Quantifying Medco's Business Model

Abstract

Based on a theory of market share rebates as exclusionary, rather than share-shifting, devices, we have estimated that Medco has a rebate negotiation competitive advantage over smaller entities equal to 4.8% of all ingredient costs. That figure is an estimate of the cost to clients of switching to entities with more transparent business models. In order to offset that loss, smaller entities would have to manage formularies aggressively and produce a generic utilization rate that is 4.8 percentage points greater than Medco’s current 46.8%