Amazon Primed to Disrupt Healthcare? Not So Fast

Analysts believe Amazon, JPMorgan Chase, and Berkshire Hathaway's proposed partnership could start with a relatively modest internal health insurance offering and build upon that.

Amazon's anticipated venture into healthcare has the potential to disrupt traditional markets, especially pharmacy, pharmacy benefits, and supply chain, Standard & Poor's analysts say.

However, the Byzantine nature of the nation's $3.3 trillion healthcare sector will also determine the pace of that disruption.

"Given the sheer complexity of healthcare and its importance to our economy, change doesn't really come fast," Shannan Murphy, director of Corporate Healthcare Sector for S&P Global, said in a conference call Thursday.

"That said, we do think that change is coming slowly but surely, and certain elements of healthcare are more or less ripe for near-term disruption," Murphy said.

The vaguely worded announcement late last month that Amazon, JPMorgan Chase, and Berkshire Hathaway would create a nonprofit entity designed to reduce their employees' healthcare costs sent shivers through the pharmacy, pharmacy benefits, and supply sectors, with a loss of about $69 billion in market cap that day.

The market slide underscored investor jitters about sustainable margins given healthcare business models that provide limited pricing transparency, S&P says. However, the trio provided few details for their plans, which S&P analysts believe could start with an internal insurance offering and build upon that.

"All three companies are likely self-insured so they could try to tackle ancillary insurance services such as PBM," said Tulip Lim, director of S&P's corporate healthcare ratings. "This could help Amazon, especially if they wanted to get into the area of prescription drugs."

"But it's probably more likely that they would buy a PBM rather than build one, because operating a PBM requires certain competencies outside of the three's core, such as formulary management," she said.

The sectors most at risk for disruption are distributors of lab and medical supplies, but that comes with caveats.

"Even though Amazon is an e-commerce powerhouse, it might take a while before they take meaningful shares from certain rated players," Lim said. "That's because many of these companies cater to the acute-care market, which will be slower to buy meaningfully from Amazon."

"The distributors are pretty intertwined with the hospitals and are also pretty efficient at delivering products in large quantities and on short notice," she said. "Plus, many of the distributors provide additional services; specialized sales people, customized products, and a breadth of products like medical supplies and drugs."

Lim said Amazon would face hurdles entering the retail prescription drug market, even though they already have the Amazon RX domain name, and they’ve been in talks with generic drug manufacturers.

"In terms of pharmacy, Amazon has already been impacting the retailers in the nonprescription drug area and they could use Whole Foods as part of a pharmacy strategy," she said. "But, we think they would have to partner with a PBM to gain any real volume. Otherwise, they could only reach the cash-pay market, which is relatively small."

That might be a big hurdle because the biggest retailers have their own competing mail order pharmacies.

Lim says the wholesale drug distribution business would seem like a logical inroad for Amazon because it's good at order taking and fulfillment. But that is not the only function of wholesalers. "They also use their scale to buy drugs at a discount. Starting out amazon wouldn't have that scale unless they bought someone," she said. "Even the biggest pharm chains have thought it was best to join forces with a distributor to buy drugs."

Amazon could also shake things up in the healthcare sector by by following through on its promise to provide market transparency.

"That is maybe one of the reasons why investors are spooked because this is a very opaque marketplace," Lim said. "There are a lot of different companies involved and there are third-party payers involved and different middlemen involved. That is part of the reason for the complexity."