Amazon Pharmacy empowers consumers

Amazon Pharmacy’s recently announced advance into the prescription drug distribution arena caused an immediate tumble of the stock prices of pharmacy giants and a major drug price-tracking platform. The reason is that Amazon Pharmacy sells prescription drugs by mail, offers savings for its Amazon Prime members when paying without insurance, and enables user-friendly comparative price-shopping. 

Unlike the purchase of cars, houses or other merchandise, comparison shopping is generally an alien concept in the purchase of prescription drugs. Third-party payment systems, whereby someone other than the customer pays for drugs, usually limit uninformed patients’ access to the cost of drugs. Highly regressive pricing discrimination known as “soaking the poor” and “the sick subsidizing the healthy” has, unfortunately, became an unspoken money-making tenet for too many health care companies. 

While many well-insured Americans have been shielded from these practices, tens of millions of uninsured and underinsured Americans have evolved into an enormous consumer group whose drug-buying behavior is sensitive to the cost of drugs. Most of the 31 million uninsured population is concerned about the cost of their drugs. The 70 million people enrolled in high-deductible plans and the 3 million enrolled in unsubsidized plans available through the Affordable Care Act (ACA) marketplace also are exceptionally sensitive to drug costs. These consumers are urgently looking for affordable prescription drugs and have become too important a market for giant retailers to overlook.  

The Amazon Pharmacy model — and others like it which may soon follow — will expand options for self-insured employers and their workers, too. An employer’s pharmacy benefit manager (PBM) may include it in its pharmacy network to compete with the existing mail-order provider. Additionally, the employer may carve out mail-order business from its current PBM and make a provider like Amazon Pharmacy the primary contracted provider. In either scenario, employers and workers will gain more avenues to purchase prescription drugs, and the additional competition is expected to positively disrupt current pricing and generate savings.

With such added competition, employers potentially can take advantage of discounted cash prices to directly manage prescription drug benefits without involving PBMs. PBMs usually contract with self-insured employers to manage their prescription drug benefits “for free.” PBMs make money from the retention of manufacturer rebates for branded drugs and the spread pricing — the difference between the charge to payers and the payment to pharmacies — for generic drugs. 

PBMs’ incentives, in some instances, may be misaligned with the interest of self-insured employers. PBMs place drugs in preferred positions on their formulary drug lists that can generate the highest rebates and can increase spread pricing, which improves their profitability. But these drugs often are not the most cost-effective therapy, resulting in wasteful drug spending for the employer and workers. 

Self-insured employers have not been able to disintermediate PBMs thus far because PBMs offer access to their discounted in-network price and pharmacies. Now, with this kind of increased competition offering discounted cash prices and home-delivery convenience, employers may have an incentive to bypass PBMs and opt to design their own “waste-free” formularies. Furthermore, drug prescription claims can be adjudicated through a clearinghouse based on a fixed fee per claim. These options will have important implications for the self-insured employers’ ability to disintermediate PBMs.  

Washington cannot enact meaningful health care reforms without the buy-in of special-interest groups, which in turn has resulted in higher prices for consumers and regulatory costs. Informed, price-sensitive consumers, empowered by Amazon and similar platforms, will likely be more effective in collectively reigning in excessive drug-pricing. 

We wonder what might be next. An expansion into the lucrative mail-order limited and exclusive distribution specialty drug market ? Establishment of self-labeled generic drugs business? Direct primary care clinics at, for example, Amazon’s Whole Foods stores, or similar arrangements by other, yet-to-emerge competitors? Exciting developments that could improve the health care equation for many Americans may lie ahead.   

Ge Bai, PhD, CPA is an associate professor of accounting at Johns Hopkins Carey Business School and associate professor of health policy and management at Johns Hopkins Bloomberg School of Public Health. Thomas Cordeiro, R.Ph FASCP is the president of Integrity Pharmaceutical Advisors, LLC. Shivaram Rajgopal, PhD is the Kester and Byrnes professor of Accounting and Auditing at Columbia Business School and a senior scholar at the Jerome A. Chazen Institute for Global Business.