CVS, Seeking Calpers Pact, Faces Trial Over Past Work For Fund

CVS Caremark Corp. (CVS), in competition for a major pharmacy-benefits contract with the California Public Employees' Retirement System, faces at the same time a trial in a long-running whistle-blower lawsuit alleging the company defrauded Calpers while overseeing the pension fund's drug plan from 2003 to 2006.

As the nation's largest public pension fund decides whether to award the 2012, three-year contract to CVS Caremark or another finalist, company lawyers must prepare for a trial scheduled to start June 13 in California Superior Court in Los Angeles. The whistle-blower plaintiffs--several former Caremark employees--allege the company cheated Calpers out of millions of dollars through fraudulent practices at its mail-order pharmacy business.

The Calpers contract represents some $500 million in drug spending a year, as the pension fund is one of the largest purchasers of employee health benefits in the U.S. Besides CVS Caremark, the other finalists for the Calpers contract include MedImpact and UnitedHealth Group Inc.'s (UNH) Prescription Solutions.

Calpers' search for a new drug-benefits manager follows the organization's move in March to drop the incumbent and favored finalist, Medco Health Solutions Inc. (MHS), from consideration after an investigation detailed Medco's payments of more than $4 million to a former Calpers official.

Medco had hired the former official as a consultant as it tried, successfully, to win the Calpers business from Caremark in the mid-2000s; state and federal agencies are now investigating Medco's relationship with the consultant.

Medco and CVS Caremark are two of the largest PBMs in the U.S.

The whistle-blower lawsuit against Caremark, which predates the PBM's acquisition by CVS, makes a host of allegations of fraudulent practices.

Specifically, the complaint alleges Caremark changed patient prescriptions without authorization from prescribing physicians, neglecting to credit Calpers for the unauthorized changes, and falsified prescription turnaround times to avoid monetary penalties set forth in the contract.

CVS Caremark noted that the amended suit has been pursued as a private matter because California declined to intervene a few years ago.

"CVS Caremark does not believe that any of the allegations in the lawsuit have merit, and we are vigorously defending against the allegations," company spokeswoman Christine Cramer said. "We are confident that our prior services to Calpers were conducted in accordance with both our Calpers contract and applicable law.

"We do not believe this lawsuit should have any impact on possible negotiations with Calpers to provide PBM services," she added

Calpers representatives indicate the pension fund will weigh the lawsuit in considering its PBM contractor, but the complaint won't necessarily eliminate CVS Caremark as a candidate. Calpers staff remained in negotiations with CVS Caremark as of this week.

"Assessment of the lawsuit is going to be part of the due diligence that (Calpers) undertakes with respect to making a decision on entering a contract with CVS and Caremark," said Tom Dresslar, spokeswoman for California Treasurer Bill Lockyer, a Calpers board member. "Clearly the lawsuit involves allegations, disturbing allegations, including ripping off (Calpers)."

For an organization the size of Calpers, however, competition is limited, Dresslar noted. "You can count the PBMs that can serve the organizations of this size on a couple of fingers, maybe three," and they frequently are subject to lawsuits and investigations, he said. He said the Calpers board had been unaware of the lawsuit when it authorized staff members to enter contract negotiations with CVS Caremark.

"We take everything into consideration when we're negotiating for any of our vendors," Calpers spokesman Bill Madison said. "We look at what's going on with every potential contractor." Calpers had no comment on the lawsuit itself.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-982-5582;

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