Part of the Disruptive Innovations in Health Series.

Amazon vs CVS Health

The Moon Race for a Retail Medical Services Model Will Drive Market Disruption

By: Robert J. Horne & Jim Bialick

Key Takeaways:

Amazon has joined CVS Health in a race to establish a retail-centered medical services care model intended to compete with physician owned practices and some medical facility business models.

• Each company has a unique retail model that can be leveraged to support the offering and unique M&A needed to complete it.
• CVS Health enjoys a significant lead in model development, but Amazon’s own experience converting Whole Foods into a community access point for a range of services, its cloud computing business that can support digital workforce alternatives, and significant financial reserves means Amazon can catch up.

Expect furious M&A and strategic partnerships from both companies over the coming months and years as each builds out the model.

• Workforces with medical prescribing authority will continue to be a priority of M&A from both companies.
• We anticipate that a host of secondary entities will look to occupy areas of business related to these models including workforce staffing agencies, third party vendors for both models and patients using them, and community medical models already in operation in local markets.
• Workforce alternatives like digital medical service providers, A.I, virtual care (including but not limited to telehealth), and lower-licensed medical workforces (ex. coaches) will continue to increase in relevance as the technology continues to evolve.

CVS is rumored to act next when more information on the company’s Virtual Primary Care model offerings is made public during Aetna’s marketing of 2023 health insurance plans set to begin October 1, 2022.

DarioHealth is rumored to feature prominently in Aetna’s 2023 health insurance offerings via its inclusion in CVS Health’s Virtual Primary Care model. If these rumors are true, the public should know any day now as insurance companies start marketing 2023 plans on or after October 1st, 2022

CVS Health ($100 million) and CIGNA ($450 million) recently announced the creation of venture funds — moves suggesting that health plans and other secondary parties will also soon enter the M&A fray.

True market disruption may be the result of what is occurring as a finite amount of medically licensed workforce numbers drive appetites from payers and others for workforce and business model alternatives.

Significance of Amazon vs CVS Health Competition

Last year, CVS Health gave insights into this new retail model when it announced a strategy to capitalize “…on the significant opportunity to make health care more convenient, personalized and affordable for consumers.” The timing of the move appeared at first glance to be in response to delays in finding an appointment to see a doctor experienced at the outset of the current COVID-19 pandemic. As noted previously, we see much earlier signs of model development beginning with the purchase of health insurance giant Aetna in 2018. From there, the needs of a payer evolved into the need for a more wholistic approach to managing care, which led to the development of a new virtual primary care model focused on offering patients access to physical, virtual, and digital medical care. Makes sense.

The move by Amazon had to come as a shock to CVS Health though, especially considering the company’s need of workforces sufficient to operate its retail model. To make it work, CVS Health’s biggest outstanding need is a medical workforce capable of writing prescriptions for patients in need of care. The One Medical purchase would have given CVS Health a substantial workforce to pair with its pharmacy and minute clinic employees versus the use of third-party staffing companies. We believe this fact led CVS into acquisition talks with One Medical. And the loss of this key medical workforce couldn’t have come at a worse time for the company.

CVS Health announced earlier this year the rollout of a Virtual Primary Care model patients can access nationwide starting January 1, 2023. An in-house physician workforce with prescribing authority–the workforce the company counted on to manage patient requests for appointments with a physician under the Virtual Primary Care model–was gone

Amazon’s success, on the other hand, was a surprise but in hindsight a clear reaction to its own business model needs. Amazon is a large and diverse company that self-insures its employees and is therefore subject to the rising costs of care just like any large company. The company is one of the leaders in the cloud computing market, a necessary resource for workforce alternatives like digital medical services. The company also had a virtual-care option with Teladoc supplying its virtual care workforce and was also reportedly seeking to partner with insurance companies to help manage the costs of its employee health care costs.

Amazon is well positioned as a company for a late entrance into the race with CVS for retail medical care. Amazon has already redeveloped Whole Foods into a community access point for various retail, storage, and transportation related services since it acquired the business in 2017. Whole Foods, until it was purchased by Amazon, had been a niche’ business operation targeting wealthy neighborhoods and customers interested in healthy food options.

The One Medical purchase only adds to the company’s community presence with physical locations and workforce to serve patients in need. It also services as a clear signal that Amazon is eyeing a material play in the health care market. And while behind the race, Amazon has the resources to engage in additional M&A very shortly (something we expect for later 2022 or early 2023) as well as an equally compelling retail presence in some communities that can help it overcome the advantages CVS Health currently enjoys.

Medical workforces are hard to replace, and it isn’t lost on us that the purchase also had the advantage of taking these resources away from competitor CVS and the Virtual Primary Care model. This has been fueled by the company’s apparent interest in further M&A as evidenced by the attempt to also purchase Signify Health. This and other indications suggestmore M&A is to come.

CVS vs Amazon — What Comes Next

CVS Health may have been dealt a blow by the Amazon deal, but it wasn’t fatal. CVS Health in fact asserted publicly during the last earnings call that it remains the largest health care retailer of health care products and services despite losing out on the One Medical deal. It appears the company remains poised for success and currently enjoys a lead over Amazon on its go-to-market strategy. Aetna, a top-five national health insurance company, and its pharmacy business are clear advantages for the company for the foreseeable future. The medical workforces from CVS Minute Clinics also represent a valuable resource for what we believe is to come.

CVS Health demonstrated this commitment with the acquisition of Signify Health eight days later, a company focused on developing new reimbursement approaches for medical providers and plans to lower costs and increase care quality. Signify gives CVS Health a substantial medical workforce necessary to help support the entire company enterprise. In addition, the company is likely to increase its footprint in digital medical services which provides patients with an alternative option to access primary and behavioral health care services among others.

Digital medical services are expected to play a growing role in the virtual care offering and community access model. CVS Health appears more ready to capitalize though. One company in particular, Dario Health, appears a likely M&A or strategic partner for CVS Health in 2022 as the company continues to build out the virtual care offering. If true, this would give CVS Health a clear competitive advantage in the digital medical services market over Amazon. We anticipate news on the specifics of this issue from the company very soon–specifically before open enrollment starts for 2023 health insurance plans starting October 15 (Medicare) and November 1 (private plans). Investors should note this would appear to line up with the company’s plans to make the Virtual Primary Care model available nationwide starting January 1, 2023.

We believe CVS Health will be announcing a strategic partnership with digital therapeutics company DARIO Health to provide behavioral health (primary care) services under its Virtual Primary Care ahead of open enrollment season to begin October 15th for insurance plans with coverage starting January 1, 2023. We believe that an agreement was already in place before Amazon stepped in to purchase One Medical, and since then the agreement has been upgraded in scope and importance. Expect more news on this agreement in the coming weeks.

However, if Amazon is indeed positioning itself as a competitor to the CVS Health model, it is years behind in planning and execution but well financed enough to make up ground very quickly through M&A and strategic partnerships with other businesses across a wide spectrum of need.

What Amazon lacks in other key areas is an insurance offering and pharmacy presence for the 100s of millions of patients working with pharmacy benefit managers. Amazon can make up for a late start with vast amounts of resources and competitive advantages in the technology space with its cloud computing and affiliated business units — units well designed to support virtual and digital medical service offerings. However, CVS has better representation in all communities across the country while Amazon via Whole Foods tends to be more represented in geographically wealthier areas and not as much in lower-income communities. We anticipate that other retail models better represented in low-income areas may be on the table for Amazon M&A soon. We anticipate Amazon to be pursuing a similar strategy to that of CVS Health including eventual offerings in virtual and digital medical service offerings fleshed out via M&A and strategic partnerships soon as well.

Expect more M&A news from Amazon in the next 18 months to better define how Amazon will be pursuing the virtual and digital medical services markets including activities to leverage its cloud computing business units. We also expect a host of secondary actors, such as health insurance company CIGNA, to also make plans to either maintain or improve its own footprint in the market.

Key Leave Behinds

Expect heavy doses of M&A and strategic alliances expected to help both companies speed up the ability to stand up a comprehensive retail care offering. These include workforce and workforce-related industries–especially from CVS Health as it seeks to recoup the workforce it lost in the One Medical deal–with virtual and digital care service companies. As both models are being developed as alternatives to local health systems, we anticipate both companies prioritizing shopping and other technological improvements that help improve the customer experience as well.

Primary care and related service areas like behavioral health and physical wellness will be the lead focus of these models initially but they are expected to expand medical service offerings as workforce specialization and technological innovation continues. As for the workforces themselves, we anticipate shortages will continue and worsen given the time and resources it takes to properly train a medical workforce.

As noted above, virtual care and digital medical service companies will continue to be targets for M&A and strategic partnerships to dominate these emerging markets. We anticipate a blending of actual and digital workforce options to continue redefining workforces and the marketplace for the foreseeable future as the pace of technological innovation and A.I. performance increases. The current market conditions and evolving workforce business model spurred by shortages across several categories — including mental and behavioral health — are expected to continue driving payer appetites in the coming years as the U.S. population continues to climb and age.

Jim Bialick and Robert J. Horne are Principals at the Kairos Policy Group.