Amazon’s healthcare marketplace is a long-term play, but just the disruption healthcare needs
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On January 22, Amazon opened Amazon Go, its cashier-less convenience store concept, to the public. Pictures of the store show a small, 7-Eleven-like space filled with grab-and-go items, meal kits, and even alcohol. Almost as soon as news of its opening spread, speculation of Amazon’s plans for the technology behind Amazon Go spread as well. Will they license the technology to others? (eh, maybe) Bring it to Whole Foods? (eventually) Build Amazon Go stores across the United States? (yep).
Over the past couple years, Amazon has shown a strong desire to create a more robust physical presence. Providing Amazon Hubs in large apartment complexes, placing Amazon Lockers everywhere, buying Whole Foods (and placing Amazon Lockers in them), building Amazon pickup stores and bookstores — it all seemed part of some grand plan to dominate physical retail the way the giant has come to dominate ecommerce.
The opening of Amazon Go to the public, in addition to Amazon’s announcement that it plans to create an independent healthcare company along with fellow corporate giants Berkshire Hathaway and JPMorgan Chase, begins to illustrate a unifying theory motivating Amazon’s varying investments in physical assets. First, it’s another concerted move by Amazon to bring its digital network into the physical world, meeting the customer where he/she is. Next, it’s an effort to squeeze every ounce of productivity out of its consumers.
First, Amazon has repeatedly demonstrated it isn’t afraid to make investments in the sometimes messy physical world. Building data centers and distribution centers, buying grocery stores, trucks and planes — these moves have demonstrated that Amazon has a desire to build a completely integrated digital and physical platform. Whether in ecommerce and logistics or in cloud computing, Amazon brings together all the necessary components — digital and physical — for customers to easily come onto their platform and begin buying, developing, or selling (ecommerce, AWS, and logistics, respectively).
Next, Amazon is notoriously a glutton for productivity. There are three ways to improve productivity: (1) shift work to lower skilled labor, (2) replace labor with technology, or (3) shift work to customers. In its logistics chain, Amazon has obviously pursued the first two: it notoriously has legions of relatively low-wage package pickers in distribution centers that work alongside robots (from Amazon’s purchase of Kiva Systems in 2012). Amazon Go obviously achieves the second goal, replacing the marginal cost of convenience store labor with the high fixed costs associated with building out the software, cameras and everything else that went into the store. But, as Amazon Go stores spread across the country, they will also pursue the third method of improving productivity, shifting work to consumers.
“The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty.” –Jeff Bezos, CEO of Everything
Amazon Go will shift logistics work from Amazon to customers in a noticeable way. From two-day Prime shipping to same-day or two hour Prime Now shipping (to those who don’t have Prime, but come on, who doesn’t have Prime?), customers on Amazon have a variety of delivery options. Our need-it-now culture drives widespread inefficiency in the backend logistics serving up quickly delivered La Croix, gadgets or whatever else (not to mention the potential environmental impact of all this inefficiency). Amazon Go solves for this problem by giving consumers the option to walk down the street and quickly pick up an item, instead of ordering it on Amazon. In the long term, Amazon Go stores can take the strain off serving millions of logistics network endpoints, moving consumers to simply pick up items from down the street. This achieves the productivity goal of shifting work to customers, without customers even realizing it: the Amazon Go experience is so effortless and enjoyable, who wouldn’t want to pick up a meal kit and some chapstick from it? Whole Foods, Lockers, Pickup and Go stores — while on their face they seem to increase the number of nodes in Amazon’s logistics network, they actually decrease the nodes served, as customers shift to buying or picking up down the street instead of in their mailbox.
This brings us to the Amazon/Berkshire/JPM healthcare announcement. While scant on details, it promises to use technology to simplify care. It will initially cover the more than 1 million employees of the three companies, but with companies as ambitious as this, the goal is obviously to reach much larger scale. Much like Amazon Go stores, an Amazon healthcare marketplace will make it easier for employers and employees to shop for a variety of healthcare goods and services. While this shifts the work and choice to consumers, it also incentivizes them to make the more efficient decision for the system as a whole, just as having an Amazon Go store down the street can incentivize a consumer to do the “last mile” logistics work on his/her own and walk to the store.
Recall how Amazon Go started: For the past year, it’s been open to Amazon employees only as the company presumably worked out the kinks and got the technology just right. They’ve done the same with AWS (Amazon developers were the first and largest users of the AWS developer platform, providing almost instant scale for the project), logistics (Amazon eventually opened its logistics platform to third party suppliers, making it so anyone can sell on its website), etc. etc. And so it will be with healthcare.
Earlier, I mentioned that Amazon is perhaps the only company in the world with an integrated digital and physical platform. Nowhere is this model more critical to success than in healthcare. While there has been much hype about virtual care and advances in telemedicine, most people still prefer to visit a minute clinic or doctor for most of their healthcare needs.
When Amazon built the Amazon Marketplace, it didn’t immediately open it up to third-party suppliers. First, it simply sold millions of books that no physical store could possible inventory. Eventually, Amazon allowed third parties to sell on its platform, granting them access to the millions of loyal customers Amazon had captured by that point. These suppliers were able to compete on price to deliver consumers an ever-growing list of goods and services, allowing Amazon to become The Everything Store. Amazon even took over the physical distribution of goods for these third parties, building the warehouses and logistics network necessary to serve customers across the country.
Note that this approach to building a marketplace of consumer goods took decades. Not until the past couple years has the power and scale of Amazon truly become part of the public conversation. Building a similar healthcare marketplace will take even longer. The players are larger and often monopolistic. There are about three pharmacy benefits managers (PBMs), three insurers, two drug distributors in the U.S., two hospital suppliers, and local markets are often dominated by one or two health systems. Amazon will start slow, allowing employees to shop for just a few healthcare goods or services on its new healthcare marketplace (think of a good or service like books in the 1990s). It will slowly bring more employers and employees onto the marketplace before eventually opening up this infrastructure to healthcare suppliers of all types, allowing them to compete on price for any healthcare good or service under the sun. One of the biggest issues facing the healthcare industry is the lack of cost and quality transparency: Amazon’s healthcare marketplace, with its price and review tools right on the webpage, will bring immediate transparency to healthcare.
And now that Amazon has brought third parties onto its Marketplace, it often integrates backward, cutting out the third-party entirely by going directly to the manufacturer and playing hardball to get the product produced even more cheaply. Could it eventually do the same with healthcare? My instinct was to say yes, but if one looks at the many holdings of Berkshire Hathaway, it becomes apparent that a number of these holdings make perfect candidates for offering products or services on the Amazon healthcare marketplace. From Johnson & Johnson’s prescription drugs and consumer health products to DaVita’s dialysis services, these healthcare suppliers would be thrilled to offer services on the new marketplace, with access to the millions of employees Amazon will undoubtedly attract. Perhaps the perceived threat of Amazon attempting to integrate backwards and cutout the supplier will be incentive enough for these companies to keep prices low. In the long run, the Amazon healthcare marketplace will create an almost perfectly competitive market for suppliers, driving costs down for employers and squeezing profits for drug makers, insurance companies, and anyone else selling to employees, the way it has done for consumer goods. On the financial front, it’s always good to have JPMorgan on your side, seemingly buying into the long, long-term vision that is the Amazon healthcare marketplace.
As an aside, we haven’t even gotten to the massive data analytics and integration capabilities AWS can bring to a broken, fragmented electronic health records (EHR) system. In November, Amazon announced a partnership with Cerner to improve population health efforts by allowing for more advanced data collection and analytics. In addition, there are a plethora of new and exciting healthcare technologies and startups, from companies large and small. But, without an ability to easily integrate into an EHR, these technologies often have a hard time gaining traction with insurers or providers. AWS can change all this with developer-friendly APIs and protocols, providing increased integration and interoperability.
As always with Amazon, the possibilities are almost limitless. Healthcare has been one of the industries most resistant to technological change, with perverse incentives driving poor decision making at almost every level of the system. I’ll write more about this as details arise, but it’s an exciting development and should spur more investment in the already booming world of healthcare technology.
Oh, and we haven’t even talked about Alexa and her potential to revolutionize healthcare yet. Stay tuned.