Amazon Business, the B2B purchasing arm of the e-commerce behemoth, is looking to disrupt the healthcare supply chain amid accelerating hospital operating expenses, flattening admissions and an increasing need to cut costs.
Under pressure to pare down unnecessary spending, supply chain professionals are increasingly rethinking traditional distribution and supplier models to gain a competitive advantage.
Some have turned to Amazon, whose shadow looms ever larger in the healthcare space. Much has been discussed concerning the Amazon-BerkshireHathaway-JPMorgan employee health cost endeavor (along with Amazon’s recent acquisition of PillPack) but one can't ignore Amazon’s subtle foray into the supply chain sector.
Amazon Business provides a marketplace for medical supplies in a format very similar to its popular Amazon Prime service. The B2B purchasing venture has generated more than a billion dollars in sales its first year alone and introduced three business verticals last year — education, government and healthcare. Already, hundreds of thousands of medical products are available on Amazon Business, from hand sanitizer to biopsy forceps.
“The shopping experience feels the same, but in the background we’ve configured that organization’s procurement practices and policies," Chris Holt, global healthcare leader at Amazon, told Healthcare Dive in an interview. "So, if they want to service particular suppliers in a given category or focus on diversity suppliers, women-owned businesses, quality-certified suppliers, they can search for things based on their own company-specific credentials, and that drives the algorithms that feed our search results.”
In the interview, Holt discussed Amazon's marketplace model, workflow approvals aimed at streamlining ordering and its "tail spend" strategy. Here are the highlights.
1) Amazon is using its tried-and-true disruption model built around a marketplace
Amazon's disruption of sectors from publishing to food is well known. In healthcare, Holt said there is a "needed shift" from an old, inefficient supply chain model that runs on physical contracts with distributors and manufacturers to Amazon's "marketplace" model.
“If you look at most healthcare providers, they have a central procurement team that tries to control the purchasing of all the employees,” Holt said. In theory, this should get them better pricing because every department is purchasing off the same product contracts. But in reality, Holt said, that drives “tremendous inefficiency, because the end user that needs the product has to go through a lot of procedural steps” — steps that tend to be driven on antiquated technology.
Since the marketplace is transparent, new suppliers are available to hospital procurement teams using Amazon Business. Amazon contends that their ability to shop across numerous suppliers will deliver big savings. One example is Summit Pacific Medical Center in rural Washington, which Amazon said it helped cut labor expenses by 80% and lowered spend related to delays in lead time and shipping upcharges.
Along with being able to accommodate IDN- and GPO-negotiated pricing and payment via invoice, the marketplace touts price transparency — an important step as hospitals shoulder increasing expense and labor costs.
This comparison-shopping ethos contrasts to older models based on fixed contracts that can obfuscate prices and where middleman fees add ancillary costs.
“Online channel[s are] going to be the primary marketplace[s] for even the most premium of medical devices in the future,” Holt said.
2) Workflow and licensing approval are baked into the purchasing process
When an employee buys a product requiring approval — maybe it’s over a certain dollar amount or in a restricted category of devices — Amazon's website can process it automatically, sending the purchase request straight to the correct approver.
So, Holt said, a lot of “manual processes that break down get replaced by these digital, automated processes."
Amazon Business claims a number of their healthcare customers have seen their labor costs cut by more than half — and it's not just big hospitals they are going after.
A professional licensing platform allows physicians to post their license with Amazon. After Amazon verifies their credentials with the state board of pharmacy, that physician may purchase restricted and regulated medical products on the marketplace, as opposed to needing new approval each time.
“It’s a big part of what we’re trying to do,” said Holt, “to enable [physicians] to buy what they use everyday — not just things you might initially think of Amazon for, like office products or IT products, but also all the medical products that they consume.”
3) Data pushes reporting capabilities for disparate purchasing groups
In a 2018 Global Healthcare Exchange survey, approximately 60% of supply chain leaders indicated that data and analytics were the highest priority areas for improvement in the next year.
Similarly, healthcare providers are looking to dynamic technology to add rigor and automation to their business processes. Amazon is counting on the fact that many workers are already familiar with the Amazon experience to give them a head start.
“When an employee sits down at work, and they see Amazon, they already know exactly what to do — they don’t even need to be trained,” Holt said. This recognizability negates the need for employee training in the system.
According to Holt, the system’s analytics capabilities allow different employees to view and manipulate their purchasing data on a macro level, allowing them to do such things as prepare customized spending reports grouped into customer-specific batches.
“Maybe you’ll have the hospital maintenance department in one group, and then the care providers like nurses and doctors in another group, and then the supply chain purchasing department in another group,” Holt said. “To all of those different employees, we provide analytics on what each different group is doing, what kind of spend categories they’re buying in, how that’s trending over time [and] insights into the price and cost-effectiveness of what they’re buying.”
Amazon Business touts the system's benefits for manufacturers too. With real-time visibility on which of their products sold on the marketplace today and in what quantity, manufacturers know how much they need to make tomorrow in order to replenish their stock.
Also in Amazon's crosshairs are outdated technological processes, like static itemmasters, where you have to lock in what you're allowed to buy.
“The procurement tools often feed back into an ERP (enterprise resource plan) or financial system that has a very standardized general ledger that does really well when it’s a repeat order, but isn’t very good at anything new,” Holt said. “We’ve been building technology to integrate backwards into all of these systems, even to enable EDI (electronic data interchange) transactions,” allowing Amazon's system to fully interact with the healthcare system's.
4) Amazon is gunning for suppliers' margins
Amazon Business is aiming to take on the roughly 20% of spread out and potentially mismanaged spending that accounts for 80% of a healthcare system's suppliers.
“That’s all the volume where you don’t spend a lot with a particular supplier; [It] could be things that aren’t high-volume purchases for your organization, and it’s generally very poorly managed,” Holt said. "It’s not worth the time and effort to negotiate contracts with those suppliers, to negotiate specific pricing or terms, or delivery capabilities.”
“As a result, you have this long tail of suppliers that are poorly managed, you don’t know if the prices are good or not, it’s not cost effective for your procurement team to engage with those suppliers,” he continued.
Amazon is strategizing to acquire this 20% of tail spend, allowing procurers “instant selection from hundreds of thousands of suppliers where you don’t need to negotiate pricing or a contract with them."
“We hear from our customers that just being able to clean that up and being able to simplify that and then have analytics and insight on how that’s doing is a hugely strategic procurement initiative,” Holt said.
Challenges and next steps
To be sure, Amazon is far from taking over the market.
The CEO of New York-Presbyterian told Healthcare Dive in late May that Amazon was unable to achieve better pricing for part of NYP’s supply chain.
Some hospitals have also been reluctant to buy supplies, citing lack of options and control over purchases and shipping. In a sector where prompt arrival and continuity of product is crucial, hospitals may stick to a known — albeit outdated — entity.
Yet costs due to administration, marketing, shipping and storage account for an estimated 20-30% of healthcare supply costs — a huge opportunity for increased competition in a market that's forecasted to reach $2.3 billion by 2022.
UPS, FedEx, and DHL have made significant investments in their healthcare supply chains. In 2015, UPS reported that healthcare was one of its fastest-growing streams of revenue. Additionally, the healthcare supply chain space is already crowded with big companies such as Cardinal Health, McKesson and AmerisourceBergen.
Yet ultimately, Holt said Amazon is betting it can help the healthcare supply chain evolve from its current pricey “push” model to a more constructive “pull” model: one that relies on demand instead of supply.
A recent Reaction Data survey found 62% of healthcare executives are hoping Amazon can shake up the industry’s supply chain, and Amazon is counting on this shifting healthcare bedrock to give it an edge as it grows.
“I think healthcare leaders are desperate for new models and are eager to try new things,” Holt said. “That intake process of expanding our customers, being obsessed with them, and listening to them and learning from them is really the key to all of this."