CalPERS hopes to rein in rising drug costs with new pharmacy benefits contract

Over the next five years, the California Public Employees Retirement System hopes to save $600 million through a new contract with an intermediary that manages state workers’ and their families’ pharmacy benefits, with the goal of minimizing rising drug prices and stabilizing premium costs.

Earlier this month, CalPERS announced a new agreement with CVS Caremark to serve as the pharmacy benefits manager (PBM) for 587,000 CalPERS members. That represents about 40% of the 1.5 million active and retired state workers and family members who are enrolled in the system’s HMO and PPO plans.

Over the past nine years, OptumRx has provided pharmacy benefits to these CalPERS members.

“We’re hoping that it will decrease drug costs and promote predictability in drug costs so that there aren’t big spikes,” CalPERS’ chief clinical director, Dr. Julia Logan, said in an interview.

Logan said the contract also offers CalPERS protection because CVS Caremark is putting money at risk to meet certain cost and performance targets. Additionally, Logan said the deal will help stabilize premium costs. Since 2023, CalPERS’ overall premiums have increased by about 30%.

Pharmacy benefits managers act as intermediaries between employers, like the state of California, and drug manufacturers to negotiate the prices of pharmaceuticals. These powerful intermediaries also can dictate which prescriptions are offered and at what cost.

CVS Caremark President Ed DeVaney said that the company works to negotiate the lowest net cost for medications and identify safe and effective therapies.

“Through innovation and a relentless focus on improving the member experience, we are driving better health outcomes and lowering out-of-pocket costs for consumers,” DeVaney said in a statement.

CVS Caremark’s formulary — the list of drugs that are covered by the company — is very similar to OptumRx’s, Logan said. In a recent update on the selection process, CalPERS noted that only 5% of drugs available to basic members under OptumRx are not covered under the new PBM. For Medicare members, there’s slightly less overlap, with a 15% difference between the two formularies.

Managing growing drug costs

In recent years, CalPERS’ outpatient pharmaceutical costs have increased from $1.8 billion in 2020 to $2.4 billion in 2023. That number is the sum of outpatient drug costs for all of CalPERS’ 1.5 million members, but it shows just how much that expense has grown. Which is, in part, why CalPERS sought a new manager for pharmacy benefits.

In addition to general health care inflation, the proportion of dollars spent on prescription drugs has been increasing in recent years, said Garen Corbett, executive director of the California Health Benefits Review Program, which provides analysis of health-related legislation.

While part of that is because prescriptions are increasingly used as treatments, Corbett said, “there’s also pricing strategies that aren’t always aligned with maybe the best ways of allocating societal value.”

To ensure CVS Caremark maintains reasonable pharmaceutical costs that don’t exceed a projected 6.5% cost trend, the company agreed to put millions of dollars at risk. If CVS Caremark doesn’t meet quality goals for treating patients with high blood pressure and diabetes, it will also have to compensate CalPERS. Over the five-year contract, CVS Caremark is putting $250 million at risk.

As a big health care purchaser, CalPERS is able to push for more transparency from pharmacy benefit managers to get access to CVS Casemark’s data and performance guarantees to improve patient outcomes, Corbett said.

The contract with CVS Caremark mirrors another major deal CalPERS made last year with Blue Shield and Included Health to become the new administrators of the state’s PPO plans.

Blue Shield and Included Health signed an agreement that included financial incentives that aimed to lower health care costs. The two companies put $464 million at risk to ensure medical cost targets are met over the contract’s five-year lifespan.

Logan said CalPERS has historically taken on all of the risks of health care costs. When those increase significantly, the pension fund is on the hook.

She described that situation as a “misalignment.” But with the new PBM and PPO contracts, Logan said these companies are now accountable for health care costs.

This story was originally published July 29, 2025 at 11:54 AM.