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Migraine Time at Medco

October 1, 2004

David Snow Jr., president, chairman and chief executive officer of Medco Health Solutions Inc., a leading pharmacy benefit manager, has every reason to be acutely stressed out. He’s got government regulators on his back, aggressive competitors nipping at his heels, a staggering $1.5 billion corporate debt hanging over his head and clients who don’t have the foggiest idea what his company does. Anyone who’s familiar with the health-care system or with the controversial pharmacy benefit industry recognizes the problem: crisis overload. But to Snow, whose father and grandfather were both physicians, handling tough cases under close scrutiny goes with the territory.

    From his commanding, no-frills office in Franklin Lakes, New Jersey, the 49-year-old health-care executive discusses what it’s like to deal with the increasingly unmanageable network of employer clients, drug manufacturers, physicians, government regulators and workers struggling to hang on to their health-benefits safety net. "It’s an all-consuming job," he says. "It’s always challenging."

    Pharmacy benefit managers save money by negotiating for lower costs than an employer could by itself. They handle administrative chores, operate money-saving mail order pharmacies, set up relationships with pharmacies for walk-in plan members, establish formularies for preferred drugs and offer cost-saving alternatives such as substituting generic drugs for more expensive brand names.

    What employers want to know about pharmacy benefit managers is this: Are their companies getting a good deal? In defense of the industry, the Pharmaceutical Care Management Association has issued a series of press releases on various PBM studies. One, commissioned by Pricewaterhouse-Coopers, estimates that PBMs will save employers $1.3 trillion over the next decade on the cost of prescription drugs. But enough questions have been raised about the industry’s pricing policies that a group of chief human resources officers of major companies, operating through the HR Policy Association, are considering forming a drug-purchasing coalition that they believe might significantly reduce their costs.

    Snow has been on quite a ride since taking over Medco last year to manage its separation from its former corporate parent, Merck & Co. Inc. Medco landed in the 41st spot on the Fortune 500 list of public companies right out of the chute, and Snow has been guiding it from one emergency to another ever since. A vigorous, confident New Englander who was reared in Manchester, New Hampshire, he earned a master’s degree in health-care administration from Duke University in 1978 and has spent his entire professional life in health-care management, holding senior-level jobs with a number of health plans and insurers.

    Veterans of the health-care wars take migraine-inducing problems as part of the job. They sigh, raise their hands as if to surrender, and complain about dumb moves like raising copayments on drugs, knowing that some patients may stop using them and wind up with a far more costly hospital stay as a result. Snow is no different. He’s a big-picture guy, but readily acknowledges that he doesn’t have the ultimate solution to the health-care system’s many problems. "I don’t have an answer," he says flatly. "There is no magic bullet."

    Workforce executives know Medco--if they know it at all--as the intermediary between drug manufacturers and the workers who are the end users of prescription-drug plans. With $34 billion in annual revenues and 13,000 employees, Medco is the dollar-volume leader among pharmacy benefit managers. Medco’s two leading rivals are Caremark Rx Inc., whose merger with AdvancePCS is expected to generate revenues of $20 billion this year, and Express Scripts Inc., which took in $13.3 billion in revenues in 2003.

Soaring drug costs
   
Workforce executives who do not know much about these companies--and Medco’s internal research indicates that many do not--would do well to learn more. Pharmacy benefit managers have a proven ability to reduce the cost of drug benefits, even though some of their pricing and rebate practices have attracted regulatory attention. Although prescription-drug costs are going up faster than payments to physicians and hospitals, studies have shown that PBMs such as Medco can slow the increases. Studies by the U.S. General Accounting Office, the Federal Trade Commission and the Congressional Budget Office show that prices negotiated by PBMs are significantly lower than what consumers would pay in cash at retail pharmacy counters. Michael Kriner, director of global benefits for NCR Corp., is one of those sold on the value of pharmacy benefit managers. The Medco-managed NCR drug plan grew 4 percent to 5 percent in 2003, he says. And spending on prescription drugs is taking an ever-growing piece of the health-care dollar. Research by the Rockville, Maryland-based U.S. Agency for Healthcare Research and Quality shows that spending on prescription drugs as a percentage of total spending on health-care services jumped from 13 percent in 1996 to 19 percent in 2001. Experts say things are likely to get worse before they get better, as the aging population pushes drug demand and pharmaceutical companies keep developing and marketing newer and more expensive drugs.


"I spent my first 90 to 120 days before we went public talking to customers. Our clients include many large
Fortune
500 companies. They demand customer intimacy. They demand that you give them unique end-to-end service and that you modify things to their needs. We were not organized to deliver that."


    Keeping health-care costs affordable is forcing difficult choices on employers. Medco and Harvard Medical School jointly published a study last year showing that dramatic jumps in drug copays may cause some patients to stop taking necessary medications, which could aggravate conditions like heart disease and dangerously high cholesterol levels. Snow has sympathy for human resources executives facing tough trade-offs. "Some of them have no choice because of what they can afford," he says. "That really is the dilemma and the challenge we are dealing with."

    Smarter choices may be one answer. The same study indicates that when employees are given a less expensive alternative--a three-tier system, say, with generic drugs as a low-cost alternative, followed by a second tier with preferred drugs and then expensive brand-name drugs--they stay with their medications longer because their out-of-pocket costs are more manageable. "We ask, why not try the less expensive generic drug before you go to this brand-new whiz-bang brand that costs $50 a pill?" Snow says. "Employers clearly are now more and more willing to make these kinds of decisions as the cost of health care continues to escalate."

    Snow took on leadership of Medco in March 2003, recruited from WellChoice Inc., formerly known as Empire Blue Cross Blue Shield, where he had been president and chief operating officer. At Empire, he helped the company survive the 9/11 terrorist attack that destroyed its World Trade Center headquarters. It was a searing experience that consumed him through months of funerals, relocation and re-building. Eventually, he would lead Empire into a turnaround that resulted in healthy profit growth and ultimately a public offering. Kenny Klepper, a senior vice president at WellChoice who later joined Medco as its chief operating officer, remembers when Snow arrived at Empire. Business was down and the company was struggling. Snow had an immediate impact. "He was and still is intensely customer focused," Klepper says. "He began to drive the view and the voice of the customer through the business. We had become internally focused. He got us talking about the customers." When Merck asked Snow to run its Medco-Merck subsidiary, he accepted the offer. "My career goal was to be CEO of a large company," Snow says.

    Snow has had his hands full getting Medco up and running as a stand-alone company. To finance the deal, Medco floated bonds to take care of the $1.5 billion debt owed to Merck. The bonds are being paid off at the rate of $200 million a year, which cuts deeply into operating revenue. Last year, Medco took in $34.3 billion in revenues, earning $1.57 a share in 2003, although the pre-tax profit margin was a razor-thin 2 percent, according to Standard & Poor’s. Medco counts General Motors, DaimlerChrysler, UPS, United HealthGroup and Highmark Blue Cross Blue Shield among its clients.

    When Snow took over Medco, he faced an array of legal problems. Although PBMs have shown that they can save their clients money, how much of the savings they should keep and how much they should pass on to clients has been the subject of numerous lawsuits aimed at Medco and other PBMs. Clients and prosecutors are troubled by such practices as PBMs receiving rebates from drug companies for putting their products on preferred lists of drugs, or formularies. In effect, the PBMs play the classic middleman role, receiving profits from both ends of the transaction--the drug manufacturers on one hand and the client drug plans on the other. There is also the question, still to be resolved, of whether PBMs have a fiduciary responsibility to their clients under the Employee Retirement Income Security Act. Clients covered by ERISA have been arguing in lawsuits that PBMs have a fiduciary responsibility to plans, requiring them to play more of an administrative role and obtain the absolute lowest price without such things as privately negotiated rebates, acting always in the best interests of retirement and health-insurance plans. Medco argues the point, taking the position that the plans, not Medco, have the fiduciary responsibility under ERISA.

    Clearing up those and other legal problems became a top priority for the new CEO. Earlier this year, Medco settled a four-year-old case filed by the U.S. Attorney’s Office after agreeing to pay $29.3 million to attorneys general from 20 states. Medco admitted no wrongdoing. Among the allegations were claims that Medco, while a Merck subsidiary, drove up health-care costs by encouraging switching patients from one drug to another to increase its rebates from drug manufacturers. Last year, Medco agreed to settle another case for $42.5 million in a dispute over the highly contentious fiduciary issue. Twenty states were involved in the litigation. Although it agreed to settle, Medco did not change its position that it was not a fiduciary and has always asserted that the plaintiffs’ claims were without merit.

    Snow is proud that Medco was one of the first large PBMs to reach a settlement agreement on a big ERISA-related class-action lawsuit. In addition to the financial settlement with 20 states, which was announced last April, Medco promised to change its business practices by disclosing such things as financial incentives that may be involved in drug recommendations to patients. "We were the first to sit down with the state attorneys general and go over their concerns," Snow says. Massachusetts Attorney General Thomas Reilly was widely quoted as saying that the settlement "set the gold standard for how we expect PBMs to operate."

    The lawsuits figured in the loss of at least one major account. But other clients are staying with Medco. Gerald Smith, a vice president at Aon Consulting Inc., whose 25,000 employees are on a Medco prescription-drug plan, says that "pricing is only one component of many." Just as important are innovative steps Medco has taken by setting up what he describes as Star Wars-type automated mail-order pharmacies, where robotic arms count pills and fill prescription bottles. He gives Medco high marks for performance, safety and quality.

Getting customer-friendly
    Snow says there’s a lot of bridge-building to be done with clients. "I spent my first 90 to 120 days before we went public talking to customers," he says. "Our clients include many large Fortune 500 companies. They demand customer intimacy. They demand that you give them unique end-to-end service and that you modify things to their needs. We were not organized to deliver that."

    Through e-mails, meetings, closed-circuit television and visits to outlying Medco facilities, Snow hammers away with his message that the company has to provide better service to clients. "But it’s a slow process," he says. Meanwhile, among Snow’s moves to cut costs at Medco are the cancellation of full medical benefits for retirees starting at age 55 and the closure of a call center and pharmacy in New Jersey that eliminated 700 jobs.

    Conceding that it had an identity crisis and needed a stronger image, Medco recently launched a national public relations campaign that involves full-page ads in newspapers and magazines, to be followed up by regional symposiums, white papers and mail campaigns. Acknowledging that PBMs might be giving people headaches, Medco’s ads promise "fast relief from prescription benefit aches and pains" and vow that Medco will make "you feel better about your prescription benefit plan."

    Jack Smith, Medco’s chief marketing officer, says the company was getting lost in big packages of health benefits put together by employers. "We serve 60 million members worldwide, yet they barely know who we are," Smith says. "We need to tell them who we are and what we do, that we’re not just a claims-processing business."

    Andrew Speller, a senior health-care analyst at A.G. Edwards & Sons, says that Medco is trying to reinvent itself. "They did get something of a bad reputation," Speller notes. "Their business model is designed around lowering drug costs for the client, and under its previous ownership, under Merck, they got away from that. They are getting back to that now."

    Speller says he believes that Caremark, with its purchase of AdvancePCS, rivals Medco as the industry leader. But he says Snow seems to be doing all the right things. "He came into a tough situation." Overall, Speller says, the pharmacy benefit management industry is solid. "Human resources folks are getting fairly sophisticated. The companies that can execute on lowering pharmacy costs are going to be the winners in the end," he says. "For Medco in particular, while they have had their challenges in gaining new business, the changes Snow has made indicate they are positioning themselves for growth in 2006 and beyond."

    Snow doesn’t want to wait that long, although he knows from his father and grandfather that the health-care business requires patience. The challenge is that the success of Medco is inextricably tied up with the future of a health-care system that is maddeningly complex and inefficient. Reflecting on his professional choices, Snow says he’s certainly never been bored. "There is a tremendous need for innovative thinking. But I have no illusions that I am going to find the ultimate solution in my lifetime."

Workforce Management, October 2004, pp. 37-43 -- Subscribe Now!