CVS Caremark Corporation: Pharmacy Industry


On October 14, 2010, the  United  States  Attorney’s  Office  for  the  Central  District  of  California   announced that CVS Pharmacy, Inc. was fined $77 million (including $75 million civil penalty and the forfeit of $2. 5 million profit) for its unlawful sales of pseudoephedrine, a regulated drug, to criminals between September 2007 and November 2008. During that period, the company failed to comply with laws that limit the quantity of the drug sold to individual customers.

The sales, according  to  the  Attorney’s  Office,  directly caused an increase the production of methamphetamine in California. CVS Pharmacy, Inc (“CVS/pharmacy”) is the retail pharmacy subsidiary of CVS Caremark Corporation  (hereinafter  collectively  referred  to  as  “CVS”). In addition to retail pharmacy, CVS also runs pharmacy services, retail clinics, and mail-order pharmacy businesses. In fiscal year 2010, the company had net revenues of more than $96 billion and a net profit of more than $3 billion.

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CVS was the 18th largest company on the Fortune 500 according to its 2010 annual report and CVS/pharmacy is one of the largest retail pharmacy chains in the United States. As of December 31, 2010, it operates more than 7,100 retail pharmacy stores in the United States. Today’s  CVS  (listed  on  New  York  Stock  Exchange,  ticker  “CVS”, web site: http://www. cvs. com/) is the results of a series of mergers and acquisitions and expansion into new markets in the past few years.

Major mergers and acquisitions during the past six years included Eckerd ($2. 15 billion), Albertson’s ($4. 0 billion), Caremark ($26. 9 billion), and Longs Drugs ($2. 6 billion). The markets in which CVS has presence also increased from 36 states in 2004 to 44 states in 2010. Like other companies in the industry, CVS has to efficiently and effectively manage  various  risks  such  as  completion  and  economic  downturn  in  order  to  deliver  “strong   growth  and  returns  to  shareholders”.

 Legal Background

Pseudoephedrine is one of the materials that are used to make methamphetamine, which “is a powerfully  addictive  drug  that  severely  affects  users’  minds  and  bodies,  ruins  lives,  and   endangers communities and the environment”  (U. S. Department of Justice Drug Enforcement Administration, 2007). To curb the illicit production of methamphetamine, the Combat Methamphetamine Epidemic Act of 2005 (CMEA) was signed into law effective March 9, 2006 to limit the sales of pseudoephedrine and other related materials.

The CMEA sets limits of sales of pseudoephedrine by retail drugstores to individuals as follows: The quantity sold to an individual in a day should not exceed 3. 6 grams, regardless the number of transactions; and 1 – For individuals, purchases in a 30-day period are limited to 9 grams In addition, the CMEA mandates that regulated retail drugstores should implement necessary measures to control and monitor the sales of pseudoephedrine.

The required measures include: placing product such that customers do not have direct access before the sale is made (“behind  the  counter”  placement)  or  in  a  locked  cabinet  that  is located in an area of the facility to which customers do have direct access; delivering the product directly into the custody of the purchaser; maintaining written or electronic list (logbook) of sales, including quantity sold, names and addresses of purchasers, and date and time of the sales; examining acceptable forms of photo identification card; requiring purchasers to sign the logbook and enter their names, addresses, and date and time of sale; and informing purchasers that entering false statements or misrepresentations in the logbook may subject them to criminal penalties according to the law.

The CMEA also requires regulated retail drugstores to provide proper training to those storefront employees who are responsible for directly dealing with customer purchases. Drugstores must ensure that these employees understand he legal requirements and follow proper procedures. Drugstores must also self-certify to relevant authorities in their jurisdictions to demonstrate that all store-front employees have undergone the required training.

In accordance with the CMEA, U. S. Department of Justice Drug Enforcement Administration (DES) specified some specific rules (U. S. Department of Justice Drug Enforcement Administration, 2006) relating to logbooks maintained by drugstores. Paper logbooks must be bound. For electronic logbooks, the records must be readily retrievable by the store or law enforcement agencies; and an electronic signature system may be implemented to capture customers’  signatures.

DEA  also  requires  the  following  notice be included in all logbooks and shown to customers: “WARNING:  Section  1001  of  Title  18,  United  States  Code,  states  that  whoever,   with respect to the logbook, knowingly and willfully falsifies, conceals, or covers up by any trick, scheme, or device a material fact, or makes any materially false, fictitious, or fraudulent statement or representation, or makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry, shall be fined not more than $250,000 if an individual or $500,000 if an organization, imprisoned not more than five years, or both. ”

If inclusion of the notice in the logbooks is not feasible, the notice may be displayed in the place where the customer will see it when providing relevant information to complete a purchase. For mail-orders pharmacies, the purchase by an individual is limited to 3. 6 grams per day and 7. 5 grams in a 30-day period. Some requirements for retail drugstores are not applicable for mailorder  pharmacies.

These  include  “behind-the-counter”  alike  physical  control  measures  and   customers signing logbooks. However, the CMEA requires mail order sellers to file monthly reports with DEA and verify customer identities prior to shipping. 2 In addition the federal CMEA, state laws may also impose restrictions on sales of pseudoephedrine. According to DEA (U. S. Department of Justice Drug Enforcement Administration, 2006), state laws vary considerably from state to state.

For example, 27 states impose single transaction limits; 19 states have monthly or weekly limits. As emphasized by DEA,  “CMEA  does  not  preempt  those  requirements  under  State  laws/regulations  that  are ore   stringent than the CMEA  requirements…  all  persons  subject  to  CMEA  must  comply  with  the   CMEA  and  the  laws  in  the  State(s)  in  which  they  sell  [pseudoephedrine]. ”

Pseudoephedrine  “Smurfing”

Since mid 2007, the state of California has experienced a surge of large-scale methamphetamine production (U. S. Department of Justice National Drug Intelligence Center, 2009). According to NDIC (National Drug Intelligence Center), the surge was fueled by the organized and widespread  pseudoephedrine  “smurfing”,  where  individuals  purchase  pseudoephedrine  in   quantities at or below legal limits and then aggregate into bulk quantities for producing methamphetamine. Pseudoephedrine acquired through smurfing was also found be sent in bulk to methamphetamine producers in Mexico.

The  surge  of  smurfing  in  California  could  be  partly  attributed  to  CVS/pharmacy’s  failure  to   control the sales of pseudoephedrine as required by the CMEA, according  to  the  U. S. Attorney’s   Office (United States Attorneys’ Office Central District of California, 2010). During the period of more than one year from mid-2007, smurfers were able to make repeated purchases of pseudoephedrine from CVS/pharmacy stores that exceeded federal limits set by the CMEA. Sometimes  smurfers  were  able  to  “cleaning  out  store  shelves”.

CVS/pharmacy’s  Compliance  Practices

According to the investigation by DEA and other law enforcement agencies (United States Attorneys’ Office, 2010), CVA/pharmacy has implemented some measures in order to comply with the CMEA. These measures included physical control of pseudoephedrine, a paper-based logbook, and later on an electronic logbook (replacing the paper-based logbook).

To comply with the CMEA, CVS/pharmacy moved pseudoephedrine behind cash register counters in their retail stores. The company also provided written materials to train and educate employees about the new federal requirements and the problem of diversion of pseudoephedrine to make methamphetamine.

CVS/pharmacy initially implemented paper-based logbooks, which were deemed CMEAcompliant. By using the paper logbook, cashiers at each store would be able to track and prevent excessive pseudoephedrine sales. The paper logbooks recorded customer names alphabetically and past purchases the customers make. The paper logbooks had some limitations, as CVS/pharmacy suggested.

In 2007, CVS/pharmacy decided to replace the pager logbooks with a computer system called “MethCheck” The system would allow CVS/pharmacy stores to track pseudoephedrine sales and provide information to law enforcement agencies when needed. The system was to be implemented at all CVS/pharmacy stores across the United States. The  key  feature  of  the  MethCheck  system  is  “Lookback”,  which  enables  the  tracking  and   reviewing of customer purchases of pseudoephedrine and prevents any sales that would violate federal and state limits. Without the LookBack feature, the system would not be able to perform the aforementioned functions.

The feature, however, must be turned on for all states, regardless of whether a state has any daily or monthly limits on pseudoephedrine purchases by individuals (some states, e. g. California and Nevada, do not set monthly limits). CVS/pharmacy implemented the MethCheck by disabling the Lookback features in those states that did not impose monthly limits.

By doing so, the company would essentially be unable to prevent aggregated purchases by an individual that exceeded the daily limit of 3. 6 grams imposed by the CMEA. As a result, the sales of pseudoephedrine at CVS/pharmacy stores increased significantly from late 2007 to late 2008, particularly in California and Nevada. During that time, some CVS/pharmacy employees raised concerns about excessive purchases of the drug by individuals.

The management, however, did not promptly respond and investigate the suspicious increased sales. Instead, employees were instructed to rely on the MethCheck system to determine whether or not to block a customer purchase. After the government started its investigation  of  the  company’s  compliance,  CVS/pharmacy   changed the configuration of the MethCheck system by enabling the Lookback feature at stores in California and Nevada in late 2008 and other states in February 2009.

Post-Investigation Remedial Measures During  the  government’s  investigation,  CVS/pharmacy  accepted  the  responsibility  for  those   unlawful sales of pseudoephedrine (United States Attorneys’ Office, 2010). More specifically, the company acknowledged some unlawful conduct in the California and Nevada:

  • employees at certain CVS/pharmacy stores knowingly sold the drug over legal limits;
  • the stores that oversold the drug had reasonable knowledge that the drug would be used to make methamphetamine;
  • the  company’s  distribution  center  was  in  a  position  to  monitor  and   report the excessive sales of pseudoephedrine but failed to do so.

In  response  to  the  government’s  investigation,  CVS/pharmacy  implemented  some  internal   control measures to ensure its compliance. The measures included: Monitoring the sales of pseudoephedrine products and reducing the threshold amount that can be ordered by each store; Reducing inventory level that can be held at each store and requiring the return of excessive inventory; Establishing an advisory committee to ensure compliance with the CMEA and relevant state laws; Updating store operation manual and training materials that include additional information about pseudoephedrine and related policies and procedures; and Moving pseudoephedrine drugs from the retail counter to the pharmacy counter.

As part of the non-prosecution agreement with the government, CVS/pharmacy would establish and maintain a Compliance and Ethics Program that requires the company to exercise due diligence to prevent criminal conduct, promote and encourage ethical conduct, and maintain procedures for an anonymous reporting mechanism and discipline employees who violate compliance policies.

Reflections  on  CMEA  Compliance In a statement (CVS Caremark Corporation, 2010) after the settlement with the government, Thomas M. Ryan, then  CEO  of  CVS  Caremark,  acknowledge  that  “the  lapse…was  unacceptable   breach  of  the  company’s  policies  and  was  totally  inconsistent  with  [the  company’s]  values. CVS/pharmacy is unwavering in its support of the measures taken by the federal government and the  states  to  prevent  drug  abuse.  To  prevent  the  non-compliance from happening again in the future,  Ryan  argued,  the  company  has  “strengthened  …  internal  controls  and  compliance   measures  and  made  substantial  investments  on  improve  [the  company’s]  handling and monitoring  of  PSE  by  implementing  enhance  technology  and  making  other  improvements  in  …   stores  and  distribution  centers. ”

CVS has been involved in some other law suits and investigations by the government. On April 15, 2011, CVS/pharmacy agreed to pay the United States and 10 states $17. 5 million to settle False Claims allegations. The company was alleged to have inflated prescription claims to the government by billing the Medicaid programs in the 10 states for more than what the company was owed (U. S. Department of Justice, 2011).

On January 16, 2009, CVS/pharmacy and the U. S. Department of Health & Human Services (HHS) reached an agreement to settle  the  company’s  potential  violations  of  the  HIPAA  Privacy   Rule (U. S. Department of Health & Human Services, 2009). The investigation by HHS indicated the company:

  • failed to implement adequate policies and procedures to reasonably safeguard health information during its disposal process;
  • did not adequately train employees;
  • did not implement corporate policy to enforce employee compliance with its disposal procedures. CVS/pharmacy agreed to pay $2. 25 to settle the allegations.

On March 18, 2008, it was announced that CVS Caremark Corporation has agreed to pay $36. 7 million to settle Medicaid fraud claims filed again the company (U. S. Department of Justice, 2008). CVS allegedly switched Medicaid patients from the cheaper tablet form of a medicine (Ranitidine) to the more expensive capsule version solely to increase its reimbursement rate during the period from April 2000 to December 2006. The company did not admit any wrongdoings in the settlement.

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CVS Caremark Corporation: Pharmacy Industry. (2016, Nov 13). Retrieved from