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PAID RX'S 2.7 MIL. CARDHOLDERS GENERATED 26 MIL. DRUG CLAIMS IN FY 1986; PAID ACQUIRED BY POREX IN 1985 FOR TWO TIMES SALES TO MESH WITH RX MAIL BUSINESS

Executive Summary

PAID Rxs' 2.7 mil plastic cardholders generated approximately 26 mil. Rx drug claims in pharmacies enrolled in the drug claim processing service in fiscal 1986, Medco Containment Services Exec VP James Manning said at a health care seminar sponsored by Morgan, Olmstead in New York Oct. 28. PAID was merged into an affiliated mail order company, Medco, in March 1986 by the parent company Porex. "The dollar volume of these claims amounted to approximately $364 mil.," Manning noted. "PAID gets an administrative fee for processing the claim, but the dollar value of the claims process gives an indication of the type of retail value of these claims." A recent prospectus for Medco shows that in fiscal 1986 (ended June 30) PAID revenues were $14 mil., up 4% over the previous year, while net income slipped 6.2% to $664,000 ("The Pink Sheet" Sept. 22, T&G 8). After seven years as a subsidiary of Computer Corp. (CSC), PAID has resurfaced as a part of the Porex strategy to cash in on the cost-containment environment. Porex paid a high price to CSC for PAID in January 1985 -- approximately $28 mil.: $14.7 mil. in cash and 560,000 shares of Porex, then valued at approximately $13.4 mil. PAID Rx was originally a non-profit corporation working with the Bergen Brunswig subsidiary, Health Application Systems, to run third-party Rx benefits. The "key aspect" of PAID's services, Manning explained, is the company's "ability to put together specialized PPO network of pharmacies to handle specific business." Manning said that PAID has been able to sign up a "high percentage" of drug stores approached to join the program "who will offer a significant discount from their typical retail price" because of the increased store traffic associated with the program. PAID currently has 48,000 pharmacies that accept the plastic card, up from 47,000 a year ago. Manning asserted that Medco's integration of a mail order business with PAID gives the firm advantages over "stand-alone plastic card programs." Manning maintained that "owning both a mail service operation and the claims processing operation enables Medco to provide a flexible program designed to maximize cost containment for the plan's sponsor." As cost saving factors, Manning cited the inherent savings from a mail service; reduction in repetitive administrative and dispensing fees; the avoidance of potential abuses in the retail environment; and the ability of the Medco program to provide "exactly the number of days supply of medication that has been ordered by the doctor and received by the patient." PAID assures health plan sponsors that its price for drugs "will be the lesser of the AWP . . . or the amount that is submitted by the network pharmacist (which is lower than AWP in approximately 30% of these cases)." PAID said it "believes that its strict adherence to these pricing guidelines saves an average plan sponsor approximately 15% to 20% of the total cost of providing a Rx drug benefit when compared to conventional plans where the third-party administrator or plan sponsor pays whatever amounts are submitted by the retail pharmacist." PAID plans usually include a co-pay for cardholders that can range up to $7.00, the company reported. Medco indicated in the prospectus that PAID's primary competition is McKesson's Pharmaceutical Card System (PCS), "which the company believes process approximately 50% more claims" than PAID. According to a recent PCS prospectus, the McKesson subsidiary processed 43.1 mil. claims in fiscal 1986 (ended March 31) and should process over 50 mil. claims in fiscal 1987 (see story, p. 3). Medco markets its mail order business and PAID "nationally through a sales/marketing organization of 42 persons, including a sales force of 15 account executives deployed in major cities throughout the country." The company's four major customers are General Motors Corp. (10.4% of FY 1986 sales), the Public Employees Retirement System of Ohio (10% of sales), the International Ladies Garment Workers Union (9.2%), and the State Teachers Retirement System of Ohio (8.1%). Combined, the four groups accounted for $51.3 mil. of Medco's corporate sales of $136 mil. in fiscal 1986.

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