Three Firms Vie To Run CalPERS’ Drug Benefits

The offices of the California Public Employees' Retirement System in Sacramento in 2010. (Ken James/Bloomberg via Getty Images)

Three industry heavyweights are vying to run the prescription-drug business for one of the nation’s biggest health-care buyers, the California Public Employees’ Retirement System.

Express Scripts and UnitedHealth Group’s OptumRx unit are each trying to unseat the current pharmacy-benefits contractor, CVS Health. The stakes are high for the companies and CalPERS, which is struggling along with many employers nationwide to contain fast-rising drug costs.

The agency’s medical costs are closely watched as a harbinger of what big employers and their workers might be facing across the country.  CalPERS spends more than $8 billion annually on medical care for 1.4 million state and local government employees, retirees and dependents. About a quarter of that, or $1.8 billion, goes to prescription drugs.

CalPERS uses a pharmacy benefit manager to handle much of its drug business, but some HMO plans offered through CalPERS handle their own pharmacy claims. This contract would cover about 486,000 of CalPERS’ 1.4 million members.

Tuesday, a key CalPERS’ committee voted to award the next five-year contract to Optum. The full CalPERS board is scheduled to vote on that recommendation Wednesday. The next contract would start Jan. 1.

Optum was the lowest bidder, according to cost projections released Tuesday. The company’s bid totaled $4.88 billion for the five-year cost of prescription drugs, including rebates and the company’s administrative fees. The bid amounted to $191.82 per member per month.

CVS bid $4.90 billion overall, and Express Scripts was $4.95 billion, according to CalPERS. 

Kathy Donneson, chief of CalPERS’ health plan administration division, said her staff has spent 18 months working on the bidding process and then negotiating proposed contracts with each of the three finalists. She said the agency wants to do all it can to combat rising costs while maintaining service and choice for patients.

“The trends that are driving pharmacy spending are a concern to us,” Donneson said in an interview Monday. In these proposed contracts, “we have a lot of protections in place to make sure we get the best deal for our dollars spent on the pharmacy program.”

In 2014, prescription drug costs rose nearly 8 percent at CalPERS. Donneson said the increase ran closer to 9 percent to 12 percent during 2015 and the first quarter of this year. Like many public and private payers, CalPERS has attributed much of the recent surge to specialty medications such as hepatitis C drugs Sovaldi and Harvoni.

The high cost of specialty drugs and sharp price hikes for some older medications have become a hot topic during the presidential campaign and for state and federal lawmakers looking for remedies.

For years, pharmacy-benefit managers have been criticized for being opaque middlemen and for not passing along more of the savings they negotiate from drug makers. In its bidding process, CalPERS said one of its goals was more “transparency into the PBM-pharmaceutical manufacturer agreements.”

In the CalPERS bidding, all three firms received four stars overall from the agency’s staff. But Optum was the only bidder to receive five stars for cost projections.

CVS received some of the lowest marks, including three stars for its work and staffing plans. However, CVS did garner five stars for financial performance measures, better than Express Scripts and Optum.

Another wild card for CalPERS and its next pharmacy manager: California’s November ballot measure known as the Drug Price Relief Act. It would prohibit the state from paying more for a prescription drug than the lowest price paid by the U.S. Department of Veterans Affairs. The VA gets some of the largest discounts for prescription drugs of any government program.

CalPERS said it is still assessing the potential impact of the measure.

The state Legislative Analyst’s Office, in a report last week, said the initiative’s impact is unclear because VA prices are not publicly disclosed and drug makers could raise prices at the VA, nullifying the expected savings.

CalPERS has worked with CVS and its Caremark unit as pharmacy-benefit manager since 2012. CVS didn’t respond to a request for comment Monday. At Tuesday’s meeting of the pension and health benefits committee, a CVS executive touted the service and savings the company has delivered to CalPERS under the current contract.

Jennifer Luddy, a spokeswoman for Express Scripts, said the company “can offer CalPERS and its members an innovative, high-quality pharmacy benefit program focused on improving patient outcomes while controlling costs for the plan.”

UnitedHealth declined to comment on the pending decision. It is the nation’s largest health insurer, and it has built OptumRx into a leading pharmacy manager for employers.

Express Scripts is the biggest pharmacy-benefit manager in the U.S., and CVS ranks second.

This story was produced by Kaiser Health News, which publishes California Healthline, a service of the California Health Care Foundation.

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