Specialty retail pharmacy company Accredo Health (NASDAQ:ACDO) is in first place this first post-Olympics morning. It is the most active stock on Wall Street and the most down -- falling 27% on news the company reduced its high-end earnings guidance for fiscal 2005 by $.41 to $1.52 per share (which is down from the $1.60 the company earned in 2004).

Accredo found good news in its just-completed fiscal year 2004. Revenue was up 16%, and earnings were up 15%. And, based on the new earnings guidance, the stock is modestly priced at 14 times forward earnings. Is it time to buy Accredo?

The company's press release uses a question-and-answer format to cover a wide swath of issues. The answer to question No. 1 is a detailed breakdown of the reduced earnings guidance. It is rare to find such a factual discussion of a company's problems.

The company is still expecting revenue to increase 23% in 2005 -- hardly bad news. Besides expanding its market share in MedImmune's (NASDAQ:MEDI) Synagis drug (which produced sales of $108 million last year) there is an expanded relationship with Medco Health Solutions (NYSE:MHS).

Reductions in MediCal and Medicare reimbursements for specific drugs are a concern -- but the government trying to control medical costs will not change. In fact, medical costs are a political football that keeps the lid on pharmacy stock price-earnings multiples.

Of greater concern is the joint venture (JV) insurer Aetna (NYSE:AET) is forming with competitor Priority Healthcare (NASDAQ:PHCC). Aetna was 10% of Accredo's revenue in 2004. All that business will transition to the JV by the third quarter of 2005.

Virtually debt-free Priority operates with much lower operating margins. Accredo, with $117.8 million in net debt, can ill afford margin shrinkage -- though the company did generate a healthy $58.3 million in cash flow in 2004 (although that was down from $71.1 million in 2003).

A warning bell has sounded at Accredo. Although the company has been frank about its prospects, investors would be wise to note its declining cash flow and the changing operating environment signaled by Aetna's JV.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned, but he has made the trip to the Motley Fool Insurance Center to learn the ins and outs of insurance.