Much has been written in recent weeks about Amazon exploring entering the prescription drug business. Will Amazon make the move, and what will it mean to the established players and the millions of Americans who take prescription drugs?
It’s part of the American business school canon how this one-time seller of books has changed U.S. retail regardless of category. The idea that Amazon is even considering entering the prescription drug market has sent shock waves through the industry and forced industry leadership to consider a variety of “what if?” scenarios.
An Amazon arrival has the potential to add efficiency to drug distribution, improve the patient experience, support adherence and improve healthcare in ways we can’t yet imagine. Amazon has historically forced others to innovate to stay relevant — and its potential impact on the healthcare ecosystem cannot be underestimated.
Yet the company faces several real business challenges (although none that a company with the size, resources and customer service mindset of Amazon could not overcome):
Challenge #1: Mail Order Is Not Enough
Amazon is of course famed for fast delivery, made free through an Amazon Prime membership supported by 85 million members. More than half of all Americans have a chronic illness and regularly take at least one prescription drug. That’s a large and lucrative market, but also represents a group for which mail-order pharmacy has been available for nearly 20 years through the big retailers and their insurer partners.
Mail-order pharmacy has not taken over the world, and retail pharmacy has not gone away. In some cases, it is still cheaper to get generic drugs filled at a retail pharmacy than via mail order.
Challenge #2: Competing on Price
The vast majority of all drugs dispensed in this country are generics, and CVS Health* reports that 87 percent of annual prescriptions cost less than $70 a year. Can Amazon make generic drugs cheaper? Can they impact the much higher cost of specialty drugs, which often require temperature control and other precise handling?
There’s the possibility that Amazon may want to go for the cash-paying customer—people without insurance or who pay for drugs upfront, offering them the ability to toss drugs into their virtual shopping cart, and perhaps some cost savings. The cash-pay part of the market equates to 5 to 10 percent of the $400+ billion pie. That is a small percentage of the total prescription market, but a number that could meaningfully increase Amazon’s $150 billion revenue.
Challenge #3: Replacing the Pharmacist
Year after year, Gallup’s annual survey about the professions that Americans deem the most honest and that maintain the highest ethical standards ranks pharmacists at or near the top. While this often puzzles urban dwellers who may have a very different experience in their neighborhood pharmacy, all over America patients trust their pharmacists and know them by name. They function as extended members of the patient’s care team and many studies have validated that pharmacy counseling supports adherence and saves money.
Challenge #4: Forming New Partnerships
Amazon will also have to contend with the tangled web of relationships that tie retail pharmacies to insurers and PBMs, and unite them in assorted combinations of accountable care organizations and other value-based models in a variety of performance-incented contracts.
Established players also won’t sit idly by, as last week’s news of the proposed purchase of Aetna by CVS Health demonstrates, and will continually look for new ways to gain a competitive edge and control over larger groups of patients and their care.
The End Game
Cheaper is better. Easier is better. But cheaper and easier, supported by better and innovative customer service, is the real threat. Getting into the prescription drug business aligns with heightened interest and investment in digital health, leverages the role Amazon already plays in the life of so many Americans, and holds the promise of forcing innovation that will impact Amazon customers and non-customers alike. A Wells Fargo report shows great consumer interest in Amazon entering the pharmacy business, with five in 10 U.S. adults saying they “would probably use” Amazon Pharmacy if the company pursued it—a stunning sign of support given that mail order is nothing new.
When Amazon last explored this market, it was 1999 with a 46 percent stake in drugstore.com—since sold and now mothballed. But in 1999, we also didn’t have Amazon buttons on our smart phones, Prime memberships or Alexa to coax us into the “store of everything” with knowledge of what we buy and anticipation of what we might need.
If Amazon does enter the pharmacy business, it will have greater ambition than just supplying drugs via mail order, seizing the cash-pay customer or even offering drugs at a lower price. The real threat (and alternatively, opportunity) is in the vision we can’t yet imagine that disrupts the delivery of American healthcare, fueled by technology, creating a better customer experience in an industry for which there is considerable room for improvement. Drugs may be just the beginning.
Kym White is global sector chair, Health, Edelman.
* Edelman client