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9/26/2003

Medco Becomes Standalone Firm

Cheryl A. Thompson

Ten years after becoming part of the world's largest pharmaceutical firm at the time, Medco Health Solutions Inc. parted from Merck & Co. Inc. on August 20 in an arrangement that seems to give the drug manufacturer a short-term advantage on many formularies designed by the pharmacy benefit management company (PBM) and financial protection in several lawsuits.

The spinoff of Medco Health to Merck shareholders occurred about the same time that the drug firm had originally planned to make its wholly owned subsidiary a separate company.

Merck in April 2002 had announced its intention to make an initial public offering (IPO) of no more than 19.9% of Medco Health's common stock shares in mid-2002 and then divest the rest to Merck shareholders within 12 months. As the time of the IPO drew near, Merck changed its plan. All shares of Medco Health were distributed to Merck shareholders in direct proportion to their holdings in the parent company.

Business as usual. John Long, Medco Health vice president of professional practices, said that, from a patient care perspective, it's business as usual for pharmacists employed by the New Jersey-based company.

"Nothing's really changed with respect to the practice of pharmacy" at the company's network of 16 pharmacies across the country, said Long, who joined the firm in 1987 when it operated as Medco Containment Services Inc. His office is in Columbus, Ohio, home to one of the firm's self-described conventional pharmacies and a call-center pharmacy (see box).

Network of 16 Keeps Prescriptions Moving

Medco Health filled or processed about 548 million prescriptions in 2002 at its

  • Conventional pharmacies in Columbus, Ohio; Richmond, Virginia; and Tampa, Florida;  
  • Prescription processing centers in Cincinnati, Ohio; Dallas, Texas; Parsippany, New Jersey; Pittsburgh, Pennsylvania; Spokane, Washington; and Tampa;  
  • Automated prescription dispensing centers in Las Vegas, Nevada; and Willingboro, New Jersey; and  
  • Call-center pharmacies in Columbus; Dallas; Dublin, Ohio; Las Vegas; and Tampa.

Vice President John Long, who oversees Medco Health's professional practices, said that, despite the national shortage of pharmacists, the company for the most part has recruited and retained full staffs of pharmacists in most locations.

Medco Health's 2000-some pharmacists who work in the pharmacies are not involved in negotiations with health plans or pharmaceutical firms, he said. These pharmacists verify prescriptions' appropriateness and insurance coverage, perform drug-use reviews and special evaluations of medication regimens taken by seniors, compound formulations, and counsel patients.

Ongoing agreement with Merck. A five-year managed care agreement with Merck, covering 2002–05 and described in the prospectus Medco Health filed with the Securities and Exchange Commission, calls for the PBM to

  • Place all Merck products protected by patent on the most-preferred tier for brand-name products in Medco Health's standardized formularies,  
  • Discuss patent-protected Merck products with all health plans,  
  • Try its best to ensure that consumers whose pharmacy benefits are managed by Medco Health have the same or better access to patent-protected Merck products as to competitors' patent-protected products,  
  • Give Merck the opportunity to tell Medco Health's clients about the drug firm's products and to receive copies of the PBM's recommendations about those products, and  
  • Achieve a certain market share for patent-protected Merck products every quarter or pay a penalty.

Medco Health's public affairs director Soraya Rodriguez said the agreement "sets forth the terms under which we continue to receive rebates from Merck, which is only our third largest source of manufacturing rebates." She declined to name the first and second largest sources of rebates.

The prospectus declared that Merck's rebates accounted for about 15% of the rebates earned by Medco Health in 2002.

"Medco Health operates in a highly competitive market," Rodriguez said, explaining that the company must "put the needs of the clients and members first."

"Our therapeutic interchange program is approved by a committee of recognized and independent physicians, pharmacists, and clinical authorities," she said.

Litigation. When Merck bought Medco Containment Services Inc. in 1993, many people feared that the subsidiary would favor its parent's products in designing pharmacy benefits plans.

Accusations that the PBM favored Merck's products over less costly comparable ones from competitors, received certain payments that violated federal "anti-kickback" laws, and neglected supposed fiduciary responsibilities under the Employee Retirement Income Security Act resulted in several lawsuits and at least one federal investigation (see January 1, 2003, AJHP News). Medco Health would indemnify Merck in these lawsuits, according to the prospectus, and Merck would indemnify Medco Health in ongoing litigation against numerous drug manufacturers, wholesalers, and PBMs for activities related to rebates and discounts on purchases of brand-name pharmaceuticals.

Under a 1995 settlement agreement with 17 states, pharmacists affiliated with the mail-order service have had to tell physicians, when discussing a brand-name alternative to the prescribed product, about the financial relationships among the mail-order pharmacy, Medco Health, and Merck.

Five days before the spinoff, the National Community Pharmacists Association and the Texas-based Pharmacy Freedom Fund said they filed a federal lawsuit against Medco Health, alleging it reduced or eliminated competition among pharmacy benefits sponsors in their dealings with community pharmacies. The Pharmaceutical Care Management Association, representing PBMs, called the lawsuit a sham.

A switch to generics. Medco Health said it generally earns higher margins on generic products dispensed by its mail-order pharmacies than on brand-name pharmaceuticals.

The company's use of generic pharmaceuticals increased to 43% of all prescriptions dispensed in the second quarter of 2003, compared with 39% for the same period a year earlier. This increase was cited by the company as the main reason its second-quarter net income increased by 1% from a year before.

Sixteen pharmacists in 15 states work full- or part-time on Medco Health's Generics First education and sampling program, said Rodriguez.

Through the Generics First program, introduced in late 2000, the pharmacists encourage physicians in inperson visits to start patients' regimens with a generic drug product, if appropriate, instead of a brand-name medication. Highmark Blue Cross Blue Shield in western Pennsylvania, Medical Mutual of Ohio, and Oxford Health Plans in New York, New Jersey, and Connecticut are among the health plans that partnered with Medco Health in the program.