Amazon’s unique market entry model focuses on competing in new ways.

Todd Huseby

Ever since its launch as an online bookstore 25 years ago, Amazon has ignored traditional economics as it solves customer challenges in new ways — raising expectations and forcing competitors to do better in the process. Over the past few years, Amazon has ramped up the number of experiments, acquisitions and offerings across the health care value chain, including the recent launch of Amazon Pharmacy in 45 states. While Amazon Pharmacy has yet to scale, its offering and experiments are sure to drive innovation, heighten patient expectations and create pressure on incumbents.

A history of disruptive market entries

Over time, we’ve seen Amazon repeatedly enter and revolutionize new markets through digital. Consider the Kindle e-reader, which launched in 2007 and quickly upended how books are produced and sold. Instant gratification via downloaded digital content quickly cut into traditional physical book sales, while the launch of Kindle Direct Publishing led to a revolution in self-publishing. A company that first opened as a bookseller swiftly overturned the traditional publishing model by finding a new way to create value.

Amazon’s unique market entry model focuses on competing in new ways that are entirely different from the way incumbents do business. The Amazon “blueprint” for success starts by identifying ways to overcome customer pain points and then piloting small-scale offerings to define and test, with little concern as to the initial cost structure of the new model. The value proposition is then further refined leveraging Amazon’s burgeoning ecosystem of data, products and customers, which includes subsets of Amazon Prime’s customer base of more than 100 million people. Finally, Amazon routinely seeks to scale by vertically integrating its sales and supply chain processes.

Katy Rauen

Other industries that Amazon has played a part in disrupting include digital video (Prime Video), digital music (Prime Music), grocery delivery (Amazon Fresh), cloud computing (Amazon Web Services) and its own package delivery (Prime Delivery and Amazon Flex). Now, Amazon is focusing on health care across multiple points in the value chain, and we should prepare for significant change as a result. Nader Kabbani, who helped build Kindle Direct Publishing, oversees Amazon’s burgeoning pharmacy business. But while Amazon’s pharmacy-related activity certainly represents a disruptive threat, it also presents opportunities for retail pharmacy to partner with health care value chain incumbents in new ways to meet evolving customer expectations.

Amazon’s actions across the health care value chain

Amazon is attempting to assuage customer pain points across the entire health care value chain. For example, the Amazon.com website now offers a dedicated section that features products that people can buy using their FSA or HSA card to maximize the value of their tax-advantaged flexible or health spending account dollars. Since purchasing PillPack in 2018, Amazon has helped patients better manage complex health conditions through direct-to-consumer delivery of medications in multi-dose packaging, while the recent announcement of Amazon Pharmacy indicates it is looking to expand its reach to a broader consumer population. The company is also exploring opportunities to use its Alexa personal voice assistant and new Halo fitness tracker product for a wide range of health applications, including patient monitoring and integration with electronic health records.

We anticipate Amazon will bring significant disruption to the health care value chain across several areas: payer relations, the provider space, e-prescription and health information exchange, and pharmaceutical fulfillment and delivery.

Brendan See

Amazon is poised to make significant moves in the payer relations space. First, it has partnered with Inside Rx, a subsidiary of Cigna’s Evernorth brand, for administration of an off-benefit prescription savings card program that Prime members can use at Amazon Pharmacy or thousands of local retail pharmacies. For Prime members, Amazon Pharmacy appears to have removed traditional restrictions like comparisons between on- and off-benefit prices that have previously posed contractual hurdles for retail pharmacies. In the on-benefit space, Amazon Pharmacy already has agreements with numerous payers in place and recently hired John Lavin, formerly of Caremark, to lead its pharmacy payer relations and contracting efforts. With Amazon acting as an on-benefit pharmacy fulfillment option, PBMs and plans must have entered contract negotiations with Amazon Pharmacy. Amazon’s history of learning through partnerships before expanding into a category (e.g., AmazonBasics, where Amazon learned which products were most desired by their consumers and then found ways to provide those products at cheaper prices) may foreshadow future ambitions: if negotiated rates, price transparency restrictions or in-network decisions create barriers for Amazon Pharmacy, Amazon could also decide to disintermediate the PBM role and go directly to employers, albeit not without significant effort. Doing so would require it to match payers’ knowledge of and skill in displaying prices, determine which providers are in-network, facilitate payment and claims adjudication, provide support to a new kind of customer, and more. This provides an opportunity for value chain incumbents to capitalize on key areas where Amazon falls short — such as lack of pharmacy fulfillment infrastructure, retail presence, awareness as a health care brand, and expertise in a complex industry.

In the provider space, Amazon is experimenting with Amazon Care, a concierge model that leverages telehealth, provides in-home ancillary care and delivers pharmaceuticals via courier in order to help keep employees healthy and productive. While currently a benefit offered to Amazon employees, this has the potential to scale more broadly as a direct-to-employer offering. While this could reduce touchpoints needed with the payer and be attractive to large, self-insured employers, it is a costly model to scale. As Amazon looks to create a sustainable offering, retail pharmacies could be an attractive partner to provide complementary services like laboratory testing and imaging services, as well as script fulfillment, in a more cost-effective manner. Whether in direct partnership with Amazon, or in collaboration with providers and payers that are likely to respond with their own offerings, companies in the retail pharmacy industry are well positioned to play a key role in enabling a more scalable model.

The newly announced Amazon Pharmacy also presents an opportunity for Amazon to disrupt e-prescription and health information exchange. Last year, Surescripts, which is privately owned by the National Association of Chain Drug Stores, National Community Pharmacists Association (NCPA), CVS Health and Express Scripts, terminated its contract with third-party data company ReMy Health, which works with PillPack, after alleging that “ReMy Health or its customers provided fraudulent information to Surescripts when making requests for patient [medication history] data from the Surescripts network.” As a result, ReMy Health was removed from the Surescripts platform, leading to speculation that Amazon may make further moves to disintermediate the Surescripts network.

Finally, Amazon has already signaled a move toward disrupting pharmaceutical fulfillment and delivery further by integrating Amazon Pharmacy and Amazon Prime. Amazon has a history of introducing new benefits to Prime subscribers to drive incremental value and limit member churn, and it has achieved Prime subscription price increases with limited attrition. Now that Prime faces competition from Walmart+, Amazon has added value for its customer base by integrating pharmacy features with Prime. While e-shoppers have come to expect free one- to two-day shipping for most items, this phenomenon has yet to catch on widely in the pharmaceutical delivery segment; Amazon Pharmacy’s two-day delivery promise for Prime members (five days for nonmembers) is a meaningful development for customers relying on refills. It may also convert future heavy script fillers into a solidly loyal customer base that would impede volume growth for small-volume pharmacies in years ahead. The many retail pharmacies that have scaled up their home delivery during the COVID-19 pandemic will now face resistance in customer willingness to pay for delivery, along with a rise in shipping speed expectations as a result of the new Amazon Pharmacy–Prime pairing.

An Rx for proactive action

Beyond the strategies touched upon above, what actions can incumbents take to protect against Amazon’s disruptive advancements into pharmaceutical fulfillment? We believe that payers will continue to promote shifts toward generic drugs and other cost-focused moves in anticipation of potential disintermediation by Amazon. They should also proactively plan future contract negotiation strategies with Amazon Pharmacy, while Amazon will likely continue to push for price transparency between on- and off-benefit options. PBMs will continue to improve both operational efficiency and the direct-to-consumer experience to protect against a shift away from mail order.

Retail pharmacies will be pressured to deliver more-convenient solutions, but they will also have opportunities to increase their value-added services as care delivery becomes increasingly virtual. Many have recent experience of providing fast delivery, though this is a costly service to offer. Continued partnerships with delivery apps are one possible solution. An increased focus on e-commerce and digital ordering is needed, along with touchless checkout options.

Further, the physical space within pharmacies needs to be rethought. A recent Kearney study indicates that more than two-thirds of patients intend to use telehealth services moving forward, and nearly three-fourths are comfortable utilizing value-added services like vaccinations, screening and chronic condition management at pharmacy locations. This suggests that expansion to ancillary services like laboratory work and imaging would be well received. Those that already have partnerships with care providers via in-store clinics have a leg up in enhancing the in-store experience further and are positioned as a good partner to both providers and payers. Other add-on services and products related to targeted adherence interventions for various disease states should also be considered to compete with the convenience of a model like Amazon Care.

Beyond expanding into new areas of health care, pharmacies also need to improve their personalized care capabilities as part of a move toward more comprehensive, digitally enabled health care. Increased use of telepharmacy services, which reduce operational costs, will preserve the one-on-one pharmacist consultations that have long been so critical to the pharmacist-patient relationship. Retail pharmacies can also expand the scope of their customer rewards programs to incorporate personalization based on patient conditions. Additionally, they can offer HSA/FSA-eligible products for chronic condition management while increasing marketing and patient awareness around which products are eligible.

Clearly, new competition from a behemoth like Amazon can be intimidating. But competition is also invigorating, and payers and pharmacies should rise to the challenge to rethink their own businesses in order to not merely remain relevant but to grow.

Todd Huseby is a partner specializing in the health care industry at Kearney, a global consulting partnership. Kathryn Rauen is a Kearney principal specializing in pharmacy and health care provider operations. Brendan See is a Kearney principal specializing in payer, retail and mail order pharmacy operations. The authors thank their colleagues Laura Bowen and Ellen Bursey for their contributions.