Merck's Getting Out of Medco....Not

Superficially, Merck’s sale of Medco Behavioral to management and Kohlberg Kravis sounds like the first rumblings of disappointment in Medco. It isn’t. For both profitability and strategic reasons, Medco Behavioral didn’t fit with Merck’s disease management goals.

Medco Behavioral makes its money not by reducing utilization—the object of most of Merck Medco’s other programs—but by steering patients to less expensive, network-affiliated providers. For example, if an out-of-network provider charges $30 for a patient visit, the insurance plan needs to pay $30. Medco Behavioral seeks discounts from its network providers, who might charge $15 per visit. Medco Behavioral would charge the plan $20, saving it $10—and still have $5 for itself.

But once Medco Behavioral has implemented its incentives, switching most patients to networked providers, its ability to continue to increase its margins diminishes. Moreover, since Medco Behavioral isn’t truly incentivized to reduce utilization (it makes more money the more services are used) it opens itself up to further scrutiny from providers: why shouldn’t Medco Behavioral pass on more of the savings to its customers?

Merck Medco, on the other hand, wants to concentrate on “per member, per month” reimbursement—getting paid for cutting utilization and increasing the quality of care. Savings on drugs can be a big part of total savings—which allow for important clinical, technological and informational synergies with its parent. In contrast, implementing drug benefit programs into Medco Behavioral would drive comparatively tiny savings for clients: the real profits are in the discounts it drives from network providers. Seen in this light, Merck’s decision to sell Medco Behavioral, and simultaenously sign both a co-promotion and a disease management deal with Wyeth-Ayerst, indicates Merck’s renewed focus on Merck Medco’s core mission.