The partnership between Amazon, Berkshire Hathaway, and JP Morgan to create a healthcare company for their US employees has great potential to disrupt the healthcare industry. The companies’ scale and resources, plus Amazon’s unique technology and logistics capabilities, will be key assets helping to drive down costs and differentiate from traditional healthcare players.
Why is Amazon doing this?
Growing US economic and societal pressures for lower-cost healthcare has created an opportunity that Amazon, Berkshire, and JP Morgan are seeking to fill with the new venture. Having disrupted media and electronics, household products, Cloud storage, grocery and other industries, Amazon has turned its attention to one of the few areas of consumer spending it does not yet have a foothold: healthcare.
What does this mean?
By starting with its typical Day 1 mentality, Amazon is not restricted by the existing structural healthcare challenges and constraints faced by traditional drugstore players like CVS, Walgreens and Rite Aid. While Amazon’s exact strategy for entering the healthcare market remains unclear, we know that any move within the healthcare space will pressure traditional drug chains to compete in new ways.
To differentiate, these players will need to emphasize their retail health expertise and core positioning and participate across more of the total healthcare value chain. This could come in the form of strategic partnerships, such as CVS’ acquisition of Aetna; providing health expertise on the shop floor; deepening initiatives in specialty pharmacy, or elevating the healthcare experience with digital add-ons like telemedicine.
For manufacturers, the extra pressure on traditional chains presents an opportunity to partner on innovation and digital insights to support their customers in competing against Amazon. Should Amazon deepen its role in healthcare, one area of focus would likely be lowering drug costs by pushing further into generics and negotiating discounts and rebates from drug manufacturers with the same data-driven intensity that Amazon uses in negotiating item-level P&Ls on the retail side of its business. In this case, manufacturers will also want to ensure they are positioned to partner with Amazon in this new venture by offering consumer insights in exchange for premium product placement on the Amazon site.
Key potential areas of focus
- Fulfillment: With its well-developed last-mile logistics ideally set up for medicine delivery, Amazon could focus on fulfillment of prescriptions to first improve traditional mail-order pharmacy and then expand beyond that. Prime integration or a healthcare-specific version of Prime are viable options to deliver a focused and personalized pharmacy and total healthcare management experience for its consumers.
- Technology: Amazon could leverage advanced data analytics to reduce healthcare costs based on analysis of healthcare expenses from different medical providers, hospitals, insurers and manufacturers its own employees currently use. It can also improve the healthcare experience using consumer data and artificial intelligence to more efficiently monitor and influence drug adherence, as well as provide more personalized health and lifestyle product recommendations.
- Pharmacy Benefits Management (PBM) and private label: Amazon could initially build out its own PBM and help manage healthcare for its own employees to learn about and improve healthcare costs before rolling it out beyond its internal organizations. As seen with Amazon Go, it is no stranger to testing and learning at a smaller internal scale before rolling out initiatives to the public. Amazon’s plan can also promote a lower-priced generics assortment, driving down price and allowing the retailer to roll out its own generics on a larger scale to take significant share in yet another category.
- Acquisitions: In order to build up its physical, proximate distribution capabilities, Amazon could make its next physical acquisition in the drugstore space. A company like, for example, Rite Aid, offers a foundation that Amazon can further develop.
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