Amazon Pharmacy: an obvious first step
I hope all of you enjoyed a relaxing, socially distanced Thanksgiving weekend. This week on In Silico, we’re going to talk about Amazon’s announcement of Amazon Pharmacy, what it means for the pharmacy industry and healthcare more broadly, and what to expect from Amazon in healthcare moving forward.
Before we dive into it, I want to clarify one potential point of confusion from my last article on how digital pharmacies are yet another workaround for a broken healthcare system. The digital pharmacies we discussed last time, like Ro, Hims, and Nurx, shouldn’t be viewed in the same category as Amazon Pharmacy, because the former write prescriptions in addition to fulfilling them, while the latter only fulfills existing prescriptions. This is a critical distinction because digital pharmacies that write prescriptions in addition to fulfilling them are going to be focused on a narrower market of medications — specifically, prescription-only drugs with direct consumer demand.
Amazon Pharmacy was inevitable
So what do I need to know about Amazon Pharmacy?
Amazon will begin offering free, two-day home delivery of prescription medications to Amazon Prime members
Amazon Pharmacy will take insurance plans but also provide discounts to Prime members without insurance
Patients will have the ability to speak to pharmacists over the phone 24/7 to answer any questions
There’s been a lot of rather dramatic media coverage of the announcement, with STAT reporting that the news “sent shockwaves through the pharmacy pipeline” and would “spur major competition”. To be honest, the only surprising part of the announcement should’ve been just how predictable it was. First of all, a pharmacy delivery service aligns almost perfectly with two of Amazon’s fundamental business tenets: (a) enabling customers to order basically anything they need without leaving their home, and (b) continuously growing the value proposition of Amazon Prime subscriptions. If the strategic fit wasn’t enough, Amazon’s acquisition of PillPack in June 2018 certainly should’ve revealed the writing on the wall.
Yes, Amazon Pharmacy will be a powerful new competitor for existing pharmacies, like CVS, Walgreens, and GoodRx. But on the flip side, you could argue that Amazon was rather slow in integrating PillPack to launch its own pharmacy offering, giving its competitors valuable time to get ahead. In the two and half years since the acquisition, CVS (June 2018), Walgreens (Dec 2018), and even Uber (Aug 2020) have launched their own analogous services, meaning Amazon Pharmacy won’t be the first, second, or even the third player in the space.
Regardless, Amazon has a formidable track record of success, and existing pharmacies should be doubling down on their efforts to differentiate themselves from Amazon in the long run. One approach I’ve written about before is the retailization of healthcare, in which companies like CVS and Walgreens can leverage their brick and mortar stores as hyper convenient points of care, turning their physical footprint from a liability to a strength. Another is for these companies to move up the value chain and start providing medical care in addition to prescription fulfillments, as GoodRx is doing with telehealth. Given the amount of competition in this space, however (think Teladoc, Amwell, existing provider networks), this path may not be much easier.
Amazon, the overnight PBM titan
While most people are focused on the impact of Amazon Pharmacy’s delivery service, the other parts of the announcement are actually more interesting. The fact that Amazon Pharmacy will offer discounts to Prime members means that Amazon has secured drug discounts on behalf of its Prime customers, bringing it into the pharmacy benefit manager (PBM) industry. For now, it appears that Amazon has decided to partner with Inside Rx, a prescription savings plan within Express Scripts, to leverage their existing contracts with drug manufacturers. But there’s been speculation that in the long run, Amazon plans to cut out the middleman entirely and become a PBM itself, and it would certainly have the bargaining power to do so. As of Sep 2020, Amazon Prime had 126 million subscribers in the US. The largest PBM, CVS Caremark, only has about 103 million plan members. Perhaps the headline about Amazon Pharmacy’s launch should instead be that Amazon is positioned to become the single biggest PBM in the country in the future if it wants.
As a consumer, there’s reason to be optimistic about this development. In the past few years, PBMs have come under fire for contributing to ballooning drug costs through mechanisms like spread pricing, where PBMs charge payers more than what they reimburse pharmacies for specific drugs and keep the difference as revenue. Amazon’s “your margin is my opportunity” mantra could provide a much needed jolt to the industry, forcing PBMs to be more competitive. Given Amazon’s measurable impact on suppressing core inflation with consumer goods, it’s not hard to imagine how its entry into PBMs could have a tangible impact on controlling drug costs as well.
Amazon eats… healthcare?
With the launch of Amazon Pharmacy out of the way, it’s time to look ahead and speculate on what to expect from Amazon in healthcare moving forward. As we’ve mentioned, the idea of fast, convenient prescription delivery is not a new one, and while Amazon Pharmacy will create plenty of headaches for competing pharmacy companies, it is not positioned to revolutionize healthcare more broadly. So what else could Amazon do in this multi-trillion dollar industry?
Although Amazon is a tech company first and foremost, we shouldn’t rule out a move into more retail-based healthcare services. With its acquisition of Whole Foods in 2017, Amazon has shown that it is willing to dip its foot into retail when there’s an opportunity that aligns with its core strategy. Is there a world where Whole Foods stores are expanded to act as physical pharmacies, to supplement the online Amazon Pharmacy experience?
It would be ambitious, but certainly not impossible. In fact, there’s a good amount of overlap between why Amazon acquired Whole Foods to expand its grocery business and how Whole Foods could bolster its pharmacy business. First, Whole Foods gave Amazon hundreds of stores in prime locations that could serve as distribution nodes for groceries, and conceivably for medications (especially those with special storage / supply chain requirements). Second, the creation of Whole Foods grocery discounts for Prime members added value to Prime subscriptions, and offering pharmacy services at Whole Foods stores would increase the appeal of Prime as well. Third, with groceries as with healthcare, there are still some things that consumers prefer to buy or do in person. Leveraging the physical footprint of Whole Foods for both verticals would allow Amazon to tap into this otherwise lost opportunity.
Another reason why this idea isn’t that far-fetched is because Amazon has already started getting into the business of providing medical care, and not just because Amazon Pharmacy will come with 24/7 pharmacist call support. In 2019, Amazon launched Amazon Care, a healthcare benefit service for its employees that’s being piloted in the Seattle area for now. Employees are able to connect with clinicians for virtual visits through an app, and if an in-person visit or procedure is needed, a nurse is sent directly to the employee’s home. Employees get prescription delivery as well, in some cases within 2 hours of ordering.
For those familiar with Amazon’s history, Amazon Care is a thrilling look at just how big the company’s plans may be in healthcare. AWS started out as an internal cloud service that eventually launched to external customers and became a hundred-billion dollar product. Amazon Logistics began as an internal shipping service that has grown to rival UPS and FedEx since its external launch in 2018. Could we, in 10 years, be walking into clinics run by Amazon Care?
All this is speculation for the moment, but it’s safe to say that Amazon Pharmacy is only a hint of the company’s broader ambitions within healthcare. After all, it’s still Day 1 at Amazon.
2020-11-30 Edit: Revised to clarify that Amazon Pharmacy is currently partnering with Inside Rx for drug discounts, but may plan to become its own PBM in the future.