January 31, 2018

Here Come the Amazonians

by Chas Roades

THE GIST

While their new venture with Berkshire Hathaway and JP Morgan Chase may just be their first shot across the bow, Amazon’s entry into the healthcare space will ultimately bring massive transformation to the industry.

THE FACTS

  • Amazon, Berkshire Hathaway, and JP Morgan Chase jointly announced plans to form a new venture to address the rising cost of healthcare for their own employees
  • Few concrete details were revealed about the new venture, although the announcement follows months of speculation and rumor about Amazon’s potential entry into the healthcare space
  • Early reporting citing internal sources indicated that the new venture would focus on using technology to drive transparency and simplification of healthcare for the companies’ one million employees
  • Markets reacted quickly to the announcement, with shares of several incumbent healthcare players, such as UnitedHealthcare, MetLife and Anthem losing significant market value

OUR ANALYSIS

1. This is really all about Amazon

If the announcement had just been than Berkshire Hathaway and JP Morgan were getting together to figure out how to reduce healthcare costs for their own employees, the reaction would have been very different. Neither firm brings much to the table in terms of healthcare knowledge, national purchasing clout, or a track record of innovation and disruption. (We’re talking about investment bankers, Dairy Queen, Fruit of the Loom underwear, and the GEICO lizard here.)

But Amazon casts a long shadow. Their enormous scale, coupled with the technology platform they bring to the table and their relentless efforts to disintermediate middle-men in every segment they enter rightly has PBMs, brokers, healthcare distributors, and insurers spooked. The ground-breaking CVS-Aetna deal announced late last year has been widely described as a pre-emptive move in anticipation of Amazon entering the space.

What makes Amazon such a compelling entrant, aside from their technology chops, is their obsession with putting the consumer at the center of their business. The heart of Amazon’s value to consumers is transparency around price and quality (customer star ratings and reviews, multiple Marketplace vendors selling the same item, a nearly-limitless return policy) – attributes sorely lacking in traditional healthcare. And Amazon’s one-click, “frictionless” approach to the purchase process, coupled with the value proposition of Prime membership, has garnered the kind of consumer loyalty that healthcare incumbents can only dream about.

What will make Amazon such a fearsome innovator in healthcare is their commitment to putting consumers at the center

2. The new venture faces strong headwinds

Even bringing 1m employees to the table, it will be difficult for these three companies to truly “transform” our byzantine healthcare industry if they’re just focused on reducing their own costs of care.

Other, even more impressive coalitions of national employers have already tried to pool their resources in an attempt to change the way they purchase healthcare – witness the Health Transformation Alliance, which includes 40 of the largest companies in America. Two years after they made waves by announcing they would change the way they purchase healthcare for employees, they’ve only made it as far as creating narrow networks in three markets and signing moderately-discounted contracts with a couple of PBMs and a health plan.

The reality is that incumbents – particularly the middle-men such as PBMs, distributors, brokers, and even insurance carriers – are deeply dug into their positions in the industry. It’s hard to displace them, even for the largest purchasers with substantial market power. Even the largest employer in America – Walmart – has been tiptoeing around the edges of healthcare for years without ever really figuring out how to crack the nut.

And the old chestnut of wisdom that “all healthcare is local” definitely still applies. “Transforming healthcare” at a national level means transforming it in Chicago, and Miami, and Boston, and Los Angeles – on a market-by-market basis. While national scale helps, networks are regional at best, and providers are hyper-local. Bringing order to the chaos of 5,000+ hospitals and more than a million doctors will be no easy task, even for a company that operates with the savvy and sophistication of Amazon.

3. Healthy skepticism aside, Amazon is uniquely positioned to make real change happen

What Amazon brings to the effort is not just awesome technological capabilities, or its own workforce of around a half-million employees. Amazon brings American consumers, who are intensely loyal to the expansive platform the company has built.

There’s been plenty of speculation about which part of healthcare Amazon will eventually go after – either through this new venture or on their own. They could displace the drug distribution and purchasing segment with their own logistics and purchasing engine. They could bring massive transparency to the pricing and quality of medical practice by harnessing consumer feedback. They could become a major player in telemedicine, or open retail clinics in Whole Foods stores, or even try to put together a kind of insurance offering as part of an expanded Prime membership. None of that is outside the realm of possibility.

But what will make Amazon such a fearsome innovator in healthcare is their commitment to putting consumers at the center. Amazon drives every decision they make around one core criteria: does this action improve value for the consumer? On that basis, they’ve “given away” billions of dollars of value providing free shipping, content streaming and unlimited returns. Bringing that consumer focus to healthcare – an industry notorious for its seeming disregard for consumer value – would be game-changing.

Subscribe to the Weekly Gist for executive-level commentary and insights from the week in healthcare, delivered to your inbox every Friday