Costco and Instacart test free one-hour prescription delivery as Amazon eyes the space

Key Points
  • Costco and Instacart are teaming up on the pilot project, and have been notifying their members in California and Washington state, sources tell CNBC.
  • That involves delivery medicines in less than an hour and all fees are waived for orders over $35.
  • Many of the largest retailers are exploring the $300 billion pharmacy market, including Walmart, Costco and Amazon, as policymakers look for ways to bring down drug prices.

Costco is teaming up with delivery start-up Instacart to test free delivery of prescription drugs to members.

The pilot program is limited to California and Washington state, according to two people familiar, and it includes delivery to a Costco member's home or office. One Costco member who has used the service told CNBC that he received a text earlier this month to offer him the medication delivery option as an alternative to picking up the meds in store.

The move could help Costco compete with Amazon and Walmart, both of which have dabbled in prescription delivery. Amazon made its first steps into the space in 2018 by purchasing PillPack, an internet pharmacy start-up focusing on patients with chronic ailments, and Walmart offers mail-order delivery in some areas. The moves also pose a threat to large pharmacies like CVS and Walgreens. The pharmacy and drug space is valued at more than $300 billion and is expected to grow, making it an attractive market opportunity for the largest retailers.

Delivery will be free on orders that cost $35 or more, not including a tip, which Instacart sets at 5% of the order price. Otherwise, prices vary depending on how quickly a member needs the medicines delivered — the fastest option is an hour — but typically cost less than $10. Updates are provided via text message, which mirrors the experience of ordering groceries from Instacart.

Unlike Instacart's grocery delivery service, however, the Instacart delivery person will ask for proof of identity to ensure they're delivering to the right person, and the checkout process requires buyers to confirm their date of birth (the service is available only to people over age 18). There's also an option for a phone consultation from a Costco pharmacist.

Instacart workers will be allowed to deliver medications only if they pass a HIPAA certification training, meaning they're aware of the rules around managing people's sensitive health information.

Costco did not immediately return a request for comment. Instacart declined to offer a comment for this story.

'More competitive forces is good'

Costco is already a player in the pharmacy space, having retail pharmacies in many of its stores. It is also known for its bargain-basement prices, which extend to health-related services and most recently included a flu shot that came in about half the price of its competitors.

These days, Costco serves more than 90 million people with its $60 and up annual membership. The company has previously said it's membership base is so loyal that more than 90 percent of people opt to renew.

Instacart, which is known for grocery delivery, hasn't previously offered a pharmacy deliveries, although two people familiar with the matter said the company has looked into the space for years. The company has partnerships with hundreds of grocers, including Albertsons, Walmart Canada and Sam's Club, and many of them have pharmacies in store or are considering adding them.

Health experts say these moves could be good for the industry overall, especially given the rising prices of prescription medicines that are squeezing millions of Americans.

"Long term you could see many of the retailers take on this ecosystem," said Emily Melton, managing partner for Threshold Ventures. "More competitive forces is good."

Costco is likely making this foray into pharmacy delivery as a benefit to its members rather than expecting to make significant revenues on high-priced meds, said Erin Fox, senior director for drug information at University of Utah Health. If anything, the company might lose out on potential sales if fewer customers come into its stores and buy other products while they wait for their prescriptions, Fox said.

Others say that the Costco-Instacart partnership is a convenient option, but it won't necessarily move the needle on drug prices.

Retailers would likely need to start working more closely with some of the big stakeholders, like the large-self-insured employers, and "provide an alternative to the status quo in the current drug supply chain" to do that, said Eric Pachman, president of 3 Axis Advisors, a research and consulting firm that specializes in the drug supply chain. Such efforts have been attempted before, but haven't been successful, although it's possible that Haven, the J.P. Morgan, Berkshire Hathaway and Amazon joint initiative, will look to fund efforts that bring down drug costs for their combined 1.2 million workers.

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