In re Caremark International Inc. Derivative Litigation

Facts

Caremark is a healthcare company that was created in 1992. Caremark and its predecessor entered into several agreements with hospitals, physicians, and healthcare providers. These companies also entered into distribution agreements with drug manufacturers. Beginning as early as 1989, Caremark’s predecessor issued a “Guide to Contractual Relationships” stating that it was Caremark and its predecessor’s policy that no payments be made in exchange for, or to induce, patient referrals. A prohibition on quid pro quo behavior, however, was not clearly prohibited by these guidelines.

In 1991, an investigation into Caremark’s predecessor was launched. Several ARPL concerns were raised after referring physicians were also classified as monitoring physicians that then received payment of fees from Caremark pursuant to a Quality Service Agreement. As a result of this investigation, the company ceased paying management fees to Medicare and Medicaid patients.

Caremark’s board then took additional steps to comply with ARPL, including: publishing a revised Guide (April 1992); requiring regional officers to approve all contracts (September 1992); an internal compliance audit conducted by a third party; adoption of new compliance policies and creation of employee ethics handbook despite the positive audit (April 1993); and dissemination of the new ethics handbook as well as a confidential ethics hotline (July 1993).

On August 4, 1994, a Minnesota grand jury issued a 47 page indictment charging Caremark, two of its officers, a sales employee of Genetech, Inc., and a Minneapolis physician with violating ARPL. On September 21, 1994, an Ohio grand jury issued an indictment against a physician for defrauding Medicare and for receiving $134,600 in payments from Caremark for referrals.