7 States Wasting the Most Money on Medications

Are your neighbors throwing away tons of money? Express Scripts (ESRX) says that they probably are. The giant pharmacy benefits manager, or PBM, recently published information that shows how much each state wastes the most in unnecessary medication-related costs. 

Express Scripts' definition of wasteful spending included three categories. First, some patients use costly prescription drugs when less expensive but clinically comparable alternatives exist. Similarly, patients who don't use home delivery and specialty pharmacies when appropriate can forego significant cost savings. Lastly, patients who fail to adhere to medication therapies rack up unnecessary medical expenses.

Here are the seven most wasteful states on a per capita basis for medication spending in 2012:

Source: Express Scripts 

Common denominators
One thing that immediately jumps out is that all seven of the most wasteful states when it comes to medication spending are in the South. 

These states have something in common other than geography, though. The Centers for Disease Control and Prevention conducts surveys routinely to determine the health status of Americans. All seven of the states identified by Express Scripts as most wasteful with regards to medication spending rank near the bottom in the CDC's health status survey.

Source: Centers for Disease Control and Prevention 

Several of the states also share another common denominator. All but Texas rank among the lowest states with regards to median household income. 

Source: U.S. Census Bureau 

The states that rank among the most wasteful when it comes to medication spending are highlighted in red on both charts -- and there is plenty of red as you can see. So why would health status and household income levels impact medication spending waste?

Higher consumption of any product provides more opportunities for inadvertent waste. It stands to reason that states with fewer residents reporting good health would also have more residents taking prescription drugs. The more prescription drugs taken creates more potential for waste.

Linking household income to higher levels of wasteful medication spending is a little trickier. One possibility is that Americans with lower incomes don't have access to the information that could help them make more cost-effective choices regarding prescription drugs. For example, many insurance companies provide information about generic drug alternatives online. However, if individuals don't have Internet access, that information doesn't help them.

Trash to treasure?
What difference do these factoids make for Motley Fool readers looking for investing ideas? I think these findings actually point to some good stocks to consider.

Total wasteful spending in 2012 amounted to around $418 billion. This means that there is great potential for reducing these costs. Companies that can help achieve this potential should do well in coming years.

Perhaps the best-equipped company to do so is none other than Express Scripts itself. It's the largest pharmacy benefit manager, or PBM, in the country with extensive research capabilities to identify the most effective ways to tackle this wasteful spending. Express Scripts isn't the only strong player, though.

CVS Caremark (CVS 1.15%) operates pharmacies across the U.S. but also stands as the second-largest PBM. The company boasts a strong mail delivery business, which is an important advantage in addressing waste related to patients not using the most cost-effective pharmacies.

UnitedHealth Group (UNH 2.96%) isn't just the largest managed care organization in the nation. The company also runs the No. 3 PBM with its OptumRx unit. This presents a dual opportunity for UnitedHealth. It can educate insured members as well as influence patients to spend more wisely through its PBM business.

Another pure-play PBM is Catamaran (CTRX.DL). The fourth-largest PBM has been very successful in promoting use of generic alternatives to higher-cost prescription drugs. Catamaran should see success in picking off business from smaller PBMs.

I actually think that investors wouldn't go wrong with any or all of these stocks. However, my favorite is Express Scripts. I think the company's scale gives it a considerable advantage. That's an edge that you can bet won't be wasted.