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Analysis

Supply Chain Is Natural Step for Amazon, Potential Boon for CFOs

By Gregory A. Freeman  
   February 19, 2018

The online retailer's plan to enter the hospital supply chain could bring major cost savings for hospitals.

Hospital CFOs are likely to welcome the most recent foray from Amazon into the healthcare market, as it should lead to lower supply costs, second only to labor as a major cost center, an investment banking analyst says.

Distributing medical supplies is so closely aligned with what Amazon already does on a huge scale that this new project is almost certain to threaten existing medical suppliers and distributors, with hospitals and health systems reaping the rewards.

Related: Amazon Primed to Disrupt Healthcare? Not So Fast

On the heels of announcing a new health plan, Amazon is now looking to become a major supplier of medical products to U.S. hospitals and outpatient clinics, competing directly with suppliers such as McKesson, Cardinal Health, and Owens & Minor, according to a report in The Wall Street Journal.

Amazon invited hospital executives to its headquarters to develop ideas for expanding its business-to-business marketplace, Amazon Business, into a hospital supply chain, the newspaper reports.

Amazon also has been working with a large Midwestern hospital system to test whether it can use the Amazon Business system to supply its 150 outpatient clinics, the article says.

The stock market reacted quickly to the news, with shares of Owens & Minor dropping 4.8% on the news, Cardinal losing 3.4%, and McKesson falling 1.9%.

'Massive change'

The move on healthcare's supply chain seems to bear out analysts' predictions that Amazon's threat to shake up the health insurance industry might be only the first step in tearing down other healthcare silos as well.  

The company's entrance into the medical supply chain could bring "massive change," says W. Robert Friedman Jr., managing director in the healthcare practice of Dresner Partners Investment Banking.

"Hospitals are under tremendous financial pressure due to the reduction in Medicare rates and Medicaid. The major expense for hospitals is the cost of labor but supply is right behind it as a big percentage of their core operations," Friedman says. "If hospitals can order directly from Amazon, which then ships directly to their distribution outlets, this would be a major transformation in the distribution component of the healthcare industry."

Gregory A. Freeman is a contributing writer for HealthLeaders.


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