customer looking at medicine in the pharmacyHealth insurers, pharmacies, and pharma companies are concerned about Amazon's entry into the market. Rightly so, they are being proactive to remain competitive in light of the uncertainty and disruptions caused by new entrants. Current market players must take more actionable steps to safeguard their footprint and maintain an offensive (not defensive) position by developing strategies consistent with their business objectives and long-term growth plans.

The healthcare sector is in a constant state of flux given ever-changing federal regulations, shifting market dynamics and players, and fluctuating patient needs. It is changing given a series of consolidations in health systems and electronic medical record providers over the past few years. Plus, there have been countless other mergers and divestitures in the hospital landscape nationwide. For example, Optum purchased DaVita Medical Group in late 2017, and we saw the merger of Cooper University Health Care, Lourdes Health and St. Francis Medical Center in September 20171.

The EHR segment has seen consolidation accelerate in 2017 as evidenced by Allscripts purchase of McKesson’s EHR for $185 million in August 2017 and its purchase of San Francisco based Practice Fusion in January 2018 to strengthen its base in outpatient settings2.

We expect to see changes in market players in the retail pharmacy sector as well. There is speculation Amazon may try to enter the pharmacy market by selling prescription drugs3, since it is already selling OTC medications and has teamed up with Berkshire Hathaway and JPMorgan Chase to lower healthcare costs4. If Amazon enters the retail pharmacy market, it could potentially turn the industry on its head by disrupting sales and distribution of prescription drugs. Amazon is known for its logistics and distribution systems, IT platforms, targeted customer marketing tactics, and competitive product pricing. It will be able to leverage its existing logistics and distribution systems to process, route, and deliver prescriptions to patients nationwide.

Online and mail-order pharmacies are not a new concept and have been around for a long time, but they may not be a formidable match for Amazon’s scale and sophisticated logistics systems. One of the benefits for consumers is that there would be more suppliers in the market, more options for consumers, and greater competition overall. All these factors would drive drug prices down and increase competition among specialty and mail-order pharmacies as they try to maintain sales and their client bases.

Insurers and retail pharmacies are embarking upon partnerships to generate synergies. Specifically, CVS and Aetna are looking to merge and become a powerhouse in both the retail pharmacy and insurance sectors. If the merger is finalized this year, the merged entity may be able to remain competitive against market disruptions such as the threat of new entrants (i.e. Amazon). The merger could solidify the unique strengths of CVS as a dispensary and center for routine medical care through MinuteClinics and of Aetna as a price negotiator with scale. One of the greatest strengths a combined CVS and Aetna entity would hold over Amazon would be the ability to connect with patients on a more personal level with a trusted reputation. It could also connect patients with healthcare providers and provide prescriptions with a more human touch building interpersonal relationships far beyond any online entity. Currently, Amazon is not able to replace the human interaction associated with speaking with a physician, nurse, or pharmacist.

If the CVS/Aetna deal comes to fruition, then the merged organization will be less vulnerable to  future threats from Amazon, however it is unclear if Amazon will enter the market alone or if it will embark on joint ventures or partnerships with existing pharmacies to leverage their industry knowledge and customer  base. Given the recent announcement that Amazon, Berkshire Hathaway and JPMorgan Chase are embarking on efforts to lower healthcare costs by creating an independent healthcare company for their employees4, it is not unfathomable for Amazon to branch out and develop additional synergies with other healthcare market leaders.

Pharmaceutical companies will also be impacted by Amazon’s potential market entry. With new market entrants prices will decrease although the quantity demanded will be higher. Some options pharma companies may pursue include:

  • Stimulating demand by increasing marketing and promotional campaigns for brand-name prescription drugs - By shifting the demand curve to the right prices rise along with the quantity demanded.
  • Creating an artificial deficit- Firms may consider reducing the supply of brand name drugs to drive prices back up. This is not a strategy that is recommended since it could result in public backlash.
  • Re-evaluating formulary drug prices to remain profitable (i.e. maintain rebates, or push prices higher) - Firms could hold off on the introduction of generics and focus efforts on the marketing of new drugs.

Manufacturers must create advisory groups focused on identifying changes in the marketplace and developing strategies to reduce or lessen the effect of market disruptions. CVS and Aetna should align on market strategies and work hand-in-hand to identify market risks and mitigation strategies to combat them. By taking such approaches, pharmacies and payers can plan for potential changes in the retail pharmacy sector and help drive future changes in the landscape instead of reacting to them.