Making Money by Saving Money

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It's not rocket science. With health-care costs on the rise during an economic slowdown, the companies that are will benefit most are those that can help their customers save money.

Pharmacy benefit manager Medco Health Solutions (NYSE: MHS) sure has the right solutions to benefit its clients, whether they're big companies or individual patients.

Let's face it: Medco's real clients are the companies and health insurers that enlist the company to manage their pharmacy benefits. They're really interested in lowering the costs incurred by their employees/members, and what better way to do that than through the use of cheaper generic drugs? Medco has that taken care of, with generic drug utilization up 410 basis points year over year to 64.4%.

The end user, the employees and health insurance members, also benefit through lower copays. They're tightening their wallets and switching to mail-order drugs, which increased 11% year over year in the third quarter. Mail order now makes up more than 40% of Medco's business.

The end result? Medco's earnings, excluding charges associated with its spinoff from Merck (NYSE: MRK), were up 43% to $0.63 per share in the third quarter. With numbers like these, who needs drugs?

As expected, the company looks good going into next year -- signing up new clients and keeping other major clients, like fellow Motley Fool Stock Advisor pick UnitedHealth Group (NYSE: UNH), happy enough to return. Earnings per share are expected to increase 15% to 20% next year. Few companies can say that in this economy.

While Medco is chugging along grabbing new business, I think there's plenty more to go around for competitors Express Scripts (Nasdaq: ESRX) and CVS Caremark (NYSE: CVS). In these tough times, companies will want to save money on benefits, and that's a service pharmacy benefits managers can provide.

I wonder whether Merck is regretting its decision to spin off Medco right about now.