AmazonCare Prime?

Social anxiety over a possible Amazon’s entry had gradually built up over last few months and with an announcement that lacks much details, speculation on exactly how Amazon, Buffett, and JPM alliance would “disrupt” the ever-broken American healthcare has peaked.

I recently heard many ideas in a meeting of Biotech executives. Some felt that the disruption will come from Amazon’s phenomenal logistic prowess powered by its Alexa front end. Someone mentioned how Amazon will merge wellness with healthcare to reduce costs through prevention. Some felt that Amazon’s disruption will leverage Buffett’s “15 minutes can save you …” Geico’s network. Though, I do not see how an auto-insurer’s network can be repurposed to run a health-insurance business, what can and probably will be leveraged is Warren Buffett’s Gen Re that provides “tailor-made reinsurance programs that help [one] achieve [one’s] life/health risk management objectives”. Certain estimates from EBRI place those insured by the large employers (1,000 or more employees) to be around 30 million. Some of these employers are self-insured and get themselves re-insured. But again, addressing just this population alone won’t bring about the disruption that public debate is anticipating.

To put the total US healthcare market in perspective, in 2010 out of total non-elderly population,

  • 156 million received insurance through their employers
  • 19 million purchased their own insurance
  • 45 million received Medicaid.

Thus, about 180 million non-elderly people buy insurance every year from the “third party payer”. Currently, these people are served by an intertwined network of the pharmaceutical supply chain (that controls the product flow) and the value chain (that controls the money flow). Understanding this network is really the key to decrypt what part of healthcare industry is, in fact, ripe for a disruptive play.

Money in the healthcare value chain comes out of the pockets of the pool of insured people. This insurance is, in fact, just a “subscription” service for medicines. Good part of any subscription model is that it gives the consumers a predictable payment plan and protects them from uneven occurrences of health emergencies. On the other hand, it makes consumers pay a fixed amount irrespective of how much value they actually receive. In recent years, subscribers to this service has been pained by higher costs – for monthly subscription as well as additional payments termed as “out of pocket”.

Premiums paid by consumers are then shared by (a) the pharmacy – who sell the medicines, (b) the insurance companies – who sell the “subscription plan” to the employees, (c) the PBMs (who administer the value flow), (d) the wholesalers (who administer the product flow of medicines to the pharmacies and hospitals), and lastly (e) the manufacturers (who develop and produce the medicines).

So, there are at least 3 intermediaries that stand between the consumers and manufacturers – one collecting the fee, one managing the product flow, and one managing the money flows – in the present-day healthcare supply-value-chain. And, that’s where the Amazon-trio can disrupt the current state of the industry. They can combine all three roles! The insured will pay “AmazonCare Prime” a monthly subscription and get the healthcare they want … medicines can get delivered to their door or can be picked up from the Amazon lockers. AmazonCare Prime in turn would procure these medicines directly from the manufacturers or eventually might even manufacture high volume medicines themselves!

AmazonCare Prime, of course, will have to manage the value flow to pay for multitudes of medical services, too. Amazon is already a master in the logistics of products delivery – physical as well as digital (e.g. movies, books). Though little known, Amazon services does provide a platform to sell personal services, only time will tell how it will manage the complex field of healthcare services. Perhaps, we may see some acquisitions in that area. Surely, this is an area the Amazon-trio would want to test out as they rollout the offering to their employee base.

In theory, Amazon has most of the ducks in a row to seize this opportunity to disrupt healthcare industry. What remains to be seen is (a) will it have a corporate will to go full length to win the war and not just engage in non-consequential battles, and (b) if indeed Amazon decides to invest its energies in this industry, how much of the disrupted value gets passed on to the non-intermediaries; i.e. consumers and manufacturers and how much is swallowed by Amazon!!!

I welcome your views/ questions ...

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