The Amazon Effect on Healthcare M&A

By DirectorCorps

July 30, 2019 Healthcare has set its sight on industries outside the disrupted retail space. Why not healthcare?

That alarming angle was stoked in 2018 when Amazon teamed up with J.P. Morgan Chase & Co. and Berkshire Hathaway to cut health care costs. Those companies’ desire to directly contract with healthcare payors could provide competition for health insurance and pharmacy benefit managers, said CNBC. Amazon bought PillPack for $750 million in June of 2018, potentially eliminating the need for pharmacy benefit managers (PBM), according to The Street.

There’s some evidence that healthcare executives already are responding to the threat of Amazon through mergers and acquisitions. CVS Health Corp. agreed to buy one of the largest health insurers in the country, Aetna, in December 2017 for $69 billion. Analysts believed the deal was driven by Amazon’s competitive threat, according to Quartz.

The online retailer has already had acquired pharmacy licenses in several states so it could sell medical supplies. And court documents in a recent lawsuit revealed that Amazon has been engaged in direct discussions with insurer Blue Cross Blue Shield.

“Direct contracting with payors (employers, independent plans and the Blues plans) would provide Amazon-PillPack the volume to demand significant price concessions from manufacturers, and enable them to be competitive with CVS and other PBMs,” said Michael Abrams of advisory firm Numerof & Associates in the publication TheStreet.

CVS, in turn, announced plans to roll out 1,500 HealthHUBs by the end of 2021 in an effort to compete. If Houston’s pilot locations of the expanded in-store clinics are any indication, customers can expect to be greeted by a “care concierge” to direct them to various offerings, including an in-store dietician and expanded medical products.

That’s not the only move potentially driven by competition from Amazon. Cigna Corp. recently bought pharmacy benefits manager Express Scripts for $67 billion in an apparent bid to control pharmacy costs. Express Scripts was seen to be threatened by Amazon, in particular. Activist investor Carl Icahn even planned to fight the deal because of the threat to Express Scripts’ business over time, according to Bloomberg.

Healthcare needs to make changes to control costs and its compensation model. The Amazon effect may be just another catalyst to make that happen. With all the potential disruptors out there, M&A is one tool in the toolbox of transformation.