The Amazon Effect On Healthcare

If you've ever dreamed of having a hospital room delivered to your front door, you’re in luck. For $285,000 you can now have a "smart hospital room in a box" delivered to your house by tractor-trailer. With free shipping. Thanks to Amazon.

When you are a company as large as Amazon, whose market value hovers around $1 trillion you need to enter really big businesses to make your earnings grow. Healthcare in the U.S. is a multi-trillion dollar business that plays to many of Amazon’s strengths.

Is healthcare next for Amazon?

Since it was founded in 1995, Amazon has slowly gained the reputation as a company whose reach and expertise are so vast that they can dominate any market they decide to go into. One reason for this is that they are something other than a normal retailer. They are something we've never quite seen before in American business. They are a black hole that sucks whole industries into an alternate universe of impossibly low margins.

Book stores now are basically coffee shops. Been to a toy store lately? Of course not.

10 years ago, everyone was worried about the scale of Walmart, and how Walmart was going to take over the economy, given the fact that it had 4000 stores, and was within a half hour drive of 90% of all Americans.

But Amazon has something that Walmart never did. At its heart the Walmart business model is the optimization of the shelf space within its stores, from curating the items that sat on the shelves to organizing the logistics of getting them there.

Amazon's business model is far more comprehensive. Amazon dominates the online retail market, and now information technology as well through its Amazon Web services. Their burgeoning logistics network now physically places it (it being and Amazon distribution center or a whole foods) within 20 minutes of 160 million Americans.

Amazon, more and more, is building out and controlling an entirely new infrastructure for all the moving parts of business. This is something we haven't seen in business before. And now it appears they are applying it to healthcare.

Let me use the Walmart analogy again. 10 years ago, healthcare providers were worried that Walmart would open clinics in its already existing retail locations and flatten out the healthcare delivery distribution curve that had previously been dominated by hospitals.

But with all of Walmart's reach, that never happened. For the most part, the biggest impact Walmart had on healthcare during the last 10 years was the introduction of the $4 prescription plan.

But Walmart doesn't have all the infrastructure tentacles that Amazon does. Walmart also pays much more attention to quarterly earnings then Amazon does. Amazon basically shows pride in its disdain for quarterly earnings. In its initial letter to shareholders in 1997, Amazon stated "we will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."

They went on to say "we will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case."

So where as every other market participant who enters healthcare has to worry about making money as quickly as possible, Amazon doesn't. It can use its other businesses, particularly Amazon Web services, to fund its forays into new industries.

This gives Amazon a tremendous advantage over its other competitors. Their business model states that they will experiment and take their time.

So, Amazon has the advantage of time, limitless money, and extremely talented executives on its side.

What are they going to do with all this as regards healthcare? Let's take a brief look at a few areas.

PHARMACEUTICALS AND SUPPLIES

About two years ago, CNBC announced that Amazon was considering entering the pharmacy business, and a flurry of news coverage followed. Pundits breathlessly projected that Amazon would soon take over the entire industry. It was revealed that every year Amazon has an annual meeting to discuss whether or not they should break into the pharmacy market, and this year they're finally getting serious.

The Wall Street Journal reported that Amazon had been applying for pharmacy licenses. It was widely reported that Amazon was on a hiring spree for pharmaceutical talent.

It's interesting that Amazon is already in the pharmaceutical delivery business in Japan. Through Amazon prime in Japan you can get same-day delivery of food and medicine. A consultation is needed with a pharmacist before purchase; and said consultation can be initiated by reporting your symptoms and medical history via an online form on the Amazon Japan.

So, they are already doing it. Why is Amazon so intent on breaking into the pharmaceutical market? Well, a bottle of Lipitor weighs a lot less than that 1600 lbs. gun safe you ordered last week from Amazon with complementary free shipping.

But in the middle of all this noise Amazon went quiet on the pharmacy front, and it was assumed that they had decided the market might be too complicated to enter. But then in July 2018, it was announced that Amazon had bought PillPack for $1 billion, which in time I think will be seen as one of the great bargains in corporate history, right up there with Facebook's purchase of Instagram.

PillPack gives Amazon the instant ability, through their licenses, to ship prescriptions to customers’ homes in 49 states, along with a truly innovative way to package pharmaceuticals to seniors, a demographic that is growing in number and living much longer. And at least half of them are already Amazon prime members.

Amazon is already undercutting prices on over-the-counter pills on its website, and you can expect them to do that with prescription medicines as soon as they can.

Amazon is also methodically approaching the market for hospital supplies with the intention of creating a marketplace for hospitals to shop for their emergency rooms, operating rooms, and other inpatient and outpatient facilities. They've been inviting hospital executives to their headquarters to sell them on having a large portion of their purchases go through them. Amazon is positing to hospitals that the advantage they can offer is a way to simplify purchasing and to make the pricing of medical supplies more opaque.

As electronic healthcare record (EHR) software systems become less differentiated, and functionally more similar, I have often thought it would make sense for Amazon to simply give hospitals an EHR system for free, in return for a certain amount of hospital supply purchases.

AMAZON'S INTERFACE

Amazon also holds the advantage of having a purchasing interface that everybody already uses several times a month. The advantage of this interface should not be underestimated. Google already owns the universal interface for search, and we are fast approaching the time when Amazon owns the universal interface for purchasing.

As Amazon becomes the aggregator for all this ordering, it will just become second nature for people to order from them, as they will be the standard.

It's a bit like the Nook book reader, which was first introduced by Barnes & Noble. Yes, you can use it, and yes it works fine, but everyone simply reads everything on the Amazon Kindle. Because it has become the universal interface for books.

ELECTRONIC HEALTHCARE RECORDS

Amazon has made no secret of its intention to disrupt the market for electronic healthcare records. In 2017 they had a secret team called 1492 which was focused on medical records with several goals in mind.

  • Making data more freely available to patients and doctors

  • Building a platform for telemedicine that makes communicating with physicians easier

  • Integrating Amazon's existing hardware such as Echo and Dash into the EHR process

  • The extraction and utilization of EHR records to improve medicine.

It's this last area that holds the most promise, as well as the potential for the most profit. Hospitals and other healthcare providers are quickly morphing into becoming data-centered businesses––now that the data has become somewhat organized due to the (essentially forced) adoption of EHRs.

Do not underestimate the value of this data, both for clinical purposes and other purposes.

About a year ago, a study was released, which was funded by Google, that examined the anonymized healthcare records of about 200,000 patients. These 200,000 patients generated nearly 46,000,000,000 data points. By my math, that's 230,000 points of data per patient.

By applying machine learning to this data, researchers were able (with an high degree of confidence) to predict the length of the hospital stay of a patient, the chances they would be readmitted, and if they would even survive to leave the hospital. In a world of healthcare where payment is based on outcomes as opposed to services, this type of analysis is invaluable.

As is simply the data itself. Note that the only reason Facebook is worth tens of billions of dollars is because it has data on you that you have voluntarily given it. It has no other product. It makes nothing. It simply has data. Healthcare data has the potential to become some of the most valuable data there is.

This is why Amazon is placing an emphasis on the collection and analysis of electronic medical records. More on this effort, called Amazon Comprehend, will follow in a future issue. Amazon also has a project called HERA, which scans HER data for errors in diagnosis.

AMAZON, BERKSHIRE HATHAWAY & JP MORGAN

About a year ago, Amazon announced a joint healthcare project with Berkshire Hathaway and J.P. Morgan. Much ink has been spilled trying to determine the intent of this project.

Amazon has amassed healthcare data on its employees. J.P. Morgan specializes in finance. Berkshire Hathaway specializes in insurance. They each bring different things to the table that when combined could add up to something particularly interesting.

A trial is currently being held regarding Amazon’s hiring of a healthcare executive for this effort. A judge asked the defendant if the Amazon/JPM/BH effort was going to go large. He replied ““That’s not the near-term goal, it could be the great solutions are already out there and it’s about pulling out the right ones together.”

I think Amazon/JPM/BH may take the lead of Walmart and establish centers of excellence for employee healthcare across the country, to care for its employees with chronic conditions.

For example, if a Walmart employee in Arizona has a heart problem, Walmart will pay for that employee and a companion to fly to, for example, the Cleveland Clinic to receive healthcare, rather than receive that treatment locally. WalMart has amassed data from its nearly 2 million employees on where the bulk of its healthcare expenses lie, and they have decided it is more cost effective to look nationally, not locally, for certain medical treatments.

So, if Amazon and its partners do the same, and establish centers of excellence, then logically they and their partners would send their employees with certain chronic conditions to hospitals outside the areas in which they reside.

The reason this is particularly vexing for the 4,000 hospitals in the US, is that if this idea improves care and saves money, more and more companies in the Fortune 500 might implement it. I roughly estimated the numbers, and the total number of employees in the Fortune 500 is nearly 15% of the privately insured employees in the United States. If 15% of patients with good insurance are leaving home to get treated for chronic ailments, that could be a sub-optimal trend for healthcare providers.

CONCLUSION

This, of course, is all conjecture. But it is educated conjecture based upon the past actions of Amazon.

Blockbuster Video could've used a little conjecture when Netflix entered their market. Instead, they, quite literally, laughed them off, and Netflix went on to change not only video rental, but the entire business model of the entertainment industry.