Amazon, Orthopedics and Distribution Disruption

Last August 24, 2017, Amazon announced it was buying Whole Foods.

On January 30, 2018, Amazon announced a partnership with JP Morgan and Warren Buffet to begin supplying healthcare services to one million employees.

Then, February 13, 2018, The Wall Street Journal reported that Amazon is attempting to become a major hospital supplier.

Is Amazon about to do to orthopedic device makers and distributors what it did to retail goods?

The report that Amazon has been holding meetings with hospital execs to learn about their needs caused the stocks for companies like Cardinal Health, Inc. and Owens & Minor, Inc. that distribute medical supplies to tumble.

Who Is Threatened?

The threat of Amazon becoming a supplier shouldn’t be a cause for alarm for medical device manufacturers, according to Needham & Company, LLC analyst Mike Matson.

Amazon, in effect, wants to be the new middle man between manufacturers and hospital in a period of disintermediation in healthcare.

Throw in the possibility of a 3D printer at every hospital and distributors should be afraid, very afraid.

Throw in one more wrinkle.

In Panama, where this writer lives half of the year, patients are responsible for buying their own medical device with a prescription from their surgeon and bringing it to the hospital the day of the surgery. What’s next? Amazon drones delivering your spinal device to your house?

Matson writes that Amazon has typically disrupted middlemen much more than manufacturers. In his view, Amazon’s model “may work for ‘lower tech’ products but is unlikely to work with ‘higher tech’ products.” He believes that Amazon, “would simply represent another distribution channel for lower tech products. And with med tech pricing already under pressure, we don’t expect this to intensify with Amazon’s entry.”

The news report comes on the heels of an announcement on January 30, that Amazon, Berkshire Hathaway Inc. and JPMorgan Chase & Co. were forming an independent health care company to serve their employees in the U.S.

Orthopedic Pricing

One area of concern for device makers might be pricing.

But Matson wrote that med tech pricing has been under pressure for years with products typically seeing prices decline by 1-10% annually. “We think hospitals have become much savvier about negotiating medical device pricing and that price visibility has increased significantly as consultants and databases have helped hospitals compare their pricing to that of their peers.”

“Additionally, physicians are still influential in selecting products, particularly higher tech ones, and pricing isn’t a top consideration. As a result, we don’t expect Amazon to accelerate price declines.”

On reporting the announcement of the Amazon Berkshire JP Morgan initiative, our publisher, Robin Young, wrote, “It is also noteworthy that Amazon, an information and logistics company, could disintermediate healthcare system in much the same way it cut out various middle men between suppliers and consumers in the retail goods sector.”

“It also worth remembering that both retail and healthcare are, essentially, consumer industries.”

Someone better be very afraid of their place at the healthcare watering hole.