Medco's Transition to a Transparent Business Model

In an effort to make its business model more transparent, Medco Health Solutions, the second largest independent pharmacy benefit manager, first disclosed in 3Q2004 that its rebate retention rate was 40.5%.In the nine months since disclosure, Medco has allowed its rebate retention rate to drop to 28.1% and it has seen its rebate share of gross profits decline from 71.7% to 48.0%. Yet, Medco has been able to maintain its overall gross profit margin by moving toward cost-based pricing for its captive mail order operations and claims processing.