Two Revenue Streams

Medco may sit under the radar for many consumers, but it plays a bigger role in the prescription business than most people realize. About one in four Americans is enrolled in a Medco-managed drug plan. As a Pharmacy Benefit Manager, or PBM, Medco manages drug-benefit plans for corporations such as General Motors, as well as plans for BlueCross/Blue Shield, managed care organizations like UnitedHealth, and more than 100 state and local government agencies.

Medco launched in 1983 as National Pharmacies, a mail-order service based in Elmwood Park, N.J. Drug manufacturing giant Merck & Co. acquired it in 1993 for $6.6 billion and spun it off as a standalone corporation 10 years later, when its yearly revenue reached $33 billion, or more than half Mercks total. In 2004, its sales topped $35 billion.

Medco has two primary revenue streams: as a traditional drug-benefit plan manager and as a mail-order prescription provider.

Heres how Medco works as a drug-benefit plan manager: A GM employee who walks into a pharmacy to fill a prescription typically hands the pharmacist a health-plan card. The pharmacist will check the patients history to learn what previous medications he may have been taking and whether there may be any potential side effects with the new prescription.

If the customer is in a Medco-managed plan, the pharmacist taps into a 50-terabyte NCR Teradata warehouse in Fair Lawn, N.J. The system tells the pharmacist how much of the prescription the health plan will cover, and how much the customer must pay out of pocket.

For providing this service, Medco receives an administration fee—payments that generated about 65% of the companys revenue in 2004, or $23 billion.

But more and more, Medcos revenue—and profits—come from its own mail-order prescription business. Companies like GM encourage employees to order repeat prescriptions— often referred to as maintenance medication—through Medco. Typically, a customer might buy a 30-day supply of a drug like cholesterol-lowering Lipitor from his local pharmacy for $77. Medco will fill such a prescription at its automated facilities and send the customer a 90-day supply for about $204, a savings of 13%. Medco claims its mail-order service typically saves customers 8% to 10% on their drug costs compared with retail pharmacies.

A PricewaterhouseCoopers study released in July 2004 pegged the savings offered by a managed-plan company like Medco at 25% when other benefits—such as the ability to steer plan members to generics rather than costly brand-name drugs, streamline electronic claims processing, and claim rebates from drug manufacturers for volume purchasing—are factored in.

Generic drugs offer some of the largest savings. A 90-day supply of antidepressant Prozac costs about $330 at Medco, while the generic substitute, Fluoxetine, costs only $37.

Check out eWEEK.coms for the latest news, views and analysis of technologys impact on health care. Such claims of big savings have incited a war between Medco and its pharmacy benefit manager competitors, most notably Caremark Rx and Express Scripts, and the large drugstore chains such as Walgreens and CVS. Some health plans are forcing their members to order medicines by mail, a potentially severe blow to the drugstores.

Walgreens struck back on Jan. 1, refusing to accept prescriptions from Ohio state government employees after the state required its workers to use Express Scripts mail-order pharmacy.

A month later, GM pulled its business from Walgreens, in what it deemed a pre-emptive strike. GM, which spent $1.5 billion on prescription drugs in 2004 for 1.1 million employees, retirees and their spouses, says it felt Walgreens might turn away GM, as it did to Ohio, and decided to act first. Walgreens denied any intention of rejecting GMs business.

In the meantime, the largest drugstore chains, most notably Walgreens, CVS and RiteAid, have all launched mail-order prescription businesses of their own to slow Medcos growth. Greg Wasson, Walgreens president of health initiatives, says mail orders price advantage is a myth. "Yes, 90-day prescriptions save money, but 90 days is not synonymous with mail order," he says. In fact, most retail pharmacies now offer customers a 90-day refill option.

The counterattacks may be having some effect. Medcos mail-order business slowed to 10.9% annual growth in 2002, 7.6% in 2003 and 15% in 2004, compared with annual growth rates of better than 20% in the 1990s.

But those are still healthy figures. In 1999, the companys mail-order prescription business was worth $6 billion. In 2004, it delivered 87.7 million prescriptions by mail worth $13 billion.

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