Stuart R. Gallant, MD, PhD
I was intrigued by Amazon’s recent purchase of One Medical for $3.9B in cash. Amazon is implementing a strategy to move into healthcare which focuses on pharmacy and pharmacy benefit management (PBM). (Several months ago, PharmaTopo posted on PBMs [1].) Before looking at the details of Amazon’s strategy, let’s look at Amazon’s business model for some context.
Amazon and US Household Expenditures
Amazon had $486B in revenue in the last 12 months. If we look at what Americans spend money on [2], we can see how Amazon intends to grow its revenue in the coming years:
The yellow dots to the right of the table show markets that Amazon has a strong presence in (food through Amazon’s acquisition of Whole Foods, entertainment streaming and production through Amazon Prime Video, and consumer products (apparel, personal care, books, etc.) through online retail). In addition, Amazon Web Services (AWS) provides the backbone for much online commerce, generating 13% of Amazon’s revenue. The open yellow circle next to the transportation category represents Amazon’s efforts in self driving technology (which don’t seem to be generating much revenue at this time).
In summary, Amazon has a strong presence in the markets corresponding to 18% of the expenditures that American households make. What Amazon would like to do is continue expanding by offering other products and services. Currently, Amazon is making a big push in online pharmacy and may be making a move into healthcare, as well (7% of household expenditures, represented by the green dot).
Business Model 1: The Power of Market Share
Amazon, Berkshire Hathaway and JPMorgan Chase founded Haven Healthcare in 2018 [3] to reduce healthcare costs which were like “a hungry tapeworm on the American economy,” according to Berkshire Hathaway Chairman and CEO Warren Buffett. Their mechanism of cost reduction was to be a combination of data analysis and bargaining.
First, came the data analysis: Haven hired a raft of computer gurus and MBAs. Haven wanted to have the best models of healthcare cost available.
Then, came the negotiation. Haven intended to approach major medical providers with a new payment model. Instead of receiving payments for procedures, the medical groups would be compensated based on a per patient fee. If the cost of care for a given patient was less than the fee, the medical group could pocket the difference, but the medical group would have to provide medical care even when the patient’s care exceeded the fee.
However, this approach to negotiation requires a strong position in the market. The medical groups have to see their market drying up if they don’t take the deal. And, Haven didn’t have the market share in any region of the United States to make this plan work, so the investors walked away from Haven in 2021.
Business Model 2: If you can’t beat ‘em, join ‘em.
With the collapse of Haven, Amazon needed another way into healthcare. Amazon laid the groundwork with a series of strategic moves into healthcare. In 2018, it began selling over-the-counter medications branded as “Amazon Basic Care” which were produced by the generics company Perrigo. At the same time, Amazon purchased PillPack, Inc., a pharmaceutical packaging company, for $753M. And, it launched Amazon Pharmacy and Amazon Care in 2020. Amazon Care provided healthcare initially to Amazon employees, and subsequently to employees of other employers. What we see in this series of moves is Amazon systematically learning the pharmaceutical healthcare business while also diversifying its business.
The capstone of this effort was purchase of One Medical in July 2022. There are a number of aspects of this purchase that fit Amazon’s strategy particularly well:
- One Medical is a primary care clinic network with 72 clinics in the western US (as of 2019) [4].
- This relatively new medical group has its own in-house medical record system, designed to increase efficiency. This fits with Amazon’s focus on logistics in service provision.
- The group is closely associated with Google, having received investment from Alphabet and providing services to Google employees. This comfort with technology companies should aid the transition to Amazon ownership.
- Amazon beat out CVS in CVS’s bid to acquire One Medical. CVS is and will be a major Amazon competitor in healthcare.
To see how the One Medical and other Amazon efforts in healthcare fit together, let’s consider a figure from a previous post on PharmaTopo:
I monochromed the original figure (for a discussion of the original figure, see the original post [1]) and noted Amazon business initiatives in orange. If we consider the infrastructure of drug supply, Amazon has acquired businesses in each area:
- Haven Healthcare taught Amazon about the insurance business, at the same time that Amazon started its own in-house Amazon Care business that it subsequently rolled out as an insurance service for other employers to use.
- Amazon Basic Care taught Amazon about drug manufacture and drug wholesaling, as did the acquisition of PillPack. Amazon used this information in launching Amazon Pharmacy. Amazon’s goal is to grow its pharmacy business substantially—this becomes clearer in the next section of this post.
- One Medical is a medical provider, not a Pharmacy Benefit Manager (PBM), but the acquisition of One Medical allows Amazon to study the PBM business up close through One Medical. Presumably, Amazon will observe the existing contracted One Medical PBM, then displace that PBM when contract renewal time occurs.
The Pharmacy Benefit Manager Business
In a short period of time, Amazon will be able to compete with other US PBMs on a head-to-head basis. The PBM business is intimately tied to pharmaceutical sales. If you look at the companies in the US with the largest prescription drug sales, three are PBMs (Express Scripts, CVS Health, and OptumRx) [5]:
Amazon has a market capitalization around $1.5T. CVS, the leading prescription drug retailer and PBM in the US, has a market capitalization of $140B, about 10% of Amazon. Clearly, Amazon intends to grow its revenue at the expense of CVS, Walgreens, Cigna, and other pharmaceutical retailers.
Where Is This Headed?
It will be interesting to see what Amazon does next in healthcare. Some options include:
- Spin Off or Sale: Amazon could view One Medical as a learning lab and entry into the PBM business—allow it to grow organically—perhaps, sell it or spin it off one day. The One Medical business model has some interesting synergies with Amazon, but there is at least one mismatch. Amazon thrives on pushing its employees to increase productivity. One Medical is founded on making its doctors happy—deliberately limiting the number of patients they see in a given day. Amazon may not want to become a major employer of doctors with the possible headaches if and when increased productivity is required for business reasons.
- Franchise: One Medical has its own electronic medical record system, and presumably other business practices that it views as unique. It has thrived in a relatively competitive marketplace for medical services, including many clinics in busy San Francisco. Amazon could allow groups of physicians to purchase One Medical franchises. One Medical could grow without Amazon taking on a large pool of doctors as employees.
- Further Expansion into Healthcare: Amazon may move into the healthcare business in a more substantial way. Medicine and insurance are regulated on a state-wide basis in the US, with a three-tiered system of administration. Insurers contract with PPOs to provide medical care to insured patients. In turn, PPOs contract with medical practices (hospitals, general and specialty medical care groups) to physically see and treat the patients. Haven failed as an insurer because the number of patients it represented was too small to give it negotiating power with providers. One Medical, combined with Amazon Care, could represent a long-term plan to grow the number of patients that Amazon provides services to, eventually reaching a tipping point in its negotiation power with healthcare providers.
Haven aspired to change the model of care to one in which a single comprehensive membership fee would be charged, and any care would be covered under that fee. Healthcare experts dream of this approach because it promises to increase the overall health of Americans by forcing the providers to be invested in improving health outcomes (rather than being focused on services provided). It will be interesting to see if Amazon has continued its focus on that goal (past the failure of Haven) and more importantly whether reaching that goal is possible inside the US medical care system as it is now structured.
[1] pharmatopo.com/index.php/2022/03/27/payment-for-pharmaceuticals/
[2] www.bankrate.com/banking/savings/average-household-budget/
[3] www.npr.org/sections/thetwo-way/2018/01/30/581804474/amazon-berkshire-hathaway-and-jpmorgan-chase-launch-new-healthcare-company
[4] www.cnbc.com/2019/07/28/one-medical-opening-primary-clinics-in-portland-and-atlanta.html
[5] www.statista.com/statistics/734171/pharmacies-ranked-by-rx-market-share-in-us/
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