UnitedHealth Applauds Walgreen

The big HMO signs up with a big retail pharmacy for a lucrative Medicare contract.
By Melissa Davis ,

UnitedHealth

(UNH) - Get Report

is going out of its way to serve the senior population.

It will rely on

Walgreen

(WAG)

, rather than its regular pharmacy benefit manager, to fill prescriptions for Medicare recipients. It chose Walgreen over

Medco

(MHS)

due, in large part, to the drug chain's popularity with senior citizens.

The company's senior health division, known as Ovations, announced its decision on Thursday. And Fulcrum analyst Sheryl Skolnick was quick to applaud the move.

"It appears that Ovations' choice of a retail-oriented partner for a consumer-driven product is better than a choice of an employer-oriented standard PBM," wrote Skolnick, who has a buy rating on UnitedHealth shares. "Simply put, when was the last time YOU called and talked to your PBM? When was the last time

you

went to a pharmacy?"

Still, some had assumed that UnitedHealth might select Medco to handle its new Medicare drug benefit instead. After all, Medco already holds a multibillion-dollar contract to serve as UnitedHealth's official PBM. Last year alone, Medco collected $6.5 billion -- or 18% of its net revenue -- from the giant health insurer. And it has made clear that it hopes to capitalize on new opportunities made possible by sweeping Medicare reforms.

Thus, some viewed the news as a possible setback for Medco.

"UNH is Medco's largest client and has also spoken fairly aggressively about the opportunity to work with its customers in Medicare," wrote Merrill Lynch analyst Thomas Gallucci, who has a neutral rating on Medco's stock. "As such, on the surface, the announcement by UNH to partner with another PBM would be somewhat disappointing."

Even so, Gallucci believes that UnitedHealth remains happy with Medco's services. He says that UnitedHealth simply wanted a partner with a "strong brand image" to deal with the senior population.

"Brand awareness will be important for the Medicare drug benefit," he said, "because each provider generally must sign up seniors on an individual basis."

Medco actually escaped the news unscathed. The company's stock rose 27 cents to $46.21 on Friday. Walgreen -- enjoying a welcome victory over the regular PBMs -- jumped 60 cents to $44.78. Meanwhile, UnitedHealth continued its steady march higher. The stock inched up 3 cents to $91.13 and, by now, has rocketed more than 40% in a year.

Industry Star

Skolnick pointed to UnitedHealth's trailblazing decisions -- like its selection of Walgreen -- as the reason for that strength.

"The depth of the company and its thought processes, the drive to innovate and its willingness to turn a market on its ear to simultaneously create a better health system and enormous shareholder value differentiates UNH from the rest of the ... health insurance pack," she wrote on Friday. "Once again, UNH appears to be leading -- rather than following -- its peers."

By teaming up with Walgreen, Skolnick said, UnitedHealth has chosen to focus on consumers at it expands its Medicare offerings. As a result, she said, Ovation customers can better seek out the best value and service available through their new Medicare benefits. And they can rely on thousands of Walgreen pharmacists to educate them in the process.

Ovations itself stressed the importance of such an arrangement.

"The fact that nearly 30% of consumers said the would likely turn to their pharmacists for help in deciding whether to enroll in a Medicare drug plan ... underscores the value of a program that includes strong retail pharmacy networks such as that of Ovations and Walgreens," the company said on Thursday.

In contrast, some say, Medco offers less personalized service. The PBM has also seen its business practices come under fire by government regulators. It has been accused of bilking government customers and even paying an illegal kickback -- to none other than UnitedHealth -- in the process. It has denied any wrongdoing.

Medco has attracted criticism from its competitors as well. The company has won business away from traditional drugstores -- like Walgreen -- by promoting its own mail-order pharmacy as a cheaper alternative. And it has seen at least one big customer,

General Motors

(GM) - Get Report

, steer employees away from Walgreen as a result.

Victory Lap

Granted, Walgreen has tried to fight back. Following last month's move by GM, Walgreen insisted that it could fill prescriptions more affordably than the mail-order competition. Specifically, the company said it charges an average of $15 less for 90-day prescriptions than do the mail-order outlets.

"It's a myth that mail is always cheaper," said Greg Wasson, president of the PBM operated by Walgreen. "There's more to the story than employers are being told by the big pharmacy benefit managers."

Still, the company's service -- rather than pricing -- seemed to win UnitedHealth over. Even Wasson himself said that Walgreen's new partnership with Ovations "will be built first and foremost around the individual patient."

The two companies will be serving quite a crowd. Right now, Ovations is the only national Medicare player offering a full spectrum of healthcare services. It also boasts the largest pharmaceutical discount card program around.

Going forward, Skolnick views the new partnership -- targeting the crucial senior market -- as another big winner for UnitedHealth.

"The only thing left to figure out is how much money it will make UNH," she wrote. But it "looks like we'll be UNH customers for life, if UNH has its way."

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