Reports that Amazon obtained pharmacy wholesale licenses in 12 states emerged at the end of last month and caused commotion in the healthcare industry.[1] After the report was released, many pharmaceutical companies’ stock prices dropped.[2] This seems like the beginning of another industry disruption, which Amazon has become very skilled in.[3] Although this has caused an uproar, these wholesale licenses allow Amazon to distribute surgical and medical equipment—not prescription drugs. In order for Amazon to become a threat to this industry, it needs to obtain pharmaceutical licenses, which would enable the company to distribute prescription drugs. Even then, there are more obstacles unique to the healthcare industry that would restrain Amazon’s dominance. The healthcare industry is “unbelievably complex”[4] so a disruption by Amazon is unlikely to occur anytime soon.
The simplest explanation of the industry in the United States begins with a person (“patient”) looking for healthcare. From there, the patient can go to a doctor at a clinic or a hospital to be treated and even prescribed medication if necessary. The patient then goes to a pharmacy to pick up the prescription hopefully leading to recovery. This basic model becomes complex when financial concerns are factored in. Specifically, the doctor, pharmacist, and drug manufacturer must all be paid for their services. These costs complicate the model because the healthcare industry in the United States developed health insurance to make healthcare more cost effective.[5] Under this model, cash flows from the patient to the insurance company, and from the insurance company to the doctor, pharmacy and drug manufacturer. The general insurance business model is to receive payments from many patients and then pay most of the medical bills for those patients who receive healthcare.[6] While insurance companies have helped patients, their profit-seeking nature has further complicated the healthcare industry.
Health insurance companies have adopted various ways to keep costs down, such as requiring that patients pay a small portion of the medical bill in order to discourage unnecessary trips to the doctor and thus prevent additional medical costs.[7] The more sophisticated cost saving strategies, however, are the real obstacles to a dominant market position by any company, including Amazon. These strategies are generally encompassed by the term “managed care.”[8] Through managed care, insurance companies can keep costs down by coordinating with doctors and pharmacies to establish systems such as Health Maintenance Organizations (“HMOs”).[9]
HMOs exist in various forms but the general concept is that an insurance company contracts with multiple health care providers (medical clinics, doctors, hospitals, etc.) to keep costs low in exchange for restricting patients to those healthcare providers (the network).[10] The healthcare providers thereby receive more business and thus more insurance payments than they might have received if they were not in the plan, while insurance companies spend less than they would have to otherwise. Keeping costs low does not mean that quality care is withheld. On the contrary, HMOs focus on preventative care, which works by spending to treat minor issues in the present to prevent serious and expensive issues in the future.[11] These plans link compensation to healthcare providers with the money spent on patient care and they may even pay healthcare providers bonuses for better care measured inversely by patient costs.[12] Better care is shown through fewer costs.[13] In addition to quality care, HMOs make the industry more efficient by keeping each part of the healthcare chain intact.
Amazon, however, is not showing signs of hiring doctors or building hospitals. The company has stirred the pharmaceutical industry, which is an integral part of the managed care system, separate from the other healthcare providers (doctors, clinics, etc.). Pharmaceutical costs involve drug manufacturers and pharmacies, which are independent from the cost of a doctor’s appointment. Therefore, third-party Pharmacy Benefit Managers (“PBMs”) emerged. The general idea is the same as HMOs in that PBMs contract to keep costs low and restrict where patients can go to fill their prescriptions and control which drugs are distributed.[14] However, the PBMs also make a profit out of the discounts that they negotiate between insurance companies and healthcare providers.[15] Amazon is rumored to be entering the pharmaceutical business due to its recently acquired licenses. Thus, PBMs are the most relevant aspect of managed care with respect to Amazon’s current possible entrance into the industry. They cannot dominate the industry without assuming a role in the managed care model.[16] Although the company has not yet acquired licenses to distribute prescription drugs, its potential threat to the industry has highlighted how vital the managed care system is.
The most prominent reaction to Amazon’s threat has been the proposed CVS-Aetna merger.[17] CVS has a major pharmacy chain, a PBM, and medical clinics all over the country, while Aetna is a major health insurance company.[18] The merger result would consist of clinics, an insurance company, a PBM, and pharmacy locations across the nation. That’s essentially every aspect of the industry. In addition to that merger, UnitedHealth Group currently dominates the healthcare industry and presents an even bigger challenge to a newcomer.[19] UnitedHealth is the largest health insurer in the U.S., has a very competitive PBM under its Optum division, and operates many medical clinics across the country.[20] However, data analysis consisting of patient records has become a key aspect of managed healthcare.[21] This data helps improve patient care and thus keeps medical costs down. This can definitely be an area where a big tech company like Amazon has an opportunity to thrive.
Amazon is spectacular at what it does, but right now that does not pose a big threat to the healthcare industry. That would certainly change if the company acquired a license to distribute prescription drugs, developed a health plan account into its operations that most Amazon users purchase, and was then able to create a network of healthcare providers. If Amazon could implement these changes while maintaining its reputation for low prices, then the healthcare industry would certainly be disrupted.
[1] Emma Court, Drug Stocks Drop After Report that Amazon Obtained Pharmacy Licenses, Market Watch (Oct. 26, 2017, 3:04 PM), https://www.marketwatch.com/story/drug-stocks-drop-after-report-that-amazon-has-obtained-pharmacy-licenses-2017-10-26.
[2] See id.
[3] Champaign Williams, A Dozen Disruptions: Amazon’s Pursuit Of Massive Market Share In 12 Major Industries, Forbes (July 21, 2017, 9:45 AM), https://www.forbes.com/sites/bisnow/2017/07/21/a-dozen-disruptions-amazons-pursuit-of-massive-market-share-in-12-major-industries/#779c2c631ebe.
[4] Ryan Teague Beckwith, President Trump: ‘Nobody Knew Health Care Was Complicated,’ Time (Feb. 27, 2017), http://time.com/4684068/donald-trump-health-care-reform-complicated/.
[5] Robert P. Navarro & Judith A. Cahill, Role of Managed Care in the U.S. Role of Managed Care in the U.S. Healthcare System, Managed Care Pharmacy Practice, 2-3 (Jones and Bartlett Publishers, LLC 2d ed., 2009) (1999).
[6] See id.
[7] See id. at 3-4.
[8] See generally id.
[9] See id.
[10]See id. at 7-8.
[11] See id. at 13-14.
[12] See id. at 12-13.
[13]See id.
[14] See id. at 7-8.
[15] Martin Sipkoff, PBMs Raise the Curtain, managed care (Sept. 2006), https://www.managedcaremag.com/archives/2006/9/pbms-raise-curtain.
[16] Lydia Ramsey, Healthcare Companies Are Taking Amazon Very Seriously, Business Insider (Nov. 1, 2017, 11:10 PM), http://www.businessinsider.com/what-mckesson-and-express-scripts-think-of-amazon-2017-11.
[17] Lydia Ramsey, CVS is plotting a $66 billion takeover – and it has a lot to do with fending off Amazon, Business Insider (Oct. 28, 2017, 11:29 AM), http://www.businessinsider.com/cvs-aetna-takeover-creates-an-amazon-buffer-2017-10.
[18] See id.
[19] Chad Terhune, CVS and Aetna eye competition from Amazon, but the real race is with UnitedHealth, L.A. Times (Nov. 2, 2017, 6:00 AM), http://beta.latimes.com/business/la-fi-cvs-aetna-amazon-unitedhealth-20171101-story.html.
[20] See id.
[21] See id.
