Amazon is already trying to disrupt health care

Buffett, Bezos & Dimon try to tackle health care
Buffett, Bezos & Dimon try to tackle health care

Amazon made big news last month after announcing it would seek ways to address soaring health care costs for its own employees. But the online shopping titan is already focusing its industry-disrupting power on the broader health care sector.

The retailer has rolled out a line of private label over-the-counter medicines and is building a business selling a wide array of medical supplies to doctors, dentists and hospitals.

Amazon (AMZN) says the efforts are part of its strategy to enhance the shopping experience for businesses and consumers. But its forays into the health care field are being closely watched, especially after it announced last month that it is working with Berkshire Hathaway (BRKA) and JPMorgan Chase (JPM) to better control costs and reduce spending on the health insurance they offer for the 840,000 people who work for them. Some industry watchers also speculate that the firm may try its hand at selling prescription drugs in the near future, though they warn this would be a big lift since the drug industry is so highly regulated.

Health care is "opaque with respect to pricing and how much players are compensated along the supply chain, so entrance by an e-commerce giant like Amazon could be a game changer," S&P Global analysts wrote in a recent report titled "U.S. Healthcare is 'prime' for change by Amazon and others."

The company won't comment on rumors. However, it acknowledges that it is becoming a bigger player in over-the-counter medicines. Amazon has long sold Tylenol, Band-Aids and thermometers on its website. But last summer, it quietly launched a line of private-label medicines manufactured exclusively for Amazon by Dublin-based Perrigo (PRGO).

The Basic Care line, which has its own page within the Amazon site, offers a range of products, including ibuprofen, allergy medicine, laxatives, hair regrowth treatments and nicotine gum.

Prices for many items are significantly cheaper than traditional pharmacies, such as CVS (CVS), Walgreens (WBA), Rite Aid (RAD) -- even Walmart, analysts at Raymond James said in a December report. For instance, Basic Care ibuprofen cost $7.50 for 500 tablets, while Walmart (WMT) charged $8.23 and Walgreens $15.49. A bottle of Basic Care laxatives cost $7.39, compared to $8.04 at Walmart and $11.99 at CVS.

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Private label items typically provide much higher profits than brand name products -- to the tune of two to three times the margin, said Elliot Wilbur, a research analyst at Raymond James. But one hurdle Amazon faces with some of its Basic Care line is that consumers aren't willing to wait 24 to 48 hours to get their cold or pain medicine when they are in need, he said. Instead, many will prefer to run to the store.

Still, Amazon is likely to be a bigger disruptor in the over-the-counter market than it would be if it starts selling prescription drugs, which is much more highly regulated and complex, said Shannan Murphy, director at S&P Global. The company can use its expertise in ordering and delivering commodity products to get non-prescription medicines to consumers quickly, she said.

"When Amazon disrupts an industry, they don't usually do it by doing what existing players do -- they come up with new, innovative methods," Murphy said. "So, I don't think Amazon will start a drugstore or drug distributor -- but they could partner with someone to change how drugs are sold. This is likely many years down the road, however."

Amazon is also trying to convince the medical community to buy commonly used products -- such as rubber gloves, syringes, gauze, surgical gowns, stethoscopes and dental bibs -- from its AmazonBusiness site, which launched three years ago. It brought on Chris Holt, who has long worked in the health care supply chain field, to lead the health care initiative. In addition to employing a sales team, the division has been attending industry conferences and events to raise its profile.

While this business line isn't as complex as pharmaceuticals, it still required Amazon to get licenses in various states before it could sell certain medical supplies. This set off a flurry of speculation that the company was moving one step closer to selling prescription drugs, but an Amazon spokesperson clarified that the licenses were for products, not medication.

Related: Can Amazon do to health care what it did to books?

Amazon is betting that those who buy supplies for medical practices -- as well as for educational and government offices -- will be comfortable shopping online. Its business site offers additional functions, such as allowing multiple users on a single account, requiring approvals from supervisors and enforcing spending limits. But it also allows users to quickly compare prices for a variety of vendors.

"We want to create an experience similar to the way people shop at home," said Lori Torgerson, an Amazon spokeswoman.

This venture also has its risks, analysts said. Doctors and dentists often have their preferred providers and aren't as sensitive to prices, Murphy said. Also, medical offices and hospitals can never afford to be out of stock, which is why they tend to stick with the suppliers that have worked well for them.

Amazon, however, is well known for testing markets and exiting them if the efforts aren't successful.

"You never quite know what they are going to do," Murphy said. "They have a lot of capital so they can try a lot of things."

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