Here's the reason why Amazon is diving into health care

Amazon's roughly $1 billion acquisition of online pharmacy PillPack marks the retail giant's latest effort to push into the crowded health-care space and follows its alliance with JPMorgan Chase and Berkshire Hathaway to lower the cost of covering employees.

Amazon's might sent investors in competing companies running for the hills, with shares of Rite Aid, Walgreens Boots Alliance and CVS Health hard hit. Consolidation is a game plan for some, with Cigna in March saying it would buy Express Scripts for $52 billion and Rite Aid and Albertsons working on a deal.

Amazon late last year was reportedly on the brink of deciding on whether to sell drugs online. In April, it shelved a plan to sell drugs to hospitals through its Amazon Business marketplace.  Now, it's going all in. 

For good reason: The U.S. health-care industry is a convoluted mess. According to a recent study by the Commonwealth Fund, the U.S. health system is the worst among high-income nations despite costing the most. The U.S. Centers for Medicare and Medicaid Services estimates U.S. health spending came to nearly $3.5 trillion last year. 

Amazon's intent for entering into the venture with JPMorgan and Berkshire was to squeeze waste out of the cost of care by dispensing with profit-sucking middlemen like pharmacies.

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The Health Strategies Consultancy

PillPack delivers medications in pre-sorted dose packaging, coordinates refills and renewals and ensures that shipments are delivered on time. The service is currently available in every U.S. state, except Hawaii. The deal will let Amazon ship prescriptions overnight in a direct threat to the $400 billion U.S. pharmacy industry.  

The purchase echoes Amazon buying a a 40 percent stake in Drugstore.com in 1999. This time, Amazon CEO Jeff Bezos is betting on a better outcome, as Drugstore.com shares tanked during the dot-com bust and was eventually shut down in 2016 after being purchased by Walgreens.  

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.