The ongoing CVS-Pillpack lawsuit just revealed part of Amazon's plan to disrupt the prescription drug market

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An ongoing lawsuit with CVS revealed that Amazon plans to leverage PillPack to sell prescription drugs directly to health plans and employers - an explosive move that would put Amazon in direct competition with pharmacy benefits managers (PBMs).

For context, PBMs act as middlemen that negotiate drug costs for payers. The lawsuit with CVS Caremark - CVS' PBM service - culminated in a ruling that a former CVS Caremark executive couldn't take up a role at PillPack.

Despite its win, CVS Caremark still has reason to worry: It surfaced during the court battle that Amazon's been pursuing Blue Cross Blue Shield (BCBS), aiming to deliver prescriptions to the homes of its 106 million members - and BCBS is one of CVS Caremark's major clients.

Here's what it means: Amazon has its work cut out, as it's going after one of the most entrenched, opaque, and high-value subsectors of healthcare.

Three US healthcare giants have gobbled up 76% of the$423 billionPBM market.Insurers Cigna, Aetna, and UnitedHealthcare tied up with PBMs Express Scripts, CVS Caremark, and Optum Rx, respectively - and their moves paid off: UnitedHealthcare gave a nod to OptumRx as a contributor to its 11% year-over-year revenue bump in Q1 2019, for example.

Other insurers are jumping on the bandwagon, too: Anthem, for instance, is prepping to roll out its own PBM service this year. But large employers and insurers without an in-house PBM could have a lot to gain by linking up with Amazon, which likely plans to woo health plan clients with lower drug prices. PBMs have been under fire for hiking updrug costs for payers and consumers alike, per The Atlantic.

The bigger picture: We think PillPack poses a light threat to incumbent PBMs in the near-term, but could be a disruptive force down the line.

• PillPack currently lacks the scale to compete with the top PBMs, but it's expanding rapidly. PillPack's reach is small compared with other top pharmacy benefit managers: It had only five mail-order drug shipment facilities as of November 2018, while CVS and Optum operate 26 and 18 facilities respectively. But it stocked up with licenses to ship prescription drugs in all US states except Hawaii. It's also been lengthening the list of states that its Arizona-based distribution center can ship to. I (Zoë) expect PillPack to continue scooping up these licenses, which should make it easier to attract payer partners nationwide.
• Amazon could leverage its supply chain infrastructure and e-commerce expertise to undercut incumbent PBMs. Amazon can also woo health plan clients by twisting drug makers' arms to lower the cost of prescription drugs, which PBMs were concerned about even before it unveiled its PillPack acquisition, per CNBC. Combined with its growing pharmacy distribution network and established shipping network, Amazon appears to be gearing up to compete on prices set by traditional PBMs. In its court filing, CVS admitted Amazon's "robust infrastructure, operational capacity, and distribution reach … [mean] Amazon-PillPack is uniquely positioned to negotiate directly with payers and displace CVS Caremark's mail based services."

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