Amazon's Healthcare Awakening
There has been an awakening. Can you feel it?
|Isaac Krasny||Feb 7, 2018|
Originally published January 14, 2018, before Amazon announced a three-way partnership with JP Morgan and Berkshire Hathaway to create a JV to lower their own healthcare expenditures.
Amazon has decided to get into healthcare.
They actually made the decision long ago, but lately the rumbling around their entrance to the industry is picking up steam. Many see the CVS-Aetna mega-merger as a defensive move anticipating the entry of a major new player in the space. Whether or not this is the case, current players are taking the rumors very seriously.
Amazon is doomed and determined to make a big move into healthcare.
Why Amazon Must Enter Healthcare
To understand a company’s strategies, you must first understand its goals.
As Ben Thompson puts it, “Amazon’s goal is to take a cut of all economic activity.” He points out that Amazon’s stated mission over the years has morphed from being about selling books online, to selling anything online, to the current incarnation of simply being the most customer-centric company on the planet.
They dominate online retail: Fortune estimates Amazon accounts for 34% of online sales in the United States. Through Amazon Web Services they are one of the most powerful players in cloud storage and computing. Through their acquisition of Whole Foods, they are now firmly in the $800B U.S. grocery market. With their Echo devices, Fire TV sticks, and Kindles, Amazon is also one of the bigger consumer electronics firms in the country. Finally, they have a burgeoning logistics business and seem poised to give UPS and FedEx a run for their money by fulfilling their own packages door to door. Amazon is well on its way to being the conglomerate to end all conglomerates.
But Bezos’ empire won’t be complete without successfully entering healthcare.
Healthcare is big. CMS estimates the total National Health Expenditure for 2016 to be $3.3 trillion. That’s 17.9% of the entire United States GDP. Nearly one in five American dollars spent in a given year is spent on healthcare.
Amazon simply can’t ignore that. First, because they want to have a cut of all economic activity and there’s a lot of economic activity in healthcare. Second, because if they truly want to be the most customer-centric company on Earth, they need to cater to all the needs of the customer. With a per-capita healthcare spend of $10,000+, Americans have a lot of healthcare needs.
What Amazon Healthcare Will Look Like
One of Jeff Bezos’ strongest managerial convictions in running Amazon is holding true to a “Day 1” mentality. He has been using this phrase and pushing this vision since pretty near Amazon’s actual day 1 back in 1994. “Day 1” refers to day 1 of a startup, where the company has limitless energy, potential, and is devoted to solving a specific problem and resolved to discover the best way to solve that problem through disciplined experimentation. Even though Amazon now has a market capitalization of $600B and tens of thousands of employees, Bezos demands his company continues to grow, experiment, and solve problems like a startup on day 1.
To see this mentality in action we can examine Amazon’s expansion into grocery. While they recently made their bold statement by spending nearly $14B on Whole Foods, their experimentation in grocery started a decade ago with the creation of Amazon Fresh.
Amazon Fresh, which allows customers to order foods – perishables and non – to their front door, was launched in 2007 in Seattle. While, at a high level, it was similar to their core online retail model, the actual warehousing and fulfillment activities were markedly different, and thus challenging for Amazon to handle. As one would expect, it took Amazon some time to figure out how to build a grocery supply chain that was able to fulfill perishable goods while working within the Amazon model. But that was the point.
Amazon Fresh met a number of needs for Amazon. They got to examine and overcome, on a small scale, the challenges of operating a perishable supply chain. It allowed them to place a bet on the future of online grocery sales. And it gave them a reason to create non-threatening relationships with existing players in the grocery industry.
In addition to Amazon Fresh, the company has introduced other grocery related services like granting PrimeNow customers the ability to have groceries collected from a retailer and delivered to their home within two hours. Amazon Pantry lets customers buy a selection of non-perishable food items from the main Amazon store. Amazon Restaurants will deliver you food from participating restaurants that don’t offer delivery themselves.
These experiments in grocery confirmed for Amazon that without their own brick and mortar retail presence, they couldn’t be a major player there. Using the knowledge gained through operating in the space for a decade, Amazon could make a much more informed bid for Whole Foods, and better project the effects they would have by applying the Amazon consumer-centric approach to the space.
From this examination, we can glean a few insights into how Amazon enters new industries:
The mission comes first. Amazon doesn’t want to build a classic conglomerate of companies affiliated solely by ownership; they want a single company operating with the same ethos in many industries.
Amazon is methodical. They won’t enter a space with a big acquisition and then figure out how the industry works. They’ll experiment and spend money on a smaller scale and then decide how to make their grand entrance.
Amazon is patient. Jeff Bezos has shown time and again he is willing to play the long game. Amazon won’t rush into a big acquisition or announcement for the sake of pleasing the market.
So what will it look like?
First there will be a period of cautious experimentation. It’s already happening on a number of fronts. Amazon has been selling over the counter medical products for a number of years through the main online retail store. You can purchase a huge selection of vitamins and dietary supplements, pregnancy tests, ankle and knee braces, cough & cold medicine, and more. Amazon already has pretty much all of the products you’d find in a standard retail drug store, aside from what’s behind the pharmacy counter, of course.
In addition to Amazon’s core competency of retailing hard goods, the company is more entrenched in healthcare software than many might have realized. Amazon Web Services has been providing cloud storage, computing, networking, and disaster recovery services to Electronic Health Record companies for some time now. They have an internal team devoted to EHR and healthcare efforts, and have a section of their website devoted to pitching healthcare customers directly.
What’s more, it was widely reported last November that AWS was due to announce a large-scale collaboration with health IT giant Cerner. As reported, the deal would have AWS providing machine learning services on the data gathered and held in Cerner’s vast data warehouses (many of which are already on AWS servers). The AWS re:Invent conference came and went with no announcement, so we’re left to wonder if talks broke down or if they’re just delayed. Regardless, we can see that Amazon is interested in wading deeper, and more directly, into the waters of healthcare.
Amazon has also set up a secret working group, dubbed 1492, that is purportedly working on a set of specific problem areas in healthcare. It’s all just rumors, and much of the information is based on good old fashioned internet sleuthing. Rumor has the 1492 team working on tasks related to the interoperability of EHR data, telemedicine technology, and bringing health applications to Amazon devices.
Perhaps the biggest news of late was the discovery that Amazon had applied for pharmacy licenses in 12 states. This was initially treated as evidence Amazon would be getting into the business of prescription drugs, but it was later revealed that some of these licenses were only to sell durable medical equipment and medical devices. The fact that these licenses are only in 12 states further reinforces that Amazon is still just experimenting in healthcare, perhaps considering launching a DME store where patients can order goods that will be reimbursed by their insurance companies, and possibly even working the kinks out of an online pharmacy through running their own.
Once Amazon has experimented enough to learn the space, they’ll determine their best way to make a true entrance. In grocery, they saw the need to have a large terrestrial retail footprint and bought themselves a grocery chain. In healthcare, the decision won’t be that easy. I suspect the company won’t have trouble uncovering opportunities, but instead the challenge will lie in managing resources as they pursue multiple opportunities at once.
It’s all but certain Amazon will continue to grow their presence in health IT. This is likely to happen in the EHR space, where they already have a strong presence. It wouldn’t be surprising to see them extend more healthcare-specific AWS services in the realms of machine learning and EHR-specific hosting. While this push will be impactful, it’ll be more opportunistic than mission-driven, and won’t have much appreciable impact on the end customer (at least that the customer will notice).
It’s important to remember that Amazon doesn’t just want to get into healthcare, but they want to bring their customer-centric worldview with them.
The customer-centric healthcare push will likely have more to do with the secretive 1492 project and the uncovered pharmacy license applications. If Amazon is indeed developing telehealth applications for their Alexa assistant and numerous in-home devices (more of which are expected to be announced this year), they could quickly become one of the most utilized telehealth portals in the country. Imagine the convenience of being connected with a nurse via your Echo device at any time and at no or low cost (because Amazon has a deal with your health insurer.) If 1492 is also working on ways of interacting with EHRs, it’s feasible your Echo device could become an interaction point for your wifi-enabled scale and your fitness tracker, relaying that information directly into your health record. This is all purely speculative, but the takeaway is that by virtue of its existing presence in the lives of millions of consumers, Amazon could launch credible healthcare services rapidly, and readily eclipse the market share of established players.
While Amazon has impressive reach via their devices, it’s their unparalleled fulfillment operation that will serve as their biggest advantage in entering healthcare. Simply taking semi-controlled purchases like DME and prescription drugs and putting them into the Amazon super-fast fulfillment pipeline and excellent customer service experience will set them apart. Amazon doesn’t need to have an innovative take on healthcare, but instead can rely on their propriety fulfillment advantage to provide their competitive edge. Amazon Key, the recently announced service that allows select service providers and package carriers into your home, is enough to get CVS and Walgreens shaking. Why bother using a drugstore that offers same-day delivery when your replenished prescription could be waiting on your kitchen counter when you get home from work?
Gazing further into the future, it’s not hard to see Bezos’ ambition taking Amazon into the core areas of healthcare: providers and insurance. The merger of CVS and Aetna is, among other things, a serious play by the new combined entity to be the first major corporate healthcare provider. It’s entirely within Amazon’s customer-centric mission to provide excellent healthcare at an affordable price. This is a long way down the road, but entirely within the realm of realistic strategic thought.
Healthcare Is A New World for Amazon
1492 is an apt name for Amazon’s secret healthcare project. This unconfirmed but almost-certain reference to Columbus’ voyage to the New World demonstrates Amazon’s understanding that the dynamics of the healthcare industry are unlike anything they’ve experienced before.
Healthcare is largely devoid of the free-market forces that have brought Amazon success. Free markets call for an informed consumer; specifically a consumer who possesses accurate cost and quality information with which to make a decision. They also assume that the end-user is the same person footing the bill. Amazon used these simple dynamics to dominate by featuring quality products (and the information to demonstrate quality) at competitive prices. In healthcare, these dynamics don’t generally exist.
Consumers pay for healthcare, but do it largely through premiums, meaning they often don’t know what a product or service will cost as that detail is negotiated by insurance companies and pharmacy benefit managers. Quality information is scant, because it either isn’t properly collected and disseminated, or because it doesn’t exist.
If Amazon follows through on the rumors and starts selling durable medical equipment, they’ll need to first negotiate with insurers and CMS before they can approach their first customer. If those negotiations are successful, they won’t be able to court customers with the promise of a best price because customers often won’t see the price, and thus won’t care. They’ll be entirely reliant on their excellent customer service and fulfillment operation to convince customers Amazon is the place to buy medical products. It’s a safe bet this will be enough, but removing price from the equation is taking a handful of arrows out of their quiver.
If the rumors of the 1492 project are accurate, an Amazon telemedicine service is on the horizon. Once again, if Amazon goes through traditional healthcare channels they’ll be constrained by which insurers with which they can negotiate favorable payment terms, meaning the abilities of your Echo device will correspond to your health insurer. This is antithetical to Amazon’s customer-centric mission, and so finding success in this space will require them to innovative on the healthcare business model.
While these unique market forces will complicate Amazon’s entry into healthcare, it doesn’t mean that Amazon will fail. On the contrary, a consumer-centric healthcare player with enough persistence and vision to play the long game could be exactly what American healthcare needs to achieve a sustainable market driven system.
A McKinsey report on consumerism in the industry paints a picture of a system that is ripe for disruption. Consumers are clamoring for incredibly basic customer-friendly aspects of other industries like knowing the price ahead of time and amiable customer service.
American healthcare consumers are demanding a new era in healthcare, and while it is wrapped up in ideology around single payer or free-markets, all they really care about is receiving quality care at a reasonable price. If Amazon can edge the industry closer to this ideal, they could have an effect on American healthcare as dramatic as the effect that Columbus’ voyage of 1492 had on the continent.