The U.S. attorney's office has been investigating whistleblower allegations against the company since 1999 and intends to file its own complaint in September, said Associate U.S. Attorney James G. Sheehan.

The government has decided to intervene in two lawsuits brought by three whistleblowers. Those suits allege that Medco changed prescriptions without a physician's approval to favor more expensive drugs produced by Merck & Co. and induced physicians with false information to switch to higher cost Merck drugs. Medco also destroyed mail order prescriptions without filling them and in other cases mailed patients less than the number of pills ordered but charged for the full amount, the lawsuits allege.

Medco is a subsidiary of Merck.

"We know from industry studies that almost half of mail order participants will run out of medicine within two days if they fail to receive their new prescriptions," said Patrick L. Meehan, the U.S. attorney for the eastern district of Pennsylvania.

Medco officials contend that the allegations are untrue or "reflect years-old isolated issues that were identified and corrected," said Ann Smith, director of public affairs at Medco. At no time was the quality of patient care compromised, Smith said.

Most Americans know pharmacy benefit managers, or PBMs, from the plastic cards they hand over at local pharmacies when filling a prescription. Major employers and health plans hire these companies to negotiate with drug companies to control drug costs for plan enrollees, and to oversee the complex paperwork associated with filling prescriptions.

The Senate is considering plans to provide prescription drug coverage to the elderly that may enhance the clout of pharmacy-benefit managers, industry analysts say. The companies are expected to administer government drug spending under some plans, according to congressional testimony offered by the National Association of Chain Drug Stores, and to receive a larger share of government reimbursements for prescription drugs.

More than 62 million Americans get prescriptions processed through Medco, according to the company. Medco handles pharmacy benefits totaling nearly $30 billion per year, including $1.2 billion from Blue Cross Blue Shield as part of the Federal Employees Health Benefits Program.

George Bradford Hunt and Walter W. Gauger, who both worked as pharmacists in Medco's Las Vegas processing facility, and Joseph Piacentile, a physician, allege in their complaints that on busy days Medco would cancel or destroy prescriptions to avoid penalties for delays in filling orders. Customers would be told that the prescriptions had never been received, Sheehan said.

The company is also accused of fabricating records and, when the handwriting on prescriptions was unclear or difficult to read, simply guessing at what they said, according to Sheehan. The government's suit against Medco could ask for damages in the millions of dollars and new oversight systems.

Merck acquired Medco in 1993 at a time when other drugmakers were purchasing pharmacy-benefit managers. By the end of the 1990s, all pharmaceutical manufacturers but Merck had sold their units amid concerns that the drug companies would use the benefit managers to push their own drugs, rather than doing what was best for clients.

In 1998 Merck signed a settlement agreement with the Federal Trade Commission stating that "Medco has given favorable treatment to Merck drugs." Last December, Medco agreed to pay $42.5 million to settle a class-action lawsuit alleging that the company improperly promoted higher priced Merck drugs rather than seeking the best price from alternative pharmaceutical companies. Merck announced it intended to spin off Medco last year, but delayed the initial public offering of shares because of the depressed stock market.

Yesterday's announcement marks the first significant legal action by a federal agency against a pharmacy-benefit manager. Previously, attorneys general of at least 25 states have opened inquiries into Medco to determine whether it has violated state laws, and New York State Attorney General Eliot L. Spitzer said last Friday that his office was investigating another company, Express Scripts Inc., for allegedly overbilling state health plans…

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