regulation.
Caremark Supports Florida Attorney General's Motion to Intervene in Qui Tam Lawsuit Business Wire June 18, 2004

In a topsy-turvy whistle-blower lawsuit, a Tallahassee judge has ruled in favor of two Fort Lauderdale pharmacists who insist that the state has no right to intervene in their suit against Caremark Rx, the nation's second-largest pharmacy-benefit manager.
Judge excludes Florida in pharmacists' suit against benefit manager The Miami Herald July 28, 2004


They same group commenced another Qui Tam action in Illinois. The state did not join their suit in Illinois but did mount its own investigation

The Illinois attorney general's office is investigating whether prescription-benefits company Caremark Rx Inc. has illegally sold drugs to mail-order customers after the drugs had been returned by other customers. Such sales are illegal in many states, including Illinois.
Health Care Brief: Caremark Rx Inc. The Wall Street Journal January 17, 2005

Caremark didn't say what the whistleblower suit alleged, but added it was similar to suits brought against it in California and Florida. The suit involves the same "relators" and plaintiff's counsel.
Caremark:US Attorney Declines To Intervene In Qui Tam Suit Dow Jones News Service February 4, 2006


Similar allegations were made in California by four Whistle blowers including the two Fowlers.

Caremark Rx, Inc.'s business practices came under additional scrutiny last month with the unsealing of a whistle-blower lawsuit in California, where the PBM holds a $265 million contract with the California Public Employees' Retirement System (CalPERS). The false claims suit describes a number of alleged practices by which it falsely represented its entitlement to payment for prescription drugs, including products that had been returned by members of CalPERS and other plans and were allegedly resold to other patients.
The new suit, filed by four former Caremark employees, describes the various ways in which mail-order pharmacy employees allegedly restocked and resold returned prescriptions. The plaintiffs allege a number of actions that could have compromised patient safety, including:

Employees of Caremark's Florida facility allegedly used hot blow dryers to remove the patient labels from returned prescription drugs and threw away the original patient labels.
The complaint says that the employees making the restocking decisions were unaware of the storage and handling conditions of the drugs upon their return, including the refrigerated drugs, and that they often sat in the Redlands facility and other specialty pharmacies for extended periods of time until employees finally determined if they should be restocked and resold to "unsuspecting" Caremark members.
At Caremark's Texas facility, heat guns and other means were allegedly used to remove the patient labels on returned prescription drugs, including those that required refrigeration.
The whistle-blowers contend that employees at Caremark's Texas and Florida facilities created thousands of fraudulent records falsely certifying that the returned goods had been destroyed. They also charge that Caremark did not notify the state of California, CalPERS and plan members of the alleged practices and continued to receive payment from them for drugs that had been returned, never received, destroyed or resold.

In addition, the suit charges the company with systematically creating fraudulent "receive dates" so that it could meet the contractually agreed-upon "turnaround" times for prescription orders, thus avoiding monetary penalties and maintaining the appearance of a high level of service.
Suit Alleges Caremark Faked Info to Get Paid by CalPERS, Others Drug Benefit News July 15, 2005

It (the suit) was filed by former Caremark pharmacists Michael and Peppi Fowler of Florida, both 12-year company veterans, and Victor Cortes and Danny Nevarez, workers at a drug center in Texas.
At the time Caremark employees were restocking and reselling returned drugs, the whistle-blowers asserted, they were also instructed to create thousands of fraudulent "Returned Goods Memos" indicating that drugs returned by mail-order customers were destroyed.

In other instances, the former employees say, Caremark employees were told to delay plan member orders for drugs near the end of a month to cut costs, make false computer entries about dates that prescriptions were received and remove customer complaints from files.

This would help evade payment of penalties for slow order processing, the former employees said.
The lawsuit alleges Caremark used several other tactics: The company made deliberate efforts to "convert" prescriptions for antihistamines to over-the-counter medications by contacting doctors' offices.

This forced the unsuspecting plan members to pay for their own medicines, or they had to return to their doctor, pay for a second visit and get their prescription reinstated.

When doctors refused to convert prescriptions and sent orders to that effect, Caremark employees would then contact their nurses or receptionists and secure conversions from them, tossing out doctors' orders.
Caremark employees were paid bonuses based on how many "conversions" they could obtain, nicknaming them "perversions," the four former employees allege.

The ethics hotline operated by Caremark was "bogus," they add, and its regulatory compliance program "toothless."
CalPERS defrauded, suit claims; Pension fund is customer of firm ex-workers charge mishandled drug orders The Sacramento Bee August 22, 2005

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Consultants Defrauded
Consultants employed by Caremark claim that the company defrauded them of large sums owed by concealing revenue.

Hagens Berman Sobol Shapiro filed a proposed class-action suit today in the U.S. District Court of Arizona alleging that CareMark Rx, Inc. (NYSE: CMX) intentionally concealed revenue in order to avoid paying certain commissions owed to consultants who marketed and sold its services.
According to the complaint, CareMark engages consultants to market and sell its services to health plan sponsors and plan participants. If an entity contracts with CareMark to use its pharmaceutical services, the consultant is entitled to either a percentage of the total revenue -- including administrative fees -- or a set rate for each drug purchased.

The complaint states that CareMark failed to honor the plain language of the consulting contracts by not paying commission based on total revenues and instead paying commission based on only partial revenues.

According to named plaintiff Jan Peck, CareMark intentionally failed to report total revenues earned from four companies she brought to two of CareMark's predecessors.
Peck estimates she is owed between $25 and $50 million in under-reported revenue commission.
CareMark Rx Target of Class Action Accusing Breach of Contract and Failure to Pay Commissions; Suit Claims CareMark Owes Millions in Past Commissions PR Newswire (U.S.) July 20, 2006 

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The Stock Option Scandal
Caremark was caught up and investigated in the US wide stock options scandal. Caremark settled a shareholder action related to this. After Caremark sold itself to merge with CVS the government decided not to prosecute.

Caremark Rx, Inc. (NYSE: CMX) today announced that on Wednesday, May 17th it received a grand jury document subpoena from the U.S. Attorney for the Southern District of New York requesting records pertaining to the granting of stock options.

The company also announced that on the same day it received a letter of informal inquiry from the Securities and Exchange Commission requesting documents related to the granting of stock options and the company's relocation program. The letter from the SEC states that this informal inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred, or as an adverse reflection upon any person, entity or security.
Caremark Rx, Inc. Receives Subpoena and Letter of Informal Inquiry Business Wire May 19, 2006

Two separate shareholder lawsuits filed in federal court against Caremark Rx Inc. (CMX) claim the pharmacy benefits manager hurt investors by allowing senior executives to collect stock options backdated to low points in the company's trading history.
The Simon lawsuit claims that Caremark Chairman, President and Chief Executive Mac Crawford and Executive Vice President Edward Hardin acted "to reap hundreds of millions of dollars in unlawful windfall profits at the expense of the company."
Shareholders Claim Caremark Stock Options Were Backdated Dow Jones News Service June 1, 2006

 CVS Caremark Corp., while denying any wrongdoing, agreed to settle shareholder litigation arising from inquiries into alleged stock-options backdating at Caremark Rx Inc. before CVS Corp. acquired it in March. Under the settlement, the defendants -- Caremark, CVS and their directors -- will agree to maintain for at least four years a number of governance provisions relating to the exercise and disclosure of stock-option awards, and won't oppose the plaintiffs' petition for an award of attorneys' fees and expenses not to exceed $7.5 million.
CVS Caremark Corp.: Company to Settle Litigation Arising From Options Probe The Wall Street Journal August 9. 2007

CVS Caremark Corp. (CVS) said Friday that the Securities and Exchange Commission and the U.S. Attorney's Office for the Southern District of New York have closed their investigations into Caremark Rx Inc.'s stock-option granting practices.

The SEC and the U.S. Attorney's Office won't take any enforcement action against Caremark Rx, CVS Caremark said in a filing with the Securities and Exchange Commission.
CVS Caremark: SEC Won't Recommend Action Vs Caremark DOW JONES NEWSWIRES August 17, 2007

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Enforcing Transparency
Regulators in various states and some large corporations forced the PBM's to be more transparent in their financial disclosures. Something they strenuously disputed.

Federal Judge D. Brock Hornby on Wednesday upheld a magistrate's recommendation to dismiss a lawsuit challenging a Maine law requiring pharmacy benefit managers to disclose certain financial information, - - - - .
In a lawsuit filed in September 2003, the Pharmaceutical Care Management Association -- whose members include Medco Health Solutions, Express Scripts and Caremark Rx -- argued that the law violates trade secret protections. According to the lawsuit, because the law allows entities that file suit against PBMs to have access to price information, the information could become public, which could make pharmaceutical companies less likely to provide large discounts on their medications.
Maine Regulatory Law Upheld in District Court American Health Line April 14, 2005

The companies, which have increased revenue and profits in recent years, have been fighting efforts from state legislators to disclose more of their financial dealings with drug manufacturers and to agree to be fiduciaries to their clients, meaning they will always act in their clients' best interests. Some employer groups have joined PBMs to oppose such measures, saying increased transparency can lead only to higher prices, not lower. PBMs likely will play a major role in the coming Medicare drug benefit.
Caremark Settles U.S. Probe Tied To AdvancePCS The Wall Street Journal September 9, 2005

The U.S. Supreme Court has declined to review a lower court ruling that upholds a Maine law requiring pharmacy benefit managers to disclose the discounts they negotiate with drugmakers, CQ HealthBeat reports (CQ HealthBeat, 6/7).
Supreme Court Declines Review of PBM Case American Health Line June 9, 2006

The two PBMs, Medco Health Solutions Inc. and Caremark Rx Inc., each handles the drug benefits for tens of millions of Americans. They have agreed to participate with eight smaller PBMs in a purchasing model that would require them to pass on to clients their own costs for acquiring retail and mail-order prescriptions. They also have agreed to pass along the price rebates, rarely disclosed in the past, that they receive from drug manufacturers.

The more transparent purchasing model is the brainchild of a coalition of 56 large employers, - - - - - .
Managers of Drug Benefits Agree To More Transparency in Pricing The Wall Street Journal July 24, 2006  

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Caremark's Responsibility to its Customers
It seems that some of Caremark's customers had forgotten the "customer beware" adage. They felt that Caremark had a legal responsibility to look after their interests in their negotiations - a fiduciary duty. This is also referred to in the section above. Caremark thought otherwise and the appeal court agreed.

Caremark Rx, Inc. did not breach its fiduciary duties when negotiating drug prices and managing the formulary for a multi-employer health fund because it was not acting as a fiduciary, a federal appeals court ruled last month. The PBM industry hailed the opinion, saying it sets a precedent for other lawsuits and state initiatives that claim PBMs have fiduciary responsibilities.

In a Jan. 19 ruling (No. 05-3476), the U.S. Court of Appeals for the Seventh Circuit upheld a lower court ruling that found Caremark was not an Employee Retirement Income Securities Act (ERISA) fiduciary for the Chicago District Council of Carpenters Welfare Fund (Carpenters). The fund had sued Caremark, claiming it breached fiduciary duties under three multiyear contracts to provide Rx benefits to union members.
Appeals Court Finds Caremark Rx Did Not Breach Fiduciary Duties Drug Benefit News February 2, 2007

I find this decision a little confusing. This is a health fund which is responsible for the care of citizens. The ruling seems to be an affirmation that those operating in the health care marketplace have no ultimate responsibility to the citizens that the system is intended to serve - in this instance through the agent employed to serve them. This is a market like any other. Patients and their representatives are fair game and on their own - patient beware! The law is not going to interpret failures as a breach of any duty. Shareholders on the other hand are fully protected legally by the company's fiduciary duty. We know this is what happens in practice - bt is the law now formally sanctioning it?

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Government Contracts
In spite of the concerns about its operations raised by the many allegations Caremark continued to play a key role in the governments drug policy and win government contracts. They had made large political donations.

Congress added prescription drug benefits to Medicare last year to address the spiraling costs of drugs to some 42 million senior citizens and disabled Americans. Companies like Caremark that negotiate with drug firms on behalf of HMOs, insurers and employers are expected to land the bulk of the government business, which is expected to exceed $500 billion.
Burns (Taxpayers Against Fraud) saw irony in Caremark being awarded a contract in February to provide mail-order prescription drug service for almost 4 million federal employees. He noted that the government declined to renew its contract with Medco after the false claims lawsuit surfaced.

Caremark, Express Scripts and Medco, who spent more than $770,000 lobbying Congress and the Bush administration on the Medicare bill last year, have been chosen to participate in the federal government's prescription drug discount card program. Medicare recipients can begin using the discount drug cards in June.

Government watchdog groups contend that the cases involving Caremark, Medco and the Express Scripts inquiry raise serious questions about the integrity of the industry. There are concerns about whether these companies can be trusted to operate in the best interest of consumers.

"It seems unlikely that these companies accused of ripping off the government for private profit will undergo a transformation," said Peter Lurie, deputy director of the Health Research Group at Public Citizen, a consumer advocacy group. "How ironic that these companies are expected to save the government millions of dollars on prescription drugs."
Caremark suit raises concerns about company's role in Medicare drug benefit Gannett News Service April 9, 2004

Caremark Rx, Inc. will handle the mail-order function of a new Medicare demonstration program starting this fall that will spend up to $500 million on providing 50,000 beneficiaries with certain self-administered drugs and biologicals.
Caremark to Do Demo Mail Order Drug Cost Management Report July 2, 2004

On another matter, the proxy noted a shareholder proposal from the Adrian Dominican Sisters of Adrian, Mich., requesting that Caremark disclose semiannually its policies and procedures for direct and indirect political contributions made with corporate funds, contributions to political candidates and parties, and the identity of people who made the decisions to contribute
The sisters said Caremark has raised its level of political giving in recent years without increasing the transparency for shareholders.
Caremark CEO Got $4M Bonus, $1.6M-Plus Salary In 2004 Dow Jones News Service April 7, 2005

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Caremark becomes part of CVS
In November 2006, CVS, The US's second largest drugstore chain and Caremark indicated their intention to merge as equals. CVS would pay US $21 billion for Caremark. In spite of concerns expressed and action by some shareholders Caremark board approved the merger.

Some shareholders were concerned that the very considerable benefits for the board, including their coverage against litigation by CVS insurance, had driven their decision and that the shareholders' interests were not foremost.

Six weeks later before the deal was finalised, Caremark's smaller rival Express Scripts mounted a hostile US $26 billion takeover. A protracted dispute with multiple regulatory issues and court actions followed. In the face of intense criticism Caremark's board maintained its support of the lower bid from CVS. In spite of this CVS was ultimately forced to increase its offer to US $26.5 before the deal went through.

One analyst's comments about Caremark's eagerness to sell itself are of interest. The analyst noted its dependence on the republican government's Medicare drug system and the likely consequence of the now unsupportive Democratic party dominated congress - with the possibility of changes.

Given the allegations made by the many whistleblowers we might also ponder whether the increased transparency required by government and its customers might also have impacted on potential profitability and precipitated the sale.

CVS in Talks To Buy Drug Middleman The New York Times November 1, 2006

CVS operates about 6,200 stores in 43 states and a wholly owned pharmacy benefit management subsidiary. In June, CVS bought 700 Osco and Sav-On pharmacies for $2.93 billion.  
CVS To Buy Caremark In $21B 'Merger Of Equals' Dow Jones News Service November 2, 2006

The new company will be called CVS/Caremark Corp. and will be headquartered in Woonsocket.
CVS girds for battle with purchase of Caremark; Drugstore chain creates $75-billion giant to take on Wal-Mart in generic drug sales The Globe and Mail November 2, 2006

Wall Street usually loves a mega-merger, the bigger the better. But a surprising amount of criticism has surfaced over the proposed $21 billion union of CVS (CVS) and Caremark Rx (CMX).
Some Caremark shareholders said the price is too low. The deal gives CVS shareholders 54.5 percent control over the combined company, but values Caremark at almost exactly where the shares traded before the merger's announcement on Wednesday and about 18 percent less than their level of a month ago.
Wall Street pills have questions about CVS-Caremark merger The Chicago Sun-Times November 5, 2006

The Iron Workers of Western Pennsylvania Benefit Plans Pension Plan last week filed a shareholder lawsuit against Tennessee-based pharmacy benefit manager Caremark Rx over a planned acquisition by Rhode Island-based pharmacy chain CVS, "claiming that the deal is merely a cover up for a takeover by the drugstore chain and isn't fair to investors," the AP/Houston Chronicle reports (AP/Houston Chronicle, 11/15).
Large Shareholder Files Suit Over Acquisition by CVS American Health Line November 17, 2006

The $21 billion question that investors have been asking since drugstore giant CVS Corp. announced a merger with pharmacy benefits manager Caremark Rx Inc.: Why did Caremark sell when its stock is so cheap?
It appears that Crawford's bet is as much political as it is strategic. At the time the CVS deal was negotiated, the Democrats were rapidly surging in the polls. And a Democratic Congress figures to be inhospitable for Caremark and the other pharmacy benefits managers (PBMs).
Near the top of Democrats' agenda is an overhaul of the Medicare "Part D" prescription drug benefit. It's well known that Big Pharma would suffer from this initiative. But what has been less widely appreciated is the impact it would have on middlemen such as Caremark.
Did the Election Spur a Drug Deal? Why the Democrats' plans for health care may be behind CVS's bargain buyout of Caremark BusinessWeek November 27, 2006

CVS-Caremark Deal Faces a $26 Billion Threat --- Express Scripts Could Bid For Rival Benefit Manager, Tapping Flush Financing The Wall Street Journal December 18, 2006

A group of shareholders in pharmacy benefit manager Caremark Rx on Thursday filed a motion in U.S. District Court in Nashville for an injunction that would require the company to consider more than one acquisition offer, the AP/Houston Chronicle reports (Giuffrida, AP/Houston Chronicle, 12/22).
Shareholders Seek Injunction on Acquisition by CVS American Health Line December 22, 2006

Judge Won't Force Caremark To Review Express Scripts Bid Dow Jones News Service December 23, 2006

Caremark Board Unanimously Affirms Commitment to CVS Merger Business Wire January 8, 2007

A public pension fund in Louisiana has sued the directors of Caremark Rx, contending that their unanimous backing of the company's $21 billion merger with CVS over a rival $26 billion bid from Express Scripts improperly benefits Caremark executives at the expense of shareholders.

Among the benefits Caremark executives and directors will receive if the CVS deal goes through, the fund's lawsuit contends, are positions at the combined company and indemnification from penalties and fines that may result when criminal and regulatory investigations into possible stock option backdating by Caremark officials are concluded.
A Public Pension Fund Sues Directors of Caremark Rx The New York Times January 11, 2007

Investigations into whether Caremark Rx Inc. officials received backdated stock options are becoming an issue in a takeover battle for the pharmacy-benefits manager.

Some investors are now questioning whether the issue played a role in the board's decision to back the lower of two bids for the company.
In an amended complaint filed against Caremark directors for breach of fiduciary duty, Express Scripts charged that CVS is offering Caremark directors broad indemnity against any wrongdoing. The offering document from CVS stipulates that directors would be covered by Caremark's current provisions, or "to the fullest extent permitted by Delaware law," including against events that occurred before the transaction. "These acts would include the granting or receipt of backdated stock options," the complaint adds.
Caremark Options Probes Ruffle Deal The Wall Street Journal January 30, 2007

CVS raises its offer for Caremark Rx to $26 billion, less than one day after rival suitor Express Scripts sweetened its proposal; - - - .
CVS AGAIN INCREASES ITS OFFER FOR CAREMARK The New York Times Abstracts March 9, 2007

"We question whether Caremark's management and board negotiated the best deal for shareholders," the firm (Advisory firm Proxy Governance) said in a report issued late Monday.
Proxy Governance Urges Caremark Holders To Reject CVS Deal Dow Jones News Service March 14, 2007

Pharmacy-benefits manager Caremark Rx has announced that shareholders have approved its $26.5 billion acquisition by drugstore giant CVS Corp., creating the largest combined mail-order and retail provider of medicine, according to Bloomberg.
Caremark Shareholders Approve CVS Offer March 16, 2007

Former Caremark chief executive officer E. Mac Crawford will be chairman. CVS' Tom Ryan will continue on as president and CEO of CVS/ Caremark.
CVS names its new board The Providence Journal March 23, 2007

Common Sense: CVS/Caremark Deal Challenges Merger Playbook The Wall Street Journal March 28, 2007

A Delaware judge has set a June 8 hearing to review the settlement of the shareholder class-action lawsuit that pushed CVS Corp. to boost its bid for the former Caremark Rx Inc. by $7.50 per share
Locked in litigation with Caremark shareholders and in a bidding war with Express Scripts, Woonsocket, R.I.-based CVS sweetened its offer three times before Caremark shareholders finallly said "yes."

Former Caremark chairman and chief executive Edwin "Mac" Crawford, who is chairman of the merged CVS/Caremark Corp. (CVS), was targeted for criticism in court, as were members of the board that agreed to CVS's original deal.

Shareholder approval of the merger didn't end the threat of continued legal trouble for Caremark's leaders in Delaware. But the settlement, if approved, will put Caremark's board in the clear on charges they breached fiduciary duties..
Caremark, CVS Seek To Settle Shareholder Suit Over Merger Dow Jones News Service April 18, 2007

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Web Page History
This page created July 2003 by
Michael Wynne
updated November 2004, Jan 2005 and Oct 2007