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MEDICAID PATIENT POPULATION MAY BE MORE ACCESSIBLE TO Rx BENEFIT MANAGEMENT FIRMS UNDER CLINTON HEALTH CARE REFORMS AND HIPCS, MEDCO MAINTAINS

Executive Summary

Medco Containment Services hopes to ride the Clinton health care reform plan to increased access to the Medicaid outpatient drug population, estimated to represent about 12%-14% of the current ambulatory prescription drug market. The prescription benefit management and mail-order company believes it will benefit if Medicaid plans are folded into the purchasing alliances described as the centerpieces of the reform plan. Medco Chief Financial Officer James Manning told an Alex. Brown & Sons investment seminar May 11 in Baltimore that "the impact on Medco...will be to further expand our available market." Manning pointed out that the Medicaid market "has been very difficult...for Medco to break into because of the restriction on states to enter into managed care arrangements with companies like Medco, but this will solve that situation." Medco is getting a toehold in the Medicaid market in advance of the Clinton plan through its October 1992 agreement with EDS to act as the prescription point-of-sale processing subcontractor where EDS is the Medicaid contractor. Medco is already providing utilization review services in about half a dozen states, including Vermont and Indiana, as an outgrowth of that arrangement. The company will pick up another major account on Jan. 1, 1994, when it will begin providing prescription claims processing for the Medi-Cal program. As part of the processing, Medco's PAID subsidiary will also provide concurrent drug review for Medi-Cal drug beneficiaries. Medco maintains that the claims processing business represents a first step towards further services. The company reports that about a half-dozen clients asked Medco to move from handling drug claims processing to managing their retail drug spending at the beginning of this year. As of May 1, Medco is providing managed care pharmacy plans for clients covering 10 mil. lives: 8 mil. in plans with the Medco integrated mail-order and retail plans and 2 mil. in mail-order only formulary plans. Medco claims that the formulary component creates additional savings to sponsors of 5%-10% on drug costs. Medco agreements cover a total of 33 mil. eligible lives -- 14 mil. under an integrated mail-service/retail program and 19 mil. under mail-service only -- and the company estimates that the total drug expenditures on eligibles in its programs now represent between 15% and 20% of total U.S. outpatient drug spending. The adoption of a Medicare outpatient drug benefit may pose a challenge to Medco if currently covered retirees in Medco plans switch to a government plan. Manning discounted that threat, however, in his comments to the Alex. Brown meeting. He said the effect of a Medicare outpatient benefit would be "minimal." Manning noted that "if employer coverage is retained," many Medicare eligibles will continue to be covered under Medco managed programs. About half of the current Medicare eligibles are covered under retiree plans, Manning pointed out. The Medco exec also referred to indications from the Clinton health care reform task force that the Medicare drug benefit may be made less generous than the private plans serving the health alliances in an attempt to drive Medicare beneficiaries into the private plans ("The Pink Sheet" May 3, p. 3). Similarly, Express Scripts President Barret Toan said that in the case of "the majority" of reforms considered by Hillary Rodham Clinton's task force, "whether it's universal coverage, small group insurance reforms or health alliances, or administrative features...our company has, I think, a good position, and hopefully the impact on [us] will be positive, although obviously none of us can know for sure." Value Health anticipates "services being bought by these purchasing coalitions," President Robert Patricelli noted. "We see potentials for selling particularly prescription drugs -- low cost prescription drug programs -- to HMOs and others who are competing in the HIPC market." In addition to the changes expected from the Clinton reform effort, Medco pointed out that its efforts to create smaller, more specialized panels of retail pharmacies for clients as a cost control mechanism also has implications for the future of the mail-order business. As the approved retail outlets become less convenient, the company points out, its mail-order business becomes more attractive to customers. Through the nine months ended March 31, Medco's drug benefit business continued to maintain volume growth above 30% -- rising 33% to $1.65 bil. from $1.24 bil. Operating earnings climbed at almost double that rate, jumping 57% to $158 mil. with operating margins expanding to 8.5% compared to 7.4% in the same period in fiscal 1992. Medco's growth in the drug benefit management business is not closing the field to other players. In addition to Medco's 30%-plus growth, Value Health is showing an almost doubling of its business (95%) in first quarter revenues; Express Scripts reported a 79% revenue increase and a 102% jump in earnings. Value Health added 70,000 new members to its retail pharmacy program and 100,000 to its mailservice program when American Airlines enrolled with the company on May 1. The total number of lives now covered by the company's prescription drug services is about 7.5 mil., Patricelli said. Express Scripts prescription drug programs cover 3.5 mil. lives, according to Toan, after adding 1.6 mil. lives to its drug coverage in the nine months since the company initially went public last year. The company says it maintains 25 different pharmacy networks to serve its customers. The company's clients save 15.9% on prescription costs from independent retail pharmacies, 16.3% from chains and 5.5% from deep discounters. Medco attributes much of the margin growth to the increased dispensing of its "preferred" or "contracted for" drugs, which provide higher operating margins. The company reports that preferred drugs now account for 25% of Medco's mail-service revenues, up from 13% a year ago. The company hopes to double that percentage by 1994 by obtaining additional therapeutic categories, increasing the market share of preferred drugs and increasing Medco customer participation. Somewhat offsetting the margin expansion from the preferred product arrangements, the company notes that when it takes over managing a client's drug spending fully and gets paid on a per prescription basis, Medco's margins decrease. The prescription reimbursement is recorded in Medco's sales total, but the company has to show the costs of fulfillment in its costs of business. "The formularies and prudent prescribing programs have a very significant impact on both our financial performance as well as our cost-effectiveness in the marketplace," said VP for Strategic Marketing and Planning Per Lofberg. "They provide significant incremental cost savings to the payor, and also incremental earnings to Medco." The conversion rates for Medco's counter-detailing efforts range from 80% of physicians who will change a nitroglycerin patch prescription when contacted by Medco to 26% who will change an NSAID prescription. Medco continues to promise to "get more invested in the retail environment to push the preferred drugs and to communicate with physicians and patients in trying to move market share to the preferred drugs or the manufacturers who participate in these programs," said Manning.
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