Last month, Amazon announced a new venture, Amazon Pharmacy into the US healthcare market, sending the stocks of leading competitors down massively. The introduction of Amazon Pharmacy has been largely expected over the past few years (given Amazon’s acquisition of the medication delivery company PillPack in 2018) but this news still sent shockwaves in the sector. The stock price of competitor GoodRx, for example, fell by nearly 19% following Amazon’s announcement. So will Amazon Pharmacy revolutionise healthcare in the US?
Amazon Pharmacy allows consumers to order generic and prescription drugs online, with Amazon Prime members getting free, unlimited delivery within 2 days. This level of convenience and speed is unrivalled in the healthcare market. The only other mainstream mail-order medication company in the US is GoodRx; they have 5 million members, whereas Amazon Prime has 126 million members. This marketing reach, combined with its superior logistical power, will allow it to rise to the forefront of the sector.
But the biggest impact of Amazon Pharmacy could be on price. Unlike the UK, where drug prices are regulated, the drug makers are the ones to set prices in the US. Since the early 2000s, prescription drug spending in the US has risen faster than many other western countries. Now, per capita spending in the US is more than double the UK’s and nearly triple that of Sweden’s. Healthcare can often be households’ biggest cost in the US. Shocking stories of people rationing their medication (and dying because of it) due to sky-high prices often hit the news.
Amazon Pharmacy’s statement has said that its service can allow consumers to save up to 80% on generic medication. How does it do this? Amazon’s system allows users to compare the cost of drugs covered by their healthcare insurance, as well as the price of paying out of your own pocket (which can sometimes be cheaper, especially with discounts offered by drug manufacturers). Amazon also has the capacity to break some monopolies in the sector. Giant companies, such as CVS and Walmart, use their market power when negotiating drug prices to create monopolies on some drugs. This means consumers are forced to buy from them, and at exorbitant prices. Amazon’s sheer size will allow it to break these monopolies, as it has huge purchasing power. It’s clear that Amazon’s entry into the market spells good news for consumers; prices will indeed fall somewhat.
But the cause behind the absurdly high drug costs in the US isn’t being tackled by Amazon at the moment. Pharmacy Benefits Managers (PBMs) have led to the high costs of drugs. PBMs are middlemen between pharmacies and drug manufacturers. In theory, PBMs are meant to reduce how much pharmacies spend on drugs. However, PBMs aren’t transparent in the real costs of drugs. They’re responsible for negotiating rebates for drugs, and they often take a large cut from these rebates. These rebates are meant to reduce pharmacies’ drug spend, but it doesn’t work out like that in practice. As rebates are based on the price of the drug, PBMs favour more expensive drugs in order to gain larger rebates. These rebates aren’t disclosed. There was hope that Amazon’s entry into the market would lead to a move away from the inefficiency of PBMs, but Amazon is currently using the PBM model. This means that Amazon is still employing the middlemen to negotiate drug prices from manufacturers, which incurs higher costs. In fact, Amazon is only partnering with one PBM at the moment, Express Scripts, whereas competitors like GoodRx are partnered with multiple (making GoodRx more likely to find cheaper products). Amazon’s solution to this competitive disadvantage would be to partner with more PBMs (that wouldn’t be a problem, considering Amazon’s buying power), but that would only serve to entrench this inefficiency in the system.
Adhering to the PBM model means that the underlying reason behind the high costs isn’t tackled. Yes, consumers may receive some lower prices due to increased competition and more cost comparison, but the issue of pharmacies’ and manufacturers’ costs of using these middlemen isn’t addressed. Until this issue is solved, consumers won’t get significant price reductions going forward.
But if anyone is going to break away from the PBM model and usher in real change, it’ll be Amazon. Its huge distributive, marketing and purchasing power makes it the prime candidate to do so. Bezos’ famous phrase “your margin is my opportunity” was all about removing inefficiencies in the supply chain, like middlemen. That would logically point towards a move away from PBMs, but unfortunately the signs aren’t there just yet.
Amazon’s foray into the healthcare market offers hope to the millions of Americans suffering from the extortionate prices of medication. Over the course of its history, Amazon has entered markets and dramatically lowered prices in aggressive style. Undoubtedly, Amazon’s entry makes medication more convenient and somewhat cheaper. But if it wants to create meaningful, long-term change, it must turn towards addressing costs in the sector. The healthcare supply chain is hugely inefficient in the US, and Amazon has the power to change that. The removal of PBMs would go a long way towards reforming American healthcare. But at least for now, the US moves one step closer to a fairer system for its people.
Image by Tumisu from Pixabay