The company hired to deliver prescription drugs to CalPERS members is paying $19.9 million to settle claims that it cheated the California pension fund and other customers on a previous contract.

CVS Caremark was hired in June to run a massive drug-benefit contract covering 350,000 members of CalPERS' PPO plan.

CalPERS board members knew Caremark was facing a lawsuit claiming the company had defrauded the fund the last time it had the PPO drug contract, from 2003 to 2006. But the board went ahead with the new pact, saying the pension fund had instituted safeguards to prevent new problems.

The new Caremark contract with the California Public Employees' Retirement System, worth tens of millions of dollars a year, takes effect in January.

In the lawsuit, a group of former Caremark employees accused the company of falsifying records, improperly switching CalPERS members to cheaper drugs and illegally supplying members with drugs that had been returned to the Caremark warehouse.

On Friday, the employees' attorneys announced Caremark was settling the California suit, plus two similar cases in Illinois and Florida, for a combined $19.9 million.

Michael Leonard, an attorney in Chicago for the workers, said $6.9 million goes to settle the California case. Under California's whistle-blower law, the money will be shared between the workers and the state itself, he said.

Leonard called the settlement "a successful resolution" to a series of cases that began in 2003, while Caremark was still working on the first contract for CalPERS.

CalPERS spokesman Bill Madison said the fund is "pleased that the suit's been resolved" but declined further comment.

Caremark said it settled the case "to avoid the costs of continued litigation.

"There were no findings of wrongdoing or any admission of liability in any of the cases," the company said.

Caremark, based in Rhode Island, is a drug wholesaler and retailer whose operations include the CVS and Longs drugstore chains.

Ironically, Caremark was hired only because the top choice for the contract, Medco Health Solutions Inc. of New Jersey, was implicated in a bribery scandal that engulfed CalPERS over the past two years.

Medco has run the drug-benefit program since 2006 and won the bidding for a new contract last fall.

But in March, CalPERS cut off negotiations amid disclosures that Medco paid businessman and former CalPERS board member Alfred Villalobos some $4 million to represent the company in its dealings with the pension fund.

State officials have sued Villalobos, accusing him of bribing CalPERS officials to win investment deals for his Wall Street clients. He has denied any wrongdoing.

The state's lawsuit has nothing to do with Villalobos' work for Medco. But Medco, while saying it did nothing wrong, has acknowledged that it's being investigated by the California attorney general and the Securities and Exchange Commission.

With Medco out of the picture, CalPERS turned to the runner-up in the bidding, Caremark.

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Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

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