RALEIGH -- North Carolina has awarded a Medicaid contract worth $33 million to a newly formed diabetes supply company run by two brothers with a checkered business history, including a recent bankruptcy and lawsuits alleging patent piracy.
The state contract, signed in October, gave an exclusive deal to Prodigy Diabetes Care without competitive bids by other companies. The contract establishes Prodigy as the only supplier of glucose monitors and test strips for the 50,000 Medicaid recipients in North Carolina who have diabetes.
Patients' advocates have raised concerns, contending the Prodigy meters are little-known and could cause confusion - even medical problems - among diabetics who rely on the devices to measure their blood-glucose levels and manage their fdisease.
State officials say the deal was struck to save money in a cash crunch. Medicaid, which pays health bills for poor people using state and federal tax dollars, is expected to save $4.4million over the two-year life of the contract , with the Charlotte-based company promising rebates on many of its diabetes products.
"We've got a major budget problem we're trying to solve, and you have to do it every way that you can with the goal of maintaining the services in the process," said Lanier Cansler,head of the state Department of Health and Human Services, which runs the state's Medicaid office.
One competitor, Roche Diagnostic Corp., wrote a letter of protest to the state, contending that the no-bid process violates federal Medicaid rules.
"Certainly, had Roche been given the opportunity, we could have also negotiated with DHHS or its agent and may have provided even greater cost savings to the state of North Carolina," a company official wrote.
Prodigy's spokesman, Pete Bosak, said the company is well-positioned to meet its obligations to the state and to diabetes patients. He said grousing about change is to be expected.
"Our billion-dollar competitors of course are going to complain, as they could not match our quality, technology, ease of use and prices and thus were not awarded a contract," Bosak wrote in an e-mail message.
But the deal went through with little scrutiny of Prodigy, which was founded just two months before the state contract was signed.
Record in Florida
At the helm of Prodigy, and its parent company, Diagnostic Devices Inc., are brothers Ramzi Abulhaj, 45, and Rick Admani, 40.
The two previously ran businesses in Florida, where they left a string of legal battles, including a bankruptcy and lawsuits alleging the theft of intellectual property.
About 12 years ago, the brothers began incorporating numerous businesses in Florida, with their main focus importing and marketing medical devices through a company called VitalCare Group Inc., and another called Diagnostic Devices.
In 2003, VitalCare declared bankruptcy. Two years later, Diagnostic Devices was sued in a Florida bankruptcy court over a series of large money transfers between companies operated by the Abulhaj brothers.
A trustee appointed to oversee the bankruptcy alleged that the brothers made the transfers to hide assets from VitalCare creditors.
Last year, in a final judgment on the case, the bankruptcy judge repeatedly referred to the "fraudulent transfer" of money and ordered Diagnostic Devices to pay a $2.4 million judgment to the trustee.
The brothers contend that the transfer was a miscommunication with an investor and that their lawyer hadn't told them of the court date that culminated in the judge's order. A hearing on the matter is scheduled in Florida on Dec. 29.
Bosak, the Prodigy spokesman, said the Abulhaj brothers are traveling out of the country and could not be reached for comment.
He said the issues in Florida involve different corporate entities that have nothing to do with the North Carolina businesses.
But annual reports, filed at the Florida Department of State office, show overlap. Diagnostic Devices' principal place of business is listed at a Miami address from 2002 through 2006, and then the Charlotte address in 2007 and again in 2008.
The Abulhaj brothers moved to Charlotte in 2006, after incorporating a Diagnostic Devices in North Carolina a year earlier.
More legal issues
The bankruptcy in Florida was prompted by a patent infringement fight involving the brothers' VitalCare business.
Palco Labs won a $100,000 settlement against the company, accusing VitalCare of stealing its idea for a hand-held blood sampling device that operates like a pen.
VitalCare also settled with another company, Stat Medical Devices, over another device to draw blood.
A more recent lawsuit is active in U.S. District Court in Charlotte, where Diagnostic Devices has sued the Chinese manufacturer that made its Prodigy line until recently. Diagnostic Devices contends that TaiDoc Technology Corp. broke an agreement to give it exclusive U.S. marketing rights for certain styles of glucose meters.
TaiDoc has countered that it has lived up to the agreement, and that the lawsuit is a ploy for Diagnostic Devices to renege on paying TaiDoc more than $1.5 million owed for meters.
It's not clear who now makes Diagnostic Devices' products under the Prodigy label. The company has announced plans to move manufacturing from China to Charlotte, hiring more than 150 people.
Bosak, the Prodigy spokesman, said construction is under way at the company's Charlotte warehouse, and in January it will begin making the testing strips used in the meters.
"We're enjoying an extreme amount of success," Bosak said. "I believe we're really going to take off." He noted that a business magazine recently cited Prodigy as one of the state's fastest- growing businesses.
Why pick Prodigy?
The choice of Prodigy surprised many in the diabetes community, particularly because the company is so new and the Abulhaj brothers are not known to be politically active. Neither Ramzi Abulhaj or Rick Admani donated money to state politicians, according to records at the N.C. State Board of Elections.
Some have speculated that the company's promise of adding jobs in Charlotte helped its case. Prodigy's sales vice president, Jerry Munden, wrote DHHS officials in August that the state agreement would "stimulate growth and allow Prodigy to add approximately 150+ new North Carolina jobs during this contract period."
DHHS officials mention the promise of more jobs when they defend their contract decision. But Cansler, the DHHS secretary, said the jobs promise did not influence state officials to award Prodigy the contract. Documents from the state Department of Commerce, which manages state-backed business inducements, show no such offers to Prodigy.
"That's not a game that we get into," Cansler said. "We're purely focused on making sure that people have access to the supplies they need."
Cansler said the state chose Prodigy out of financial expediency. With high unemployment driven by the recession, more people turned to programs such as Medicaid. At the same time, state tax revenue fell, creating a budget crisis.
In August, state legislators passed a bill authorizing Cansler to sign some contracts with vendors without going through the lengthy bid process, enabling the state to enter a deal quickly and start saving sooner.
The sole-source contract drew immediate fire from competitors, pharmacy suppliers and diabetes educators who teach patients how to use the monitors. Roche filed a formal complaint, and officials with other major competitors also fired off testy letters.
The state's Medicaid director who signed the contract, Dr. Craigan L. Gray, had little patience with complaints about the sole-source contract.
In an e-mail message Nov.5, Gray wrote: "Isn't it interesting that Roche was very willing to bill 'full' price to Medicaid and had no complaint until an enterprising competitor under priced them."
State officials also said they contacted other states where Prodigy has Medicaid contracts and found nothing to indicate Prodigy would fail to meet its obligations in North Carolina.
"I did not find a 'moral turpitude' clause in the contract; however, if such a clause were evenly applied across state government it may have interesting results:) " Gray wrote by e-mail Dec. 4.
Prodigy meter doubted
It wasn't just competitors who complained. Trade associations representing community pharmacists, medical device manufacturers and diabetes educators wrote Gov. Bev Perdue and other state officials to protest the contract.
"It was kind of done under the table," said Kimberly Hanchette, president of the Research Triangle Association of Diabetes Educators.
Janet A. Nicollerat, director of the adult diabetes education program at Duke University, wrote state officials protesting the decision to use only Prodigy meters. "There is no one meter on the market that works for all patients with diabetes," she wrote, adding that the Prodigy line has limitations. "The Prodigy meter is not easy to use, easy to handle, nor does its accuracy data compare with the other meters on the market."
State officials forwarded her letter to the company, and Munden responded point by point, referring to a University of Florida report praising the meter as easy to use and accurate.
Device suppliers and diabetes educators also expressed concerns that the young company could not meet the heightened demand, endangering patients who depend on the meters.
Hard to change meters?
"Our biggest issue is we've never heard of the brand," said Tina Metts, with Carolina Diabetic Supply Group, a mail-order company that ships the meters to patients. "Most patients have not used this kind of meter, so you have to get them on the phone, walk them through how to use it properly, or refer them to their doctor or educator."
Metts said her company has already run into delayed orders, stemming from a shortage of the company's syringes. And Research Triangle Association of Diabetes Educators requested meters to help patients learn how to use them, and they have not arrived.
Cansler said the state is making contingency plans, putting other companies on alert that the state may still need them if Prodigy runs short of supplies.
Hanchette, of the diabetes educators association, said patients' reluctance to change glucose meters could result in medical crises. Some people may end up testing their blood glucose levels less often than they should, she said, or misinterpret readings and take actions such as altering their diets or taking insulin.
Bruce McNeil, 59, a Medicaid patient in Raleigh, said he received a Prodigy meter last week, but hasn't begun using it yet because he hasn't been trained on it. When he tried it, he ran into complications, so he decided he'd keep using his old meter for now. He said he depends on his meter to keep his health on track.
"It's very important," McNeil said, noting that he carries his meter with him everywhere. "Diabetes is a real serious threat."
News researcher Lamara Hackett contributed to this report.
