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), 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), 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.
Its main pharmaceutical wholesaler, taking up 62% of its 2008 purchases, is AmerisourceBergen ( ABC). Cramer also pointed to Medco's Therapeutic Resource Centers as another tool for reining in costs. The program, according to Cramer, keeps doctors and patients within the borders of certain accepted treatment protocols for varying chronic illnesses, thereby eliminating some waste in the healthcare system. In 2007, Medco began jiggering its pharmacy model around the Therapeutic Resource Center system so that patients with chronic conditions could get access to pharmacists with specialized training in specific diseases. In October 2007, Medco acquired PolyMedica for $1.5 billion to supplement the Therapeutic Resource Centers' treatment and support of patients with diabetes. According to Snow, Medco clients include 25% of the diabetic population, making it the world's largest diabetes pharmacy. The company is also going international. In March 2008, it entered the Swedish market when it partnered with the government's retail pharmacy authority in developing an automated, electronic prescription review network. The next month, MedCo bought a majority stake in Europa Apotheek, a mail-order pharmacy company in the Netherlands. Shares of Medco were up 2%, or 93 cents, at $47.02 in the afternoon. Since the beginning of the year, shares have climbed 9.5%.