The California Public Employees' Retirement System is negotiating a lucrative pharmacy benefits management contract with Caremark Rx Inc., a company being sued for defrauding the pension fund of tens of millions of dollars.
It's the second embarrassing misstep by CalPERS in the last month as the scandal-plagued agency seeks a contractor to manage the delivery of mail-order prescription drugs for about 300,000 state and local government workers, retirees and their families.
CalPERS is the largest buyer of healthcare benefits after the U.S. government.
In March, the CalPERS board canceled negotiations with Medco Health Solutions Inc., which had been the front-runner for the contract, after an internal investigation revealed that Medco allegedly had paid more than $4 million in bribes to win a similar three-year, $26-million contract in 2006. With Medco under investigation by law enforcement, the CalPERS board in March directed its staff to start talking with the runner-up, Caremark, a unit of CVS Caremark of Woonsocket, R.I., which bills itself as the "largest pharmacy health care provider in the United States."
The Caremark lawsuit, a whistle-blower case filed by private attorneys in the name of the state of California, is based partially on evidence from former Caremark employees. A trial is slated to begin May 10 in Los Angeles County Superior Court and is scheduled to last for at least a month, a time when CalPERS staff is expected to be negotiating the pharmacy contract with Caremark. A number of CalPERS members and staff have been subpoenaed to testify.
Caremark is accused of endangering CalPERS members by making unauthorized and illegal changes to prescriptions submitted between 2003 and 2006, often by switching patients to cheaper drugs or canceling prescriptions outright. Caremark representatives would contact physicians' offices by telephone and "obtain authorization from virtually anyone in the doctor's office, including receptionists and others with no authorization or competence to make medical decisions," the lawsuit said.
Caremark also falsified dates in transaction records to improve its required "turn-around-time" performance as required by CalPERS, according to the complaint.
"For-profit Caremark intentionally changed CalPERS plan members' prescriptions, illegally, without authorization from their doctors; and then, manipulated … prescriptions by canceling them or changing the date of receipt to avoid paying substantial penalties," plaintiff's lawyer Michael Leonard said.
Caremark spokeswoman Christine K. Cramer said the lawsuit had no merit and that the company was defending itself against the allegations.
"We are confident that our prior services to CalPERS were conducted in accordance with both our CalPERS contract and applicable law," she said. "We do not believe this lawsuit should have any impact on the current CalPERS contracting process."
The allegations against Medco and Caremark "point to the larger issue of how dysfunctional our healthcare system is that the two top bidders are engaged in alleged acts of bribery and fraud," said Kathay Feng, executive director of California Common Cause. "It's a real concern that CalPERS' bidding system does not allow for a more nuanced consideration of the quality of service and the safety and transparency of the bidding company."
Caremark's alleged mishandling of the CalPERS contract, if proven in court, would indicate that the company "is putting people's lives at stake," Feng said. "Trying to cancel people's prescriptions is a game that entails the health of individuals, who are reliant on these prescription drugs."
CalPERS spokesman Brad Pacheco said the agency "has been following this [Caremark] lawsuit since Day One."
Pacheco declined to comment on what, if anything, CalPERS has done to investigate or correct the alleged wrongdoing. He stressed that CalPERS has not yet signed a contract with any pharmacy benefits manager, and "as part of the negotiations on a potential contract, we will evaluate and take into account claims in the … case."
However, a spokesman for state Treasurer Bill Lockyer, a member of the CalPERS board, said board members were not aware of the Caremark lawsuit and allegations that the company committed fraud against CalPERS at the time the board directed staff to negotiate with Caremark to replace Medco.
Lockyer is concerned that despite the serious allegations raised by the lawsuit, CalPERS may be forced to do business with Caremark because it and the now-disgraced Medco are among the few companies capable of handling such big pharmacy benefits management accounts, spokesman Tom Dresslar said.
"This case involves allegations of reckless disregard for the health and safety of PERS members and a multi-pronged rip-off of PERS," he said. "Unfortunately, all this is likely to be a moot point because PERS may be forced by legal and procedural requirements to do business with Caremark. That doesn't make it any less distasteful."
In October, the CalPERS board selected Medco as the top finalist and directed staff to open negotiations. At the same time, it told staff to do likewise with the next highest bidder, Caremark, in the event that the Medco talks failed, Pacheco said.
Those negotiations were quickly halted last month after the CalPERS board received the findings of an internal legal review that said Medco allegedly paid a secret "consulting" fee to Alfred J.R. Villalobos, a former CalPERS board member turned deal maker. The suggestion that Medco pay the money to Villalobos came during a meeting that was also attended by Federico Buenrostro Jr., who was then the pension fund's chief executive.
Both state and federal law enforcement agencies are investigating the alleged payments, according to CalPERS and disclosures made by Medco in documents filed with the Securities and Exchange Commission.
Shum Preston, a spokesman for California Atty. Gen. Kamala Harris, declined to comment on the whistle-blower lawsuit against Caremark. He said Harris' predecessor, then-Atty. Gen. Lockyer, in 2005 declined to intervene as part of the plaintiff's litigation team. Preston acknowledged, however, that the state would receive a share of any award if the plaintiffs prevailed.
An attorney general's decision not to get involved in a whistle-blower case "isn't necessarily a comment on the merits of the legal arguments, said Dresslar, Lockyer's spokesman.
"A variety of factors, among them allocation of resources, go into making those decisions," he said.