'Mad Money' Spotlight: Cramer Prescribes Medco

With our nation's capital abuzz with talk of the health-care reform that may or not come, Jim Cramer took the time to explain one corporate player that could weather the storm just fine. In fact, Cramer thinks its cost-cutting ways are a model for the health-care system.

That company is Medco Health Solutions(MHS Quote), whose CEO, David Snow, dropped by Cramer's studio to talk about the regulatory environment.

Medco is one in a segment of players in the prescription benefit-management industry. The field, which began growing in the 1980s, uses its market position to negotiate drug discounts from manufacturers, distributions and pharmacies. Companies like Medco use bargaining power to extract cuts and discounts, passing along savings to clients and pocketing some of the difference.

Medco, the 800-pound gorilla of the industry, is also the largest mail-order drug company. In 2008, it administered a mind-numbing 586 million prescriptions, 105.8 million of which came through its mail-order pharmacy system.

The company, based in Franklin Lakes, New Jersey, also makes money when drugs go from brand name to generic. According to Cramer, for every $100 million of brand name drugs that end up in the generics pile, Medco pockets $9 million while its clients chalk up $45 million in savings. In the next few years, as much as $104.7 billion in drugs may lose their patents, meaning more potential for future growth.

In all, Medco serves more than 60 million people while working with more than 60,000 retail pharmacies to provide discounted rates for patients.

It's not surprising, then, that the company is not unfamiliar with the ways of Washington. According to The Associated Press, Medco spent at least $3.5 million to lobby the federal government between January 2008 and last March, concentrating on health-information technology, patient privacy and chronic-care management issues.

At the end of 2008, Medco's largest client was UnitedHealth Group(UNH Quote), which represented 21%, or $11 billion, of net revenues. Medco's 10 biggest clients accounted for 45% of revenues, though none of the others took up more than 10% by 2008. Other clients cut across a large swath of insurance carriers, third-party benefit plans, unions and the like.