Healthcare industry 'ripe for disruption,' S&P Global warns
- Rising costs, growing consumerism and heightened government scrutiny have created a cocktail of forces that leave the healthcare industry “ripe for disruption," according to a new S&P Global Ratings report.
- Amazon, which last year upended the supermarket industry with its purchase of Whole Foods Market, could seize market share from medical supplies distributors such as McKesson and Cardinal Health with its announcement this week it will expand efforts in that market and is in a pilot with a major hospital system. However, serious erosion could take time due to long-term relationships between buyers and existing distributors.
- The e-commerce behemoth could spark mergers and acquisitions among healthcare companies vying to survive in an increasingly competitive and unstable environment. For example, there’s been speculation that the CVS Health-Aetna merger was prompted by Amazon’s apparent interest in entering the pharmacy business.
Tulip Lim, an S&P Global Ratings credit analyst, said in a statement that "while ripe for disruption, the industry’s complexity will govern the rate of change.”
Segments considered to be most vulnerable to change include healthcare e-commerce sites like Global Healthcare Exchange, medical and laboratory supplies and retail pharmacies, according to the report released Thursday.
In the medical supplies distribution area, companies that distribute commodity-like products face a bigger Amazon threat than distributors of capital equipment and complex instruments. Companies like Patterson Medical Supply, which supplies rehabilitation and outpatient centers, could see erosion of market share, the report says. However, significant inroads in this space are unlikely unless Amazon acquires a distributor, it adds.
Ann Hynes, healthcare analyst with Mizuho, said recently that Medline is a likely target if Amazon decides to purchase a distributor. “Hospitals need to know where the product comes from, that it is FDA-approved, and that it is sustainable for use, especially for items that are used to operate on patients,” she said.
Group purchasing organizations such as Vizient also are vulnerable if Amazon undercuts their prices.
Amazon is already disrupting retail pharmacies by selling nonprescription drugs on its website. While the company has expressed more interest in medical supplies, it could see a lucrative market in prescription drugs and already owns the domain name AmazonRx.com, the report notes.
Amazon has dropped hints of a larger role in the medicines space. Late last year, the company filed with a number of state pharmaceutical regulators, but later told state regulators it did not intend to "store or ship drugs."
For Amazon to really grab pharmacy market share, it would need to purchase or partner with a pharmacy benefits management company, the report says. “Otherwise, it could only penetrate the cash-pay market, which is relatively small.”
The report comes days after the report on Amazon looking into medical supplies and just weeks after Amazon, Berkshire Hathaway and J.P. Morgan announced formation of an independent company to tackle the healthcare needs of their U.S. employees. The corporate giants said the initial focus will be technology solutions that provide “high-quality and transparent healthcare at a reasonable cost.”
While that corporate trio could create their own PBM, it’s more likely they would purchase one, given the skills required to run a PBM, such as formulary management and pharmacy claims processing — which none of the companies possess, the report says.