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A prescription-drug provider says it can thrive even as it helps drive down health-care costs. An interview with Richard Rubino, CFO, Medco Health Solutions Inc.
Alix Stuart, CFO Magazine
June 1, 2010
Richard Rubino began college with an interest in dentistry, but ended up in quite a different part of the world of medicine. As the CFO of Medco Health Solutions, the country's largest pharmacy-benefits manager, Rubino helps to provide prescription medications to approximately 65 million people. A $60 billion company, Medco designs, oversees, and administers employee prescription-drug programs for companies and insurers, among others. Its primary role is that of middleman, buying drugs from wholesalers and reselling them through mail-order services. Among its ancillary services is the Medco Research Institute, which is using technology to ensure that patients get the right drugs, remember to take them, and avoid adverse interactions — in part through a new set of services directed at physicians to help them prescribe drugs based on a patient's personal genetics.
The 52-year-old Rubino, who worked for IBM and PricewaterhouseCoopers before joining Medco in 1993, hopes the efficiencies Medco has helped create internally will have larger implications for the health-care system as it strives to cut costs. "We have a 99% client-retention rate, and our clients stay with us because we're sucking the waste out of the system," he says. "We're reforming health care on our own."
Your net revenues were up 17% last year, with a nearly equal increase in net income. Is your business essentially recession-proof?
What we saw was, while more-expensive brand-name drugs were not being utilized as much as they had been, lower-cost generic drugs actually increased in utilization. That's very important for our clients and patients because it saves them a lot of money. It's also good for Medco, since currently we make about half of our profits dispensing generics through mail order. For every $100 million of a brand-name drug that goes generic, our clients save $50 million, and Medco makes an additional $10 million because there's a much higher margin on generics.
How else do you make money?
We have specialty pharmacy: very, very expensive drugs, for diseases that include cancers, pulmonary arterial hypertension, multiple sclerosis, hemophilia, and rheumatoid arthritis. [Sixteen percent of Medco's revenues came from this segment last year.] But the majority of our revenue [62%] comes through the retail channel, where a member can go to any retail pharmacy and Medco reimburses that pharmacy for having dispensed that prescription. Alternatively, a consumer can go straight to Medco [for mail order], because you can get the convenience of a 90-day supply in your mailbox and you can save a lot of money.
Does Medco benefit more from one channel versus another?
We make much less per prescription on retail than we make from mail. But the interesting thing about retail is that we don't have any invested capital: we don't own the bricks and mortar or the inventory. So our return on invested capital [ROIC] in the retail environment is actually very high.
Medco added ROIC to its bonus performance metrics this past year. Is it something you focus heavily on?
It's core to how I manage the business. ROIC was about 20% in 2008, it was more than 27% in 2009, and I've guided the investment community to well over 30% in 2010. For a company that has around a $17 billion balance sheet, that is quite a feat. One of the ways we've gotten there is by focusing on right-sizing our working capital. The largest single component [involved taking] several hundred million dollars out of our inventory balances [from] their high point in the middle of 2008. We were over $2 billion [in inventory] and now we're in the $1.3 billion range. I would like to bring it down this year to $1.1 billion. [For more on working capital, see "Working It Out."]
Everyone is looking at the health system and saying we need major changes. How does it look for the prescription-drug business?
Five years ago, the business model was very much focused on utilization: How many pills are being used? Now, we're applying intelligence that will result in the nondispensing of a drug. This is a very different model. And what you're going to see over the next several years is that Medco's profitability will become much more service-oriented, with various offerings to reduce inappropriate or unsafe drug use [including analyses of patients' prescriptions for possible drug interactions, and genetic testing]. Pills are only about 10% to 15% of the total cost of health care. So as a finance guy, I look at pills as an investment to drive total health-care costs down.
Medco is a middleman, but you seem well positioned to influence how the health-care system as a whole approaches prescriptions.
I believe that what we're doing at Medco today will change how pharmaceutical manufacturers develop drugs tomorrow. Because it's not like it was five years ago, where you targeted a broad disease state and you came out with a medicine for, say, lowering cholesterol and you just hoped that everybody in that disease state started taking your drug. Those days are gone. The new era with personalized medicine is what we call smarter medicine. And manufacturers are going to have to figure out who their target market is, where their drug is of the highest level of efficacy, and be less focused on having a cure-all for the masses.
You made an acquisition with that in mind?
We just bought a company called DNA Direct. It's very small, but it helps clients, patients, and payers make sure that patients who need genetic tests are getting the right tests at the right time. The return on investment to our clients is huge, because we're keeping the patients out of the hospital, the most expensive part of health care.
You have some personal experience with the potential for such testing.
Yes, my dad, back in 1992, had a quintuple bypass. After the surgery, which was successful, the doctor gave him Coumadin. Two weeks later he had a massive brain hemorrhage because he didn't metabolize the Coumadin properly. He needed neurosurgery and was in rehab for six months and never fully recovered. Today, he would have been tested for Coumadin metabolization, gotten the right dose, and had no neurosurgery and no rehab, eliminating a million-dollar health-care bill.
How do you think health-care reform will affect Medco?
[For one thing,] Medco would have access to about 30 million Americans who don't have insurance today. For employers that were receiving the retiree drug subsidy, this can be an opportunity for them to change to an Employer Group Waiver Plan and sign up with a prescription-drug program. We have a PDP, and while it's relatively small as a percentage of our business, it has grown more than 75% in the last year. There will also be a lot of opportunity to work with the government on various comparative-effectiveness and cost-reduction studies.
Could "personalized medicine" help protect doctors from medical-malpractice lawsuits?
I would say that the more knowledge the physician applies in treating a patient the better off he'll be with regard to a tort case. Doctors who take advantage of the latest science in these personalized tests, and those who are wired, are going to provide better care and should theoretically have less exposure to catastrophic lawsuits.