Fears of US government intervention in drug pricing are being replaced by concerns about the entry of a muscular new buyer. The entry of the online retail giant Amazon into drug delivery channels has dominated executives’ discussions across the healthcare world, with big pharma, insurers and pharmacy benefit managers all forced to confront the possibility that “the everything store” could soon be selling prescription drugs.
Amazon’s silence on its plans has stimulated much speculation, with analysts suggesting that it could become anything from an online pharmacy to a full-scale pharmacy benefit manager (PBM). The benefit-design sector is most exposed to its buying power and commercial reach, to the extent that some are openly wondering how well PBMs might endure what could, in the long term, become a huge player in the pharma supply chain.
“(PBMs) evolved from a claims adjudicator and processor, and they’ve grown into a very big player that takes a growing share of a dollar of drug spending,” Geoffrey Joyce, director of health policy at the Schaeffer Center for Health Policy and Economics at the University of Southern California, tells EP Vantage. “The market’s catching up and saying, ‘What are we paying for?’”
CVS, one of the biggest PBMs, has already been motivated to respond, announcing plans earlier this week to launch one-day and, in some cases, same-day delivery of prescriptions – presumably because Amazon will have such capabilities. Its rumoured $200bn merger approach to the insurer Aetna has also been described as a defensive move to build scale ahead of Amazon’s arrival.
On its third-quarter earnings call, Express Scripts touted its work to reduce the turnaround time on mail-order prescriptions by a day and a half in the past 12 months and largely steered the conversation towards how Amazon might serve customers who are paying the full cost of prescriptions.
Big pharma, on the other hand, has been more circumspect, knowing at least that Amazon would likely be a customer in one form or another, rather than a competitor. Nevertheless, big groups have been forced to answer questions on the topic.
Pfizer's chief executive, Ian Read, said his company was interested in “any system of distribution that can cut costs and get a wide availability of products to patients”. Mr Read’s Allergan counterpart, Brent Saunders, said, “The whole ecosystem is ripe for some disruption to figure out a way to [deliver medications] more efficiently, to do it more conveniently for patients, to better manage compliance and persistence.”
Of course Amazon refused to comment on what it called rumours about its pharma entry when asked during its most recent quarterly earnings call. Media reports have put the number of state pharmacy licences it has obtained so far at 12.
Online pharmacy or more?
How Amazon would begin selling drugs is not clear, although one could surmise that immediate opportunities would lie in its massive online ordering and delivery capabilities and a bricks-and-mortar presence in the form of its newly acquired supermarket chain Whole Foods.
Goldman Sachs published a report in August on the likely role Amazon could play in pharma supply, ranging from partnering with existing pharmacies through to full-scale PBM or drug distribution. The bank concluded that in all likelihood, because the barriers to entry are high, a partnership seemed a likely first step to gain a foothold and expertise, to help the company judge whether there were any gains to be made by playing a bigger role.
This is how Amazon grew from bookseller to major retailer, so any first step will be watched closely by all the players. As a partner to an online pharmacy, Amazon would benefit from opportunities to cross-sell health-related goods from its own inventory, and could avoid the licensure requirements of operating a pharmacy.
Its application for pharmacy licences suggests that its ambitions are a bit larger. Goldman Sachs provides persuasive reasons why Amazon will not enter as a full-scale online or online/retail pharmacy, PBM or drug wholesaler. However, the fragmentation of the drug supply chain provides some rich targets for reducing costs and improving services, allowing for reduction of what the investment bank estimates is $135bn in gross profits captured along the way.
“If Amazon were to ultimately integrate the different arms of the pharma supply chain, its potential to increase price transparency and lower out-of-pocket costs at the pharmacy counter [or more accurately, on the Amazon app] becomes considerably greater,” the report states.
Aiding the PBM backlash
Lack of transparency is one aspect of PBMs that USC’s Professor Joyce criticises, and he is not alone. Georgia passed legislation this year banning patient co-pays greater than the amount a PBM actually paid for a prescription.
“The PBM is in that advantageous position knowing who is paying for what because they have monopolies in the mail order business,” he says.
This makes them most ripe for an attack by Amazon and other online retailers that could be more transparent on price, perhaps abetted by self-insured employers who question the need for PBMs and band together into purchasing consortia. “There will be [employers] who say ‘We’re going to funnel our members to lower-cost outlets,’” Professor Joyce says.
It is notable that Amazon could arrive at a time when inexpensive health plans are on the rise, many of which demand greater cost sharing from enrolees. “Now that a lot of people are in high-deductible plans, it behoves them to look online, he says.
Any arrival of Amazon will be felt first by the pharma supply chain players that are downstream from big pharma and biotech. However, if the online retailing giant grows into a bigger role, it will become a customer that could prove to be tougher than today’s PBMs. Just ask book publishers.