(Bloomberg) -- Amazon.com Inc. may have big ambitions to shake up health care, but it is starting small.
The Internet giant is angling to become the go-to source for basic medical supplies such as latex gloves, bandages and sutures. While that’s not the sort of splashy entrance into the U.S. health sector that some investors have braced for, it could be a sounder route for Amazon to set itself up as a long-term player.
Amazon is focusing on outpatient clinics, which include everything from doctors’ offices to ambulatory surgery centers, said a supply-chain executive at a top hospital system who has had multiple conversations with Amazon officials over the past several months. The official requested anonymity because the conversations with Amazon were confidential.
Big hospital systems have been rapidly buying up medical practices as they move into the burgeoning outpatient-care market. But their distribution systems, which are designed to serve centralized hospitals, haven’t always kept up.
Amazon’s user interface would be an easy sell in an underserved market, the hospital-supply executive said.
If Amazon can make restocking the supply cupboard simpler with friendly technology and speedy shipping, it could establish a dominant presence in an important niche -- and gain an understanding of the health business that could eventually allow it to move up to selling and shipping pricier drugs and high-tech medical devices.
Gaining a Foothold
By starting out with basic items that aren’t highly regulated and don’t need special handling, Amazon could gain a foothold in the medical supply chain, while keeping an eye toward expanding into higher-value, more regulated items, according to Cathy Roberson, founder of logistics market research firm Logistics Trends & Insights LLC in Roswell, Georgia.
“They are inching their way in,” said Roberson. “This is a learning experience for them.”
Amazon’s foray could particularly threaten businesses such as Henry Schein Inc. that move basic supplies to doctors, veterinarians, and dentists. Other companies that distribute medical supplies include Owens & Minor Inc., and giant drug distributors McKesson Corp. and Cardinal Health Inc.
Paul Cody Phipps, chief executive officer of Owens & Minor, said on a conference call on Wednesday that “it’s very well known” that Amazon was talking to many large hospital systems, “including our customers.”
To date, Amazon has mostly gained traction dealing directly with patients and with smaller physician offices, not the bigger hospital chains Owens & Minor focuses on. Still, “they are a force to be reckoned with,” said Phipps.
Amazon Business was set up to tap into the $1 trillion corporate spending market by offering tractor parts, paper clips and millions of other products for factories, schools and offices.
The medical market is especially attractive. Ownership of hospitals and doctor’s offices is highly fragmented but the businesses need many of the same supplies; Amazon says that it can pool their buying power and share the savings while cutting out middlemen.
Phyllis McCready, chief procurement officer for Northwell Health, said the New York health system has been meeting with Amazon for about a year. Amazon is working on a technology tool for the industry, said McCready, who couldn’t give details because of an agreement with the company.
“The front-end of Amazon is very appealing. So I would think things like that would be appealing and an improvement over what we’d do today," she said. But Amazon still must convince the health system that the cost of switching is worthwhile.
Watching and Waiting
Deborah Templeton, chief of system support services at Geisinger Health System in Pennsylvania, says the system uses Amazon now on a limited basis for office supplies. Entering medical supplies mean Amazon will have to have to develop standardized vendors so nurses know they are getting exactly the same version of a product each time they order something, she says.
One big change in an Amazon-style system would be pricing: Most medical supplies are purchased on a contract basis, at a price that doesn’t change often. Going to an on-demand price would require hospitals to adapt their ordering procedures, Templeton said.
Still, Amazon could be particularly helpful if it designed an app that allowed Geisinger patients to order supplies before or after an operation or other procedure and have them delivered to their home. Geisinger said it’s not involved in the talks with Amazon.
“We are watching how they potentially develop,” she said.
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