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June 15, 2017

Amazon's shaking up the medical supply business. Here's how we're thinking about it.

Daily Briefing

    Read Advisory Board's take on Amazon's medical supply market moves

    Amazon's increasing presence in the medical supply industry is poised to shake up the market, Alex Kacik reports for Modern Healthcare.

    Next-generation supply cost savings

    Amazon's medical supply business

    Amazon sells medical supplies through its Amazon Business platform, which launched two years ago and offers businesses discounts and expedited shipping on more than five million products from more than 45,000 sellers. Businesses can integrate the platform directly into their purchasing systems.

    Currently, Amazon sells supplies such as catheters, forceps, hospital beds, infusion pumps, scalpels, and sutures through Amazon Business.

    Amazon executives have said Amazon Business generated $1 billion in sales during the platform's first year and is poised for growth.

    Growth could shake up market, increase competition

    According to Modern Healthcare, Amazon Business' growing presence in the medical supply industry is beginning to exert downward pricing pressure, which could increase as the company expands its business.

    Experts across various industry categories say Amazon typically sells products at discount ranging between 10 and 20 percent, and those discounts can undercut suppliers' margins, Modern Healthcare reports.

    For instance, the industrial supply company Grainger experienced a 2 percent reduction in its operating margin in the first quarter of 2017, which the company attributed to price drops on so-called "spot buys" and online sales, Modern Healthcare reports.

    Likewise, Owens & Minor, a medical supply distributor that sells some products through Amazon Business, experienced a 5.2 percent drop in its gross margin during the first quarter of 2017 compared with the first quarter of 2016. Paul Phipps, the company's CEO, during an earnings call said, "Significant cost pressures will persist up and down the value chain, resulting in stepped-up competitive dynamics, margin pressure, and additional industry consolidation."

    According to Modern Healthcare, the medical supply industry already has been experiencing quick consolidation in an effort to diversify and bolster margins amid increasing competition.

    Still, some health systems told Modern Healthcare they are sticking with their current arrangements. Jeffrey Rosner, Cleveland Clinic's senior director of pharmacy sourcing and purchasing, said, "We receive the best value by negotiating our contracts and purchasing our products directly from manufacturers and our approved distributors" (Kacik, Modern Healthcare, 6/10).

    3 Amazon advantages—and 4 major challenges

    Rick Conlin, a partner with Advisory Board's Spend Performance Solutions team, told the Daily Briefing that Amazon has three inherent advantages compared with more traditional players in the market: brand awareness; an established IT infrastructure that gives them the ability to scale quickly and handle major order/data volume; and their massive existing warehousing and distribution chain.

    However, Conlin said Amazon also faces four major challenges:

    1. Stiff competition from GPO market. "Collectively, Premier and Vizient already own well over half of the market share in outsourced procurement and supply chain and have 'sticky' customer relationships that will be tough to back out of," Conlin said. "Chipping away at this market share into something meaningful will be a tough task."

    2. High-margin supplies are logistically tougher to deliver. "Warehousing and existing supply chain infrastructure (though bountiful) may not be equipped to handle 'high-end' medical supplies, that have their own unique storage standards," Conlin said. "This is where all of the best margins reside, and commoditized supply chain is already hypercompetitive, which is why it's extremely low margin."

    3. A steep learning curve. "Amazon is new to this space, one that is ripe with idiosyncrasies," Conlin said.

    4. Establishing new pricing relationships with vendors will not be easy. "While Amazon does have unprecedented business relationships, actual price negotiations (in many line items that Amazon does not currently offer) will be a herculean task," Conlin said. "Most vendors in the high-end market save best pricing for committed volume (because demand is so customized and fickle from hospital to hospital). Amazon currently has no way to predict this—it would take several years for them to be able to do so."

    Brandi Greenberg, a managing director with Advisory Board's Health Care Industry Committee, said Amazon's entry and expansion into medical product distribution should serve as a wake-up call to all suppliers that established relationships and business models are ripe for disruption when providers face so much pressure to dramatically lower the costs of care. That's the case, she noted, even though Amazon has not yet ventured into the higher margin realm of preference items.

    "Amazon's efforts here will almost certainly accelerate price pressure on suppliers, while also threatening to 'unbundle' items that historically have been grouped together through GPO or distributor arrangements," Greenberg said.

    But Greenberg added that such disruption could also open new doors for certain suppliers. "Amazon's platform could make it easier for smaller, niche suppliers to break into certain markets," she said, "while also providing opportunities for progressive vendors to bolster their on-site supply chain services to hospitals experimenting with Amazon's offerings."

    5 things your docs may not know about supply costs

    Your physicians know all about clinical supply performance and how product selection drives patient outcomes—but they may not know how supply sourcing and pricing can hurt the hospital’s financial performance.

    To help you align your physicians around supply cost management, we compiled a list of the five knowledge gaps you should address.

    Download the Infographic

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