On the heels of the recent announcement of a health care alliance by Amazon, Berkshire Hathaway, and JP Morgan, we posted a brief note to clients with our summary view and position. Following on that post, we would like to share more insights and expectations on the type and scope of disruption to be expected.
As noted in the last post, disruption is underway. Most firms in any aspect of US healthcare have been working to rethink or re-invent themselves to some degree for quite some time. But this alliance (particularly Amazon) is further disrupting and accelerating the thinking and business strategies of most entities involved in the US healthcare market - in large part due to the efficiency-focused “marketplace platform” business model that Amazon has built and refined over the decades. Historically, Amazon has by far had the most success when it places itself in a position to profit from as many business transactions as efficiently as possible. To us, that is the essence of Amazon’s disruptive influence in the US healthcare market.
By building a private, for-profit healthcare marketplace on its established marketplace model and infrastructure (including AWS), Amazon can stay at arm’s length from some of the most-regulated and costly aspects of US healthcare while profiting from an immensely scalable business. They can take a piece of every transaction; they can charge fees to participate; take a percentage of any cost reduction (outcome-based outsourcing/gain sharing!); charge for software licensing and more. We should also take into account that Amazon has applied for pharmaceutical distribution licenses in states where each of the three allies have major presences (and where Amazon has distribution presences), and of course Amazon’s massive retail presence. Net: Amazon can and probably will sell, or enable to be sold in its marketplace, practically everything that a provider, payer, PBM, insurance admin, or patient/consumer would need. One can see why the CVS-Aetna merger might have occurred as a pre-emptive strike against the Amazonian incursion.
We doubt (for now) that Amazon will launch such a marketplace quickly or in full. What is more likely is that they will build up a marketplace within the current three-company alliance with Berkshire and JP Morgan. That would likely develop into a testing ground, which over time the alliance would develop and refine into a competitive, efficient, standardized, and scalable operation that could then be opened to other companies. Given the potential for revenue, it is easy to picture providers, payers, PBMs, pharmacies and pharma providers (among others) competing to get a slice of such a pie.
That is where the greatest potential disruption begins. To compete in such a market place, participants would need to be increasingly efficient. Healthcare in most regions, including the US, is not often known for its efficiency of operations, from service provision through payment transactions. Efficiency that enables increased profitability is a goal of every market participant, and most firms today have multiple initiatives underway that enable and improve their abilities to operate efficiently. But when Amazon appears ready, willing and able to enter your marketplace, the pressure to develop and deliver efficiencies – many of which require new ways of thinking about and doing business – can ratchet up quickly and considerably.
