A couple of years ago, we published a report titled The End-to-End Healthcare Value Chain in Context that mapped the physical, informational and financial flows associated with a patient managing multiple chronic conditions in the United States. The map made real what we knew all along, but hadn’t visualized from a patient’s perspective: that the healthcare value chain in the U.S. is excessively complex, and that inefficiencies between nodes exist across all three flows, leading to high costs and a poor patient experience.
The map also highlighted that there isn’t a clear “leader” in healthcare within the U.S., which currently consists of a series of independent and fairly powerful entities protecting their own spheres of influence.
Time for Amazon Leadership?
In healthcare circles, one of the most discussed articles of the past two weeks carried the notion that Amazon might represent the solution for the U.S. healthcare woes. Although the article (Amazon is hiring people to break into the multibillion-dollar pharmacy market) says very little beyond what you can take away from the title, the reaction was swift. Shares for both CVS and Walgreens Boots Alliance fell by 3% the following day.
There are several reasons why Amazon could upend the current healthcare marketplace. Chief among them is that healthcare is more and more focused on providing at-home care, and no one serves the home better than Amazon.
Think about the typical transaction that plays out when a patient is prescribed a new medication. The physician electronically fills the prescription, and routes it directly to the patient’s pharmacy of choice. This trip to the local neighborhood pharmacy is anachronistic in an ecommerce world. Why not send the patient home and rely on Amazon Prime Health to make sure the meds arrive at the patient’s home on time?
What are the Hurdles?
From a pure physical operations perspective, I have no doubt Amazon can figure out rapid fulfilment of pharmaceutical products to the home (or anywhere the patient wants to receive their medications). At core, Amazon is made up of operations scientists who view every DC in their network as factories for further optimization.
While much is made of the regulatory complexity associated with pharmaceutical products, I doubt Amazon has much to worry about here either. For example, the cost for distribution licenses in each state is minuscule. Amazon would simply need to follow good distribution practices and be open to inspection by local authorities. If Amazon decides to pursue pharmacy repack operations, they then open themselves to additional U.S. Food & Drug Administration guidelines. But again, if you’re Amazon, repack is fairly simple.
The biggest hurdle is the current commercial model. Manufacturers, wholesalers, payers and pharmacy benefits managers (PBMs) operate within a completely arcane commercial environment where rebates are negotiated to offset a product’s list price, which can be set artificially high to maximize the potential rebate offered to administrators like PBMs. These rebates never make it back to the patient, who pays a co-pay and in most cases has a high deductible. In general, the patient pays more while the administrator pockets the rebate.
The Amazon Flywheel for Healthcare
Any market with significant selling, general and administrative costs is susceptible to disruption by Amazon.
The reason lies in the famous Amazon flywheel pictured above. Amazon’s growth rests on its ability to radically reduce the cost structure of fulfilment, which leads to lower prices, better customer experience, more customers using the platform and more sellers on the platform, which increases product selection.
None of the services offered by PBMs and pharmacies are differentiated enough to keep Amazon from spinning its flywheel in healthcare. If Amazon offers greater selection at lower costs, more convenience and a simplified financial/administrative transactional process, patients and providers will gravitate to the platform.
I imagine certain stakeholders in healthcare are frightened by Amazon’s potential entry into healthcare. They should be; we are reaching a point where disruptive players could radically shake up the market, resulting in someone other than the patient being on the losing end. Amazon wouldn’t simply add muscle to a deeply flawed system; it would transform the system. I hope it succeeds.