Scaling Up for the Web

By John Webster

August 27, 2001 12:00 PM ET

Computerworld - In the hotly contested pharmacy benefits management (PBM) market, size decidedly matters. That's why Advance Paradigm Inc. last year acquired PCS Health Systems Inc. for $675 million and another several million dollars in stock to create AdvancePCS, making it the nation's largest pharmacy benefits manager, with 4,500 employees and 75 million members. This year, AdvancePCS is expected to manage 600 million prescription transactions, worth $21 billion.

The bigger a PBM, the more clout it has with the drug manufacturers that supply its products and the health insurers that make up its client base. But to operate effectively, a PBM needs the IT resources to not only process benefits claims quickly, but also to deliver useful Internet-based services to members and business partners, according to analysts.

"Claims processing is a low-margin business, and you need scale to be profitable," says Ken Miller, an analyst at J.P. Morgan H&Q in San Francisco.

Internet-based services, which depend upon a firm's ability to aggregate large amounts of data, are expected to become essential for PBMs to remain competitive, and AdvancePCS plans to make them a key part of its business strategy.

"This will let us not only save money, but generate revenue," says Jon Halbert, vice chairman of e-business and technology at the Irving, Texas-based company.

JUST THE FACTS

AdvancePCS

Company: AdvancePCS, formed by the October 2000 merger of Advance Paradigm Inc. and PCS Health Systems Inc.

Headquarters: Irving, Texas

Employees:4,500

Description: AdvancePCS manages outpatient pharmacy benefits for health insurance providers.

Fiscal 2001 Financials Fourth quarter ended March 31

Revenue: $7 billion

Earnings: $149.6 million

(excluding merger costs and $11.1 million in nonrecurring charges related to the acquisition of PCS Health Systems)

Easy-to-access health care information will become increasingly important in helping PBMs woo clients such as big health insurers and pharmaceutical giants, says Tom Gallucci, a health care analyst at New York-based Merrill Lynch & Co.

"PBMs have to ask themselves, What can we do with the information we have in order to offer value to our clients? And the Internet lets them offer more value-added services such as disease management," says Gallucci.

For example, browser-based access to aggregated patient data, drug information and laboratory test results would allow a health maintenance organization to see how effectively certain drugs are working for a health plan member, he says.

Although such value-added services could become key differentiators among PBMs, they aren't significantly enhancing the bottom line—at least not yet. Nonetheless, AdvancePCS is trying to leverage the Internet to its advantage and help it win new business, adds Miller.

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