Make Money Off Medicare Changes

This column was originally published on RealMoney on Aug. 30 at 3:01 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

"With the Medicare Act of 2003, our government is finally bringing prescription drug coverage to the seniors of America..."

Those words were uttered by President Bush in December 2003, and the ensuing legislation resulted in Medicare's new prescription drug coverage, sometimes called Medicare Part D, which starts on Jan. 1, 2006.

This is a big deal, and it couldn't come at a better time for society, or for the stocks of several companies.

The U.S. currently spends roughly $1.9 trillion on medical care, or more than 15% of GDP, the highest rate in the developed world. And it's only going to get more costly: According to the Centers for Medicare and Medicaid Services, or CMS, total national health care expenditures could top $2 trillion by the end of next year.

While those figures are shocking, the cost of prescription drugs is increasing faster than other components of health care, which is of particular concern as America's population goes gray. People over the age of 65 currently comprise around 15% of the population but account for a full one-third of prescription drug consumption. Imagine, then, the financial impact on the country's health care costs as this demographic grows to 30% of the population in the next decade.

Congress developed Part D to help the 42 million Medicare participants with the cost of prescription drugs. After all, these folks are projected to consume a whopping $1.8 trillion of prescription drugs over the next decade. To curb these costs, an estimated 30 million Medicare patients could enroll in prescription drug insurance plans.

Many seniors will be relieved come January, and that's important. But this is, after all, an investment-oriented Web site, and many companies -- from a variety of different industry groups -- stand to benefit from Medicare's prescription drug plan. Under the timeline set by the federal government, companies can't release details of their individual plans until Oct. 1, 2005.

PBM Revs Its Engines

But one group, pharmacy benefit managers, or PBMs, already is helping ease the costs of prescription drugs. By creating large networks of participating retail and mail-order pharmacies, PBMs use their buying power to secure discounts and drive down drug prices. They also handle the delivery of high-priced specialty drugs that often require special handling, dispensing and administration.

The largest player by market value and revenue is Nashville, Tenn.-based Caremark Rx (CMX).