Selling prescription drugs to nursing homes is big business, with vast amounts of money changing hands and major profits flowing to the companies that provide the medicines.

And it’s not immune to fraud.

On Wednesday, the federal government announced action against PharMerica Drug Systems Inc., the second-largest provider of drugs to nursing homes, over allegations that it violated anti-kickback laws.

According to a complaint lodged by the U.S. Office of the Inspector General, PharMerica paid an exorbitant amount for a small Virginia pharmacy so that the sellers, who own 17 nursing homes and eight assisted living facilities, would steer future drug business PharMerica’s way.

The pharmacy in question, located in Roanoke, Va., was a new business “which had virtually no operating history,” the inspector general said. Still, PharMerica paid $7.2 million for it.

Because this amount appears to be far more than the pharmacy’s market value, the inspector general concluded that the real intent of the $7.2 million was to influence the owners to contract with PharMerica for drug sales to their nursing homes and other facilities. That’s a no-no under federal law.

Since the government pays for drugs provided to Medicare and Medicaid patients — the vast majority of nursing home patients — taxpayers stand to benefit from the crackdown on this sort of anti-competitive arrangement.

Along with $21.8 million in penalties and damages — the largest such penalty ever sought by the inspector general — the government seeks to ban PharMerica from participating in any federal program for 10 years.

If the government prevails, PharMerica will be banned from selling drugs to the Medicare or Medicaid (Medi-Cal in this state) programs, which means it will lose virtually all of its nursing home business.

Considering that PharMerica currently controls approximately 13 percent of the market, this could have major implications for the entire nursing home industry. Other companies will be scrambling to grab up the business, and nursing homes will have to adapt to changes in their pharmacy services.

The services offered by competing companies vary. Some companies are better at delivering drugs to nursing homes on short notice, to make sure newly admitted patients are taken care of. Others specialize in packaging prescriptions to make deadly medication mix-ups less likely — a major concern, since most nursing home residents take several pills per day. Others boast about lower prices.

While there are many companies which provide pharmacy services to nursing homes, about half the market is controlled by PharMerica and two other companies. Omnicare, headquartered in Kentucky, is the biggest player, with 29 percent of the market. Next is PharMerica with 13 percent, followed by NeighborCare with 11 percent.

Already, news of the inspector general’s action is being welcomed by the competitors, who are gearing up to fill the void that will be left if PharMerica’s 10-year ban is approved. Even as PharMerica appeals, the competitors are trying to convince nursing home owners to switch to companies that haven’t been accused of kickbacks.

Omnicare, which according to the Cincinnati Post has acquired more than 100 companies since 1998, can be expected to be especially aggressive when going after PharMerica’s clients.

At the same time, Omnicare is attempting a hostile takeover of NeighborCare. If the takeover succeeds and the sanctions on PharMerica go through, it is conceivable that Omnicare soon may control half the market.

NeighborCare isn’t submitting quietly to Omnicare’s takeover bid. The company’s leaders rejected a $1.3 billion offer as too low, and at a shareholder meeting earlier this month, NeighborCare’s chief executive officer predicted that its earnings would nearly triple in the next three years — from $120 million this year to $330 million in 2007.

It remains to be seen how all of this will affect nursing homes and, most importantly, nursing home residents.

On one hand, the inspector general’s actions against PharMerica could help Omnicare become so big that it will monopolize the market and set prices without the natural limits that come with competition.

A more optimistic view is that the sanctions are a sign that the government is going to start paying more attention to nursing homes and the use of taxpayers’ money.

One insider with detailed knowledge of the industry reports that some companies selling drugs to homes have been ignoring price cap laws for years, and have been bilking the taxpayers.

Another local insider claims that some companies are known to resell leftover drugs after a nursing home patient dies, charging the government twice for the same pill.

Industry representatives vehemently deny that claim, saying there is a paper trail to ensure that unused drugs are destroyed. And they point out the flip side: Medi-Cal doesn’t allow drugs to be returned for credit even if they have never been opened, and the destruction of useable drugs is a huge waste.

Carole Herman, of the nursing home watchdog Foundation Aiding the Elderly, believes doctors are over-prescribing pills without regard to patients’ needs or possible side effects, because financially “it behooves them to order more drugs, drugs, drugs.”

These practices may help company CEOs, stockholders, and people with ownership interest in both nursing homes and pharmacy companies, but they don’t do much for the patients or taxpayers.

Perhaps the inspector general will delve into these areas next.

In the meantime, the attention that is drawn to the industry by the PharMerica case should have some public benefit. When people realize that companies are making millions by selling drugs to nursing homes and having the government pay the bill, they also will understand the importance of keeping a watchful eye on all those who pocket the money.


David Kline is a Sacramento native who has been writing about seniors' issues since 1991. He has served as Spectrum's editor for the past five years — a period that has seen the paper receive awards from the California Newspapers Publishers' Association and National Mature Media Awards program.