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The sign on the door of Medcos Willingboro, N.J., pharmacy looks just like a thousand similar signs posted at neighborhood pharmacies across the country. “Pharmacist in charge, Barry M. Cesanek,” it reads. But thats where the familiarity ends.
Inside this “pharmacy,” vacuum tubes pop the exact quantity of pills required for an individuals prescription into a procession of plastic trays filled with bottles. Machines screw the caps onto their bottles with a force just right for handling by an arthritic senior. Robotic arms zero in on the correct bottle for a patient from thousands of trays and drop it into a waiting, addressed envelope. Conveyer belts carry the envelopes to mail-sorting stations, where they slide off sloped trays into large bags, ready to be taken to the nearby postal depot.
Neither a pill nor a bottle ever is touched by a human hand.
More than 9,000 bottles holding prescriptions for the employees or retirees of companies like General Motors, Ford Motor Co., United Airlines and IBM roll off these lines every hour. At peak, more than 1 million bottles leave the Willingboro facility each week.
Welcome to the front line in the battle between employers and spiraling drug costs. By handing off workers drug-benefit programs to huge automated mail-order facilities like Medcos, businesses hope to put a dent in prescription costs that have been growing at about 15% a year since 1999.
In the process, the automated pharmacies are changing the face of the industry and posing a challenge to retail giants Walgreens, CVS, Costco and Wal-Mart.
“A very busy retail pharmacy might fill as many as 1,000 prescriptions a week,” says Cesanek, Medcos pharmacy practice director, who worked in a small-town retail pharmacy before joining Medco.
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“This is like having 1,000 stores under one roof.”
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.
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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.
P.3/5: Warehouse: Pharmacy of the Future
Warehouse
: Pharmacy of the Future”>
The engine for that growth chugs away at the Willingboro pharmacy, Medcos newest and largest facility, located about a 30-minute drive north of Philadelphia. The facility could hold about seven football fields, and is home base for 1,200 employees, including 140 full-time pharmacists, who work three shifts a day, six days a week.
The company operates nine mail-order and five call-center pharmacies, some of which handle highly specialized drugs that may require refrigeration or delicate handling. However, the bulk of its orders are filled at two automated pharmacies, one in Las Vegas, which began operations in 1997, and the other in Willingboro, which opened in August 2001.
Chief information officer Mark Halloran says the Pharmacy of the Future, as the Las Vegas facility was called, involved a multipronged information systems development effort. Not only did new software need to be developed to run the automated plant, but a new system had to be devised to accept and process prescriptions in high volumes.
Medcos 700 in-house software engineers tackled the development effort, says Halloran, because there was no off-the-shelf offering available and Medco wanted to protect the technology.
The first piece of the puzzle is what Medco calls its Alpha system—essentially a platform for accepting and processing prescriptions before they are passed on to a pharmacy to be dispensed—which was completed in 1999. The Alpha system is a client-server application, meaning desktop computers communicate directly with specific servers. The system was built using Microsofts Visual Basic programming language and replaced a mainframe Cobol application.
Clients submit prescription orders to Medco in four primary ways: mail, fax, automated voice response (phone) and the Medco.com Web site.
If an order is submitted by automated voice response or online, a Medco pharmacist will contact the clients doctor and confirm the patient is eligible for the medication. With the clients complete medication history stored in Medcos Teradata warehouse, the pharmacist can also confirm how long the client has been taking a medication and whether there may be any conflicts.
When Medco signs on a new customer, such as United Airlines, it performs a data dump—essentially receiving a transfer of the medication history for the companys employees from the employer itself or from its previous pharmacy benefit manager.
Medco employs 2,000 pharmacists, typically based at call centers in Tampa; Dublin and Columbus, Ohio; Irving, Texas; and Las Vegas, to perform this task.
Once a Medco pharmacist approves a prescription, internally developed router software determines where to have it filled. The program takes into account a number of variables, Halloran says, including the clients proximity to the Las Vegas or Willingboro pharmacies, the current availability of the required drugs, workloads at the pharmacies and shipping costs.
Once it determines the most efficient and cost-effective fulfillment method, the router passes a production order on to the companys Pharmacy Automation Control system. The PAC is the brains behind the Las Vegas and Willingboro facilities, telling machines exactly what drugs to put into which bottles and what instructions to pack in the envelopes, then coordinating the printing of labels for bottles and shipping envelopes.
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PAC was also programmed in-house, but was built off a base application originally developed by BAE Systems to control aircraft manufacturing operations. Drug dispensing and aircraft manufacturing seem very different, but Halloran says they share a basic similarity. “Both start with raw materials in one door and finished products out the other,” he says. “The primary benefit [to using the BAE software] is that it employed a system of checks and balances at every stage of the manufacturing process, which we also needed to incorporate into our processes.”
This becomes clear at Willingboro when you consider how the large hoppers, or counting cells, are loaded with individual drugs. The pharmacy receives medication—say, Lipitor, Wellbutrin or Prozac—in large bottles containing from 3,000 to 11,000 pills apiece. When directed by PAC, a pharmacist must load the counting cells with the pills. The counting cells are in a series of five rows, and PAC will allow only one pharmacist in a row at a time to fill a cell to prevent the possibility of the wrong drug ending up in the wrong cell.
The pharmacist who approaches a cell must enter a security code, then scans a bar code on the bottle and on the hopper to ensure there is a match. A sample of the pill in the bottle is compared with a pill sample in a small compartment on the hopper. When the checks are completed, the pharmacist has three seconds to begin filling the hopper with pills. The three-second check is designed to prevent the pharmacist from mistakenly setting a bottle down and picking up a different bottle in error. After filling the hopper, another scan takes place to confirm the drug is correct before the new pills are released into production.
Seven different checks are required, says Jim Flynn, Medcos business development manager, and this process for refilling the hoppers may be repeated up to 4,000 times a day. The hoppers are connected to the bottle-filling machines by vacuum tubes, and no human hands will touch the drugs until they arrive at a customers door.
P.4/5: The Struggle to Move Patients Online
Warehouse
: The Struggle to Move Patients Online”>
As Medco attempts to grow the mail-order pharmacy business, its chief goal is to move as many clients as possible to use its Web site. The reason is simple, says chief executive officer David Snow. Every prescription processed via the Web saves the company $3. At 88 million prescriptions a year, thats a potential savings of $264 million.
But moving clients online is no simple task. Consider the typical user base. Seniors make up about 20% of Medcos total clients, but they are responsible for 53% of prescriptions filled. A study released by the Kaiser Foundation in January found that only 5% of seniors say they have ordered drugs online.
To meet this challenge, Medco launched a major site-redevelopment project in 2001. Besides conducting interviews with seniors and other site users, Medco worked with Cooper Interaction Design of Palo Alto, Calif., to create a series of “personas” representing its target audience.
The idea behind the personas, says Tom Feitel, Medcos e-commerce vice president, was to synthesize the needs and wants of a large segment of the customer base into a single person. “You want the portraits to be so real that if you heard a knock on your door, you could half expect to look up and see that person coming in,” he says.
Working with Cooper, Feitels group created four personas: Chris Bell, a 33-year-old accountant from Atlanta, who suffers from diabetes; Sandra Reizler, a 56-year-old secretary from LaGrange, Ind., who has osteoporosis and cares for her ailing 79-year-old mother; Maude Baruso, 75, of Philadelphia, a retired nurse who suffers from arthritis; and Frank Anderson, a 63-year-old worker at the Denver Mint, who has heart disease and “hates taking all those damn pills.” Complete profiles of the imaginary customers were created, including their individual desires. Frank, for example, wants to stay out of hospital, live a life without restrictions, and be treated like a human, not a condition.
To begin the Web redesign effort, the 100-person development team held a launch party in the fall of 2001 and actors were hired to play the parts of each of the personas.
Feitel says the exercise led to a number of insights that were put into practice. For starters, in its existing Web site design, Medco had used a number of pop-up windows to make promotional offers. “Seniors told us, Stop distracting me. Ill look elsewhere when Ive done what I need to do,” Feitel says. The site also had offered multiple forms of navigation, such as drop-down menus, but the team found that some seniors, particularly those with arthritis or shaking hands, found drop-downs difficult to use, so that feature was eliminated. The team also simplified the process for refilling a prescription. Now, when a user logs in to the site, a view shows him “Prescriptions you can order today.”
Back in 2001, out of 75 million mail-order prescriptions that Medco processed, 7.2 million came over the Internet, or 9.6%. In contrast, by 2004, Medco.com handled 17 million prescriptions out of 87.7 million, or 19.4%. Thats good for an estimated savings of $29.4 million.
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Most significantly, Feitel says, 27% of Medco.coms users are now age 65 or older, significantly higher than the Kaiser Foundations estimate of 5% for the general senior population.
“The insights we gained [with the personas and user groups] were critical,” Feitel says. “Until that point, we developed the site based on what we thought our users wanted.
“Well never make that mistake again.”
Last page: Medco Facts and Figures
Medco Facts and Figures
Medco Health Solutions Base Case
Headquarters: 100 Parsons Pond Drive, Franklin Lakes, NJ 07417
Phone: (201) 269-3400
Business: The largest pharmacy benefit manager and operator of a mail-order pharmacy in the U.S.
Chief Information Officer: Mark Halloran
Financials in 2004: $35 billion in revenue, $482 million profit.
Challenges: Fight back against increased competition from traditional retail drugstores and convince more customers to place prescription orders online.
Baseline Goals:
- Grow mail-order prescriptions to 96 million in 2005, from 88 million in 2004.
- Increase refill orders online by 23% to 21 million in 2005, from 17 million in 2004.
- Increase profit per prescription from $1.83 in 2004 by selling more generic drugs, which offer 18% margin over brand-name.