Employers have struggled to lower health insurance costs for years, with little success. But those employers haven’t been Amazon.
On Tuesday, the internet behemoth said it is partnering with JPMorgan and Berkshire Hathaway to create an independent healthcare company for their employees. Beyond that, details were vague. The stocks of insurance companies, drug distributors, and retail pharmacies swooned anyway.
On one hand, investors’ panic feels premature. We don’t know what this partnership will look like, nor do we know the extent of the consortium’s ambitions. What’s more, fixing the highly regulated, headache-inducingly complex healthcare industry is a difficult problem to crack, one that’s been previously (and unsuccessfully) attempted many times. On the other hand, as Barclays’ analysts succinctly put it following the announcement, “We are never dismissive of anything disruptive that Amazon is involved in.”
How big a deal is this?
Without accurate tarot cards, it’s hard to say. Per the press release, the trio’s goal is to improve employee satisfaction and reduce healthcare costs, with an initial focus on “technology solutions.” But that’s pretty much it.
“The news is much more specific about the problem they want to solve then how they intend to solve it,” says Mark Pauly, a professor of healthcare management at the University of Pennsylvania’s Wharton School of Business.
It’s possible the group will simply use its combined technological prowess to make it easier and more efficient for employees to find doctors, improve patient outcomes, and streamline electronic billing. Some healthcare journalists and experts went so far as to dismiss the announcement as empty PR.
Stephen Buck, a drug supply chain consultant, isn’t buying it.
“After all the buildup, for Amazon to come up and make this statement with this group and make pronouncements about American healthcare — to me it implies a seriousness of intent to do something meaningful,” he says. “It would be a massive let down if they didn’t have ambitious goals.”
The announcement is important because the companies are large and powerful, with a collective 1.1 million employees and a combined market cap of $1.6 trillion. But it matters more as a signal that Jeff Bezos is serious about entering the healthcare industry, a message underscored by the involvement of Berkshire Hathaway CEO Warren Buffett and JPMorgan chief executive Jamie Dimon.
“Amazon’s whole reason for being is to disrupt major industries,” says Robert Field, a professor of law, health management, and policy at Drexel University. “They are going to be pushing for something fundamental.”
As anyone even vaguely familiar with the U.S. healthcare system will tell you, achieving meaningful change won’t be easy.
“This might be their Waterloo,” says Pauly. “We’ll have to see.”
An expensive tangle
In the U.S., healthcare is far more expensive than it is in other developed nations with similar standards of care. And costs continue to climb at a rate that far outstrips inflation. Last year, Americans spent $3.3 trillion on healthcare, or about 18% of the GDP.
“The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” Buffett said in the announcement statement.
Because of the complexity and soaring costs, “you can’t create healthcare on an island,” Buck explains. There are too many established parties to contend with, including pharma companies, physician networks, payers, and pharmacy benefits managers.
If Amazon were to make an aggressive move, it could pick one or two links to attack first, completing the chain with outside partnerships. For example, it could start by building its own network of providers, who would be accessible through telemedicine sessions and in-person visits. The company’s $13.7 billion acquisition of Whole Foods means it already has a network of more than 450 brick-and-mortar locations in the U.S.
“If employees used this chain of virtual and physical assets for primary care, it could be a lot less expensive than if they visited outside primary care facilities,” Buck says. The company could negotiate with outside networks on a more limited basis, so workers could see specialists and surgeons as needed.
If the model works, it’s possibly the trio would open the door for additional employers to join the system, says Field, which is when things would get “really interesting.”
Another, long-floated possibility is that Amazon will create or acquire a pharmacy benefits manager, allowing it to negotiate rebates directly with drug manufacturers. From there, it could mail prescription drugs directly to patients’ homes. Amazon’s recent push into brick-and-mortar with its Whole Foods acquisition neatly aligns with this initiative, allowing it to open a chain of physical pharmacies.
For employees of the three companies, prescription drugs processed through Amazon “could be in-network,” Buck says.
Both moves would be disruptive, costly, and risky. Wharton’s Pauly isn’t convinced either would pan out. However, if anyone is capable of rewiring a stubbornly resistant system, he contends, it’s probably Amazon.
Field, of Drexel University, is more bullish.
“If I were a senior executive of a healthcare company, I would be a little wary of becoming the equivalent of a senior executive of a bookstore chain.”
The press release doesn’t disclose enough information to speculate on when or even if sweeping changes could occur.
“There’s not enough there,” Pauly says.
But the signal of intent from Amazon, a professional disrupter with a formidable track record of reconfiguring entire industries, is important in itself. Time and time again, the company has forced competitors to change their practices in response to its movements.
It looks like the healthcare industry is up next.