2018 Year in Preview

PBMs: Will the Amazon cometh?


Robert Calandra
Amazon’s Jeff Bezos

A few months ago Linda Cahn was pondering how a retailing giant might change the current PBM business model of convoluted contract language, secret side deals, opaque pricing structures, and the like.

“A Walmart, Costco, or Amazon could create a truly transparent PBM,” said Cahn, a PBM consultant and an ardent critic of the industry. “That would implode the current model.”

Well, we may soon find out.

As 2017 wound down, Forbes, Bloomberg, Barron’s, CNBC, and Marketwatch were rife with reports that Amazon was this close to diving into the PBM marketplace. And when Amazon takes a plunge, the wake usually swamps the competition.

The first hint that Amazon was sizing up the PBM market came in May, when CNBC reported that the company was hiring a general manager to lead its pharmacy business. The network followed up in September with a story saying Amazon had “ramped up” its conversations with “middle-market” PBMs (presumably after Amazon checked its website to see if it had any in stock).

A few analysts think Amazon ultimately won’t fill its prescription to become a PBM. The PBM industry thrives in a thicket of regulations and licenses that might be difficult even for Amazon to master. Amazon is also used to direct payment from gazillions of customers. Its PBM would be dealing with third-party payers.

Amazon’s experience

Of course, if Amazon buys an existing PBM it likely will have all the regulatory, licensing, and bill processing components in place. Amazon does have some experience in the prescription drug business, although it was on the retail side of the selling universe. In 2000 it held a 40% stake in Drugstore.com. That’s when Drugstore.com paid Amazon $105 million over three years to be a “featured shopping tab on the Internet e-tailers site,” according to an AdAge article. Amazon eventually sold Drugstore.com to Walgreens, which closed the website last year.

Industry analysts have noted that if Amazon were to get into the prescription drug business, it might benefit from the brick-and-mortar presence it now has in many of the most affluent and well-insured ZIP codes in the country by virtue of its $13.7 billion acquisition of Whole Foods this year. The company would be well positioned to open in-store pharmacies in those tony places. People would be able to pick up organic bananas, hormone-free milk, grass-fed beef, and their statins all in one trip.

Amazon’s poking around the PBM market hasn’t gone unnoticed by CVS, Express Scripts, or Optum. They recognize the threat an Amazon PBM would pose. So if Amazon wants to get into dispensing prescription medications, why can’t a PBM get into health insurance?

CVS and Aetna, the country’s third largest health insurer by revenue and members, are exploring a proposed $66 billion merger. According to Reuters, the merger would allow the blended company to negotiate prices with pharmaceutical manufacturers and control the out-of-pocket costs customers pay for each drug.

A CVS–Aetna mashup could have a domino effect. Other PBMs, insurers, and pharmaceutical companies would look for a dance partner. Of course, Optum is already a subsidiary of UnitedHealth Group. Optum itself expanded this year with its $1.3 billion acquisition of the Advisory Board’s health care business. Meanwhile, Anthem is partnering with CVS to form a new PBM to be called IngenioRx that will get up and running in 2020 after Anthem’s contract with Express Scripts ends.

Cahn sees a chance for a giant jolt of transparency if Amazon were to get into the PBM business. She would like to see the company insist that manufacturers simultaneously submit the net discount price for each of their drugs for the subsequent six months. Amazon could then publicize every drug’s actual price, by drug and by therapeutic category. That way, she says, everyone—plans, patients, and doctors—would know the real price before they buy or prescribe.

“Consumers in high-deductible plans would finally have a means to know the actual prices of every drug, which all PBMs today hide,” she says. “Amazon would thus impose price competition. It would grow exponentially and the existing marketplace model would crumble overnight.”