Medco, Caremark Itching to Play Medicare Card

Health care companies are lining up to sample a new growth hormone.

This spring, dozens of health care players will participate in a trial designed to test a new Medicare drug benefit that, if successful, could generate substantial new business for the industry. So far, 28 companies -- including the three dominant pharmacy benefit managers, Medco Health (MHS), Caremark (CMX) and Express Scripts (ESRX) -- have been authorized to begin offering discount drug cards this June.

The cards themselves may do little to boost near-term industry profits, but they will allow participating companies to forge important relationships with Medicare customers before the full-blown drug benefit takes effect in 2006.

"We see the card program mostly as a test of whether the bigger drug benefit will be successful," Prudential analyst Diane Duston explained in a research note last week. "Sponsors of the new drug card are investing in a temporary program, which would hardly seem worthwhile unless it leads to business in the larger drug benefit."

Participating companies will offer the cards -- providing discounts of 10% to 25% on prescriptions drugs -- for a $30 fee that, Duston believes, won't even cover administrative costs associated with the program. But the companies will still enjoy some benefits as they wait for big returns down the road. For starters, Duston noted, they can rely on the federal government to market their cards to millions of Medicare beneficiaries. The government hopes to shift seven million people -- or nearly 18% of the total Medicare population -- onto discount drug cards before the full benefit kicks in.

PBM Headaches

A startling report warned last week that the new prescription drug benefit could shave two years from the life of a Medicare program that, without changes, could wind up bankrupt by 2019. But industry players, who have pushed the Medicare reforms, remain optimistic. The PBMs -- eyeing a new multibillion-dollar market -- are especially excited.