UnitedHealth CEO: Assessing Options On Medco Relationship

UnitedHealth Group Inc. (UNH), one of the largest U.S. health insurers, is weighing the future of its relationship with Medco Health Solutions Inc. (MHS) and whether to bring in-house some of the drug-benefit business that Medco handles for its health-plan members.

UnitedHealth is Medco's largest customer and accounts for some 17% of revenue and a significant percentage of profit; the contract between the two companies runs through 2012. While UnitedHealth says it has a good partnership with Medco, the insurer also has been investing in its own large, in-house pharmacy benefits manager, OptumRx, and believes it could benefit by bringing some business in-house, United's CEO said Wednesday.

OptumRx is "a very capable" and scalable platform, UnitedHealth Chief Executive Stephen Hemsley said at a Sanford C. Bernstein conference.

OptumRx, formerly Prescription Solutions, serves outside customers, a portion of UnitedHealth's commercial members and its Medicare and Medicaid plans. Medco handles pharmacy benefits for a substantial portion of UnitedHealth's commercial health plan members.

"We are making assessments about how we will proceed going forward and we may proceed in a continued relationship with Medco in some fashion, but ... also obviously have the option and the capacity to in-source the business that we [have] with Medco today," he said. "We believe that that can be positive to our business as well, so we are sorting out the best course of action."

UnitedHealth hasn't reached "closure" on the matter yet, but needs to do so this year because of the timing of a potential conversion, he said.

While investors have known for some time that UnitedHealth was considering moving its Medco business in-house, such a move would follow some significant business losses for one of the largest U.S. pharmacy benefits managers.

In a surprise to the market, Medco recently lost to CVS Caremark Corp. (CVS) a multibillion-dollar contract to provide mail-order pharmacy and other services to more than five million U.S. federal employees, retirees and dependents, prompting a selloff.

Medco also was dropped this year from consideration for renewal of a large contract with the California Public Employees' Retirement System amid questions surrounding more than $4 million in payments that the company made to a former Calpers board member it had hired as a consultant.

Medco shares recently traded down 6 cents to $59.80.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-982-5582; [e-mail]