How Technology Could Aid Amazon’s Prescription Drug Play
By Thomas Borzilleri
Thomas Borzilleri is the founder and CEO of InteliSyS Health of San Diego, CA.
Amazon’s plans to enter the healthcare market may not be ready for prime time, but it is high time for the healthcare industry to take Amazon’s threat seriously. A recent report from Goldman Sachs notes that with 2016 prescription spending (net of rebates) topping $400 billion, high repeat purchases, lack of price transparency, and an increasing cost burden on the consumer, it’s no surprise that prescription drugs have attracted the attention of the 800-pound e-commerce gorilla. But the Goldman Sachs report goes on to warn Amazon of the complexity of the drug supply chain and the high barriers to entry for new players.
This is all certainly true. Most patients still buy their drugs the old-fashioned way, at retail pharmacies or through mail order services that reflect negotiated prices between public and private payers and pharmacy benefit managers (PBMs). These relationships will be challenging to break up. But as customers pay more for their prescription drugs, they will increasingly clamor for more price transparency and the ability to shop around, as they are starting to do for other healthcare services. As consumers increasingly drive decisions about their own care, Amazon may well find a path to success. The key is to partner with emerging technologies to bypass prescription drug middlemen and deliver real savings.
Amazon could wade in slowly to the healthcare sector. It could easily sell durable medical equipment online. There is no prescription needed and Amazon could most certainly lower prices if it can capture enough volume. At the very least, the e-tailer could offer free shipping as an incentive to choose Amazon over smaller DME vendors. Amazon could also, reasonably easily, get into the market to sell over-the-counter medicines, as discount clubs like Costco and BJ’s have already done with great success. Again, these purchases do not need to involve insurers or physicians, and Amazon can appeal directly to the consumer.
But this approach only scratches the surface of the opportunity for Amazon. If Amazon wants to go after the big Kahuna—prescription drugs—it will have to meet three essential goals
Amazon must inspire trust throughout the healthcare ecosystem, among patients, first and foremost, but also among doctors who agree to write e-prescriptions to a preferred pharmacy. Amazon may also have to inspire trust among insurers if it decides to partner with them to get access to drug coverage, formularies of preferred drugs, and guaranteed patient volume. They must convince all parties that the drugs they will deliver are as safe and effective as those found in retail pharmacies.
Amazon must offer added convenience over traditional mail-order pharmacies. The holy grail of two-hour or same-day delivery will require a large number of distribution centers, all of which need to be inspected by the US Food and Drug Administration and will require a high level of security. These demands, including added manpower to run these facilities such as highly-paid pharmacists, will be costly.
Amazon can only succeed if it can offer a lower price point, and it can only offer better prices if it can capture significant patient volume. If Amazon simply seeks to replace existing pharmacy benefit managers by winning brand-new contracts with insurers, this will be a challenge. Amazon will not, starting out, have the volume-based discounts that PBMs enjoy. Meanwhile it will face a variety of new startup costs. Additionally, Amazon will face a fierce battle from entrenched PBMs.
Amazon must, as it has done in other markets, forge an entirely new path by connecting directly with consumers and offering reliable products conveniently and affordably. Amazon has chosen a fortuitous moment, as the consumerization of healthcare is finally gathering steam. Consumers are paying more out-of-pocket than ever for prescription drugs due to rising deductibles, co-pays, and co-insurance. Meanwhile, most patients have no idea that the price of drugs varies widely and that buying medications retail may be cheaper than their co-pays. This sets up a unique opportunity for Amazon to help lift the veil on drug prices and offer patients lower-priced alternatives.
By operating independently of insurers, Amazon can sidestep a head-on fight with established PBMs. Instead of spending resources trying to pick off patients one insurer at a time, they could choose to woo patients directly, competing on price at the point of care where prescribing decisions are made.
PBMs ostensibly exist to provide volume discounts to insurers on drugs. But in reality, these “discounts” are riddled with padding. Insurers are receiving volume discounts off the manufacturer’s retail price, but PBMs tack on something called “ingredient spread” while also charging a per-transaction fee. Meanwhile, prices vary widely from one pharmacy to the next, even in the same town, and consumers typically have no idea. Consumers who buy their drugs using insurance coverage usually accept the PBM-mediated price at their closest pharmacy because they don’t have the knowledge or the ability to shop around.
Instead of allying with manufacturers and insurers (the supply side of the prescription drug transaction), Amazon would do much better to join forces with the demand side, appealing to consumers and doctors. But how can Amazon get into a doctor’s office? Send sharply dressed salesmen and women like the makers of Lipitor and Viagra? Since the Sunshine Act and other rules regulate interactions between healthcare providers and the pharmaceutical industry, drug sales personnel have less access to providers than ever.
Amazon could instead leverage new technologies that help doctors and patients access real-time drug prices at nearby pharmacies. Amazon’s prices could be listed along those at traditional retail pharmacies to allow patients and doctors to choose the lowest-priced vendor, depending on whether the retail price or the co-pay is a cheaper option. These tools, if accessed seamlessly within the e-prescribing workflow, would integrate Amazon into the existing marketplace of drug retailers and give the e-tailing behemoth a seat right in the exam room alongside the doctor and patient, giving Amazon direct and immediate access to patients across different private health insurers, public payers, and the uninsured/underinsured.
Amazon would still face the challenge of establishing mail order centers and getting them certified by the FDA. But they wouldn’t be seeking to replace one middleman—pharmacy benefit managers—with another. By going straight to the consumer and the provider at the point of care, Amazon would have a unique opportunity to disrupt both the supply chain and the pricing models for prescription drugs. This could potentially have far-reaching benefits for consumers by causing overall downward price pressure and further exposing price-gouging that PBMs engage in, even while promising discounts.
The Goldman Sachs report posits that Amazon’s best chances for success rely on choosing a partner that can help it get into the market, such as an existing PBM. While this approach may be a boon for Amazon, it won’t do much to disrupt drug prices and transparency. If Amazon is serious about remaking the way Americans buy their prescription drugs, the e-commerce behemoth should look to cut out the middlemen—PBMs—and appeal directly to consumers to help tackle the prescription drug affordability crisis in the United States.