Medco Health Solutions' (NYSE:MHS) latest financial report indicates that its business remains robust. The pharmacy benefit manager's earnings growth hasn't pleased everyone, though, and as result, Medco will be challenged to prove its worth.

The Franklin Lakes, N.J.-based firm revealed Tuesday that its fourth-quarter revenue declined 1% to $8.9 billion. The slight drop in the top line isn't necessarily a negative, though, because it was due in part to Medco clients' increased use of generic drugs. And that's actually good news for Medco, since it earns more by dispensing generic medicines than it does selling branded pharmaceuticals.

Medco's bottom line bears it out. Even with the slight drop in revenue, earnings increased 12% to $132.8 million as gross margins rose to 5% versus 4.6% in the fourth quarter of 2003. Along with the generic-drug uptick, the company's mail-order pharmacy business is bolstering results, too. By sending health-plan participants their drugs directly through the mail, Medco gets to cut out the middlemen -- retail pharmacies such as CVS (NYSE:CVS), Rite Aid (NYSE:RAD), and Walgreen (NYSE:WAG) -- and enjoy all of the profit for itself.

Still, Medco's success in winning over clients such as General Motors (NYSE:GM) to its mail-order service has ruffled some feathers. Walgreen went on the offensive after GM decided to drop it as a pharmaceutical provider because of the pharmacy chain's opposition to mandatory mail-order programs. In a press release issued today, Walgreen claims that it can offer so-called maintenance medications -- those taken over the long term -- at a lower cost than mail-order services offer. The Wall Street Journal seemed to confirm Walgreen's point in an article yesterday that showed Medco's prices for certain generic drugs were, in fact, higher than prices in some retail pharmacies.

Medco's assertion that it drives down clients' pharmaceutical benefit costs with its mail-order system will come under even more scrutiny. But as long as Medco can show that it keeps clients' overall pharmaceutical expenses down, its prospects look good.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.