It’s pretty rare for the same company to feature in two consecutive Weekly Articles; yesterday’s announcement of a health care initiative involving Amazon, though, is not only incredibly intriguing, it also fits directly into some of the most important themes on Stratechery. I couldn’t resist.
AMAZON HEALTH MARKETPLACE
What is “this”, though? It certainly is tempting to jump immediately to a possible end game predicated on the ideas I have laid out in The Amazon Tax, Amazon’s New Customer, and Amazon Go and the Future:
What would make more sense to me is that, having first built an interface for its employees, and then a standardized infrastructure for its health care suppliers, is that Amazon converts the latter into a marketplace where PBMs, insurance administrators, distributors, and pharmacies have to compete to serve employees. And then, once that marketplace is functioning, Amazon will open the floodgates on the demand side, offering that standard interface to every large employer in America.
AGGREGATION AND SUPPLIERS
This is certainly ambitious enough — basically intermediating U.S. employers and the U.S. healthcare industry — but in fact this only sets the stage for the wholesale disruption of American healthcare. First, Amazon could not only open up its standard interface to other large employers, but small-and-medium sized businesses, and even individuals; in this way the Amazon Health Marketplace could aggregate by far the most demand for healthcare.
Consolidating demand by offering a superior user experience is how aggregators gain power; given the scenario I just sketched out, Aggregation Theory has a prediction about what might happen next:
After all, if Amazon is facilitating the connection to patients, what is the point of having another intermediary? Moreover, by virtue of being the new middleman, Amazon has the unique ability to consolidate patient data in a way that is not only of massive benefit to patients and doctors but also to the application of machine learning.
Of course that leaves the insurance piece, which makes Berkshire Hathaway a useful partner; conveniently, Berkshire Hathaway is not in the health insurance business, but rather the health reinsurance business — that is, they insure the insurers. Or, to put it another way, they don’t provide any of the services that Amazon Health Marketplace might make obsolete, and specialize in the one thing Amazon Health Services would need.
Oh, and this will be really expensive, and take years to get off the ground. It certainly would be helpful to have access to financing and capital markets, which means it would be very helpful to partner with JPMorgan Chase & Company. The skills these three companies bring to bear seems far more relevant than the number of employees (and besides, the company alliance approach to traditional health care has been done).
THE ANNOUNCEMENT
From a joint press release:
From a joint press release:
Amazon, Berkshire Hathaway and JPMorgan Chase & Co. announced today that they are partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs. The three companies, which bring their scale and complementary expertise to this long-term effort, will pursue this objective through an independent company that is free from profit-making incentives and constraints. The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.
Tackling the enormous challenges of healthcare and harnessing its full benefits are among the greatest issues facing society today. By bringing together three of the world’s leading organizations into this new and innovative construct, the group hopes to draw on its combined capabilities and resources to take a fresh approach to these critical matters…
The effort announced today is in its early planning stages, with the initial formation of the company jointly spearheaded by Todd Combs, an investment officer of Berkshire Hathaway; Marvelle Sullivan Berchtold, a Managing Director of JPMorgan Chase; and Beth Galetti, a Senior Vice President at Amazon. The longer-term management team, headquarters location and key operational details will be communicated in due course.I’ve gotten more and more questions from readers about the possibilities of Amazon and health care, even before this announcement. I’ve been surprised, to be honest, but perhaps I shouldn’t be: I was the one who declared on The Bill Simmons Podcast that “Amazon’s goal is to basically take a skim off of all economic activity”, and given that health care was 17.9% of GDP in 2016, well, I guess that means I predicted this!
AMAZON HEALTH MARKETPLACE
What is “this”, though? It certainly is tempting to jump immediately to a possible end game predicated on the ideas I have laid out in The Amazon Tax, Amazon’s New Customer, and Amazon Go and the Future:
- Amazon builds out “interfaces” for its employees (as well as those of Berkshire Hathaway and J.P. Morgan Chase — I’ll just refer to Amazon from here on out), both digital and physical, to access basic healthcare needs; these sit in front of pharmacy benefit managers (PBMs), insurance administrators, wholesale distributors and pharmacies.
- Amazon starts building out infrastructure for those healthcare suppliers, requiring them to serve Amazon’s employees using a standard interface.
What would make more sense to me is that, having first built an interface for its employees, and then a standardized infrastructure for its health care suppliers, is that Amazon converts the latter into a marketplace where PBMs, insurance administrators, distributors, and pharmacies have to compete to serve employees. And then, once that marketplace is functioning, Amazon will open the floodgates on the demand side, offering that standard interface to every large employer in America.
AGGREGATION AND SUPPLIERS
This is certainly ambitious enough — basically intermediating U.S. employers and the U.S. healthcare industry — but in fact this only sets the stage for the wholesale disruption of American healthcare. First, Amazon could not only open up its standard interface to other large employers, but small-and-medium sized businesses, and even individuals; in this way the Amazon Health Marketplace could aggregate by far the most demand for healthcare.
Consolidating demand by offering a superior user experience is how aggregators gain power; given the scenario I just sketched out, Aggregation Theory has a prediction about what might happen next:
Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle.
This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers. This further means that aggregators enjoy winner-take-all effects: since the value of an aggregator to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones.The key words there are “commoditize and modularize”, and this is where the option I dismissed above comes into play, but not in the way most think: Amazon doesn’t create an insurance company to compete with other insurance companies (or the other pieces of healthcare infrastructure); rather, Amazon makes it possible — and desirable — for individual health care providers to come onto their platform directly, be that doctors, hospitals, pharmacies, etc.
After all, if Amazon is facilitating the connection to patients, what is the point of having another intermediary? Moreover, by virtue of being the new middleman, Amazon has the unique ability to consolidate patient data in a way that is not only of massive benefit to patients and doctors but also to the application of machine learning.
Of course that leaves the insurance piece, which makes Berkshire Hathaway a useful partner; conveniently, Berkshire Hathaway is not in the health insurance business, but rather the health reinsurance business — that is, they insure the insurers. Or, to put it another way, they don’t provide any of the services that Amazon Health Marketplace might make obsolete, and specialize in the one thing Amazon Health Services would need.
Oh, and this will be really expensive, and take years to get off the ground. It certainly would be helpful to have access to financing and capital markets, which means it would be very helpful to partner with JPMorgan Chase & Company. The skills these three companies bring to bear seems far more relevant than the number of employees (and besides, the company alliance approach to traditional health care has been done).
by Ben Thompson, Stratechery | Read more:
Image: uncredited
