Tuesday, May 23, 2017

A Reality Check on Amazon’s Pharmacy Ambitions

CNBC reported last week that Amazon may enter the pharmacy and/or pharmacy benefit manager (PBM) market. Here’s the story: Amazon is hiring people to break into the multibillion-dollar pharmacy market.

The news made many people freak out and then begin speculating on all of the amazing ways that Amazon would change the drug channel. USA Today breathlessly mused: Could your next prescription come from Amazon?

Amazon has been successfully attacking the front-end business of chain drugstores. But could it really disrupt the pharmacy and PBM industries?

Below, I provide a reality check on how Amazon could compete—and what it is unlikely to do.

ET TU, AMAZON?

If we assume Amazon can solve the operational and regulatory hurdles of building a mail pharmacy, then I see two most likely strategies:
  • Go after the cash-pay market. Here’s what I told The Washington Post in What Amazon could do to the business of selling prescription drugs:
    Fein said that he could see Amazon most easily entering the market for patients who pay cash, such as for generic drugs or brand-name drugs with discount coupons from manufacturers. Those patients may choose to pay for the drugs themselves because they’re uninsured or they're looking for a better deal than what they would get through their insurer, which could force them to pay the full list price before they hit their deductible.
    I suspect that fulfillment of low-cost generics would be the most logical place to enter the market. It would accelerate price competition in the pharmacy industry.
  • Build, buy, or partner with a discount card program. Discount card programs utilize PBMs’ network agreements to enable pharmacy fulfillment for patients who don't have or can’t use their insurance. Amazon could establish its own PBM relationships and build the corresponding transactional infrastructure for adjudicating discount cards. Think of something akin to Inside Rx, which I analyzed last week.

    However, it’s probably easier to buy one of the leading companies. Online discount card vendors such as GoodRx and Blink Health are backed by venture capital firms that would eagerly sell if the price was right.
OTOH

Alas, our complex, Rube Goldberg–like drug distribution and reimbursement system is highly resistant to disruptive change.

I would never underestimate Amazon. However, I believe that Amazon has limited feasible options for disrupting pharmacy and PBM markets.

Here are some strategies that would likely be unsuccessful for Amazon:
  • Build or buy a PBM. Whether you love or hate PBMs, it’s clear that there are many complex services associated with administering a prescription drug benefit plan on behalf of an employer, health plan, or the government. (See Section 5.1. of 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers for details.) The barriers to entry are just too high at this stage in the market’s evolution.

    There is also a trend toward greater pharmacy-medical integration and pharmacy-delivered patient care services. Amazon is woefully unprepared to compete in those areas. See my commentary in Why the Walgreens/Prime Deal Could Transform the PBM Industry. .
  • Become a central-fill mail pharmacy in a third-party payer’s network. Today, the largest mail pharmacies are owned and operated by PBMs and health plans. It is unlikely that these companies would allow Amazon to participate as a network mail pharmacy.

    The mail business is also not too healthy. As QuintilesIMS reported recently, mail pharmacy is the only dispensing format that has experienced a sharp decline in the number of prescriptions dispensed. (Mail pharmacies, however, have significantly increased revenues, driven by the dispensing of specialty medications.) Retail pharmacies are accepting lower reimbursements to compete with mail pharmacies. Multiple states have enacted anti-mandatory mail order legislation that blocks plan sponsors from favoring mail pharmacies.

    And don’t forget that consumers report lower satisfaction with mail pharmacies compared with some other dispensing formats. Amazon would struggle to redefine this ultra-low margin business, assuming that PBMs would even let it participate.
  • Build or buy a specialty pharmacy. I also think it is also unlikely that Amazon can compete in the higher margin, higher touch business of dispensing specialty pharmaceuticals. A specialty pharmacy’s personalized and complex services are unlike Amazon’s highly scalable yet impersonal infrastructure. And even if Amazon could somehow overcome the barriers to participating in third-party payer networks, it would struggle to gain access to products in manufacturers’ limited dispensing networks.
The CNBC article was short on details, so at this point my observations are pure speculation. In the meantime, I’ll continue to enjoy my Amazon Prime subscription.

P.S. According to a fascinating Wall Street Journal article, Amazon has disproven the old adage: “There’s always money in the banana stand!" See Amazon’s Latest Market Disruption: 1.7 Million Free Bananas.

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