Here’s What Jeff Bezos’ Healthcare Initiative Means For The Rest Of Us

Amazon together with J.P. Morgan and Berkshire Hathaway (let’s call them the “Triad”) recently announced plans to form a joint venture designed to provide more cost/effective healthcare (“higher employee satisfaction at reasonable cost”) for their 1+ million employees. Although the details are sketchy so far, the announcement drew a large amount of media attention and the stock prices of major healthcare services and products suppliers dipped on the news.

The question on many minds is: can Jeff Bezos with his powerful partners change the U.S. healthcare system, and improve its cost/effectiveness, anywhere near as dramatically as he has changed U.S. retailing, then cloud computing, and now television, the smart home and space transportation? While it’s hard to say what the limits are for a man of such talent, let’s look at the characteristics of the challenge before him.

Healthcare is not a “goods” business: about 3/4 of National Health Expenditure (NHE) goes for services provided by hospitals, other healthcare institutions, MDs or other healthcare professionals. Healthcare is also not a retail business: consumers pay out-of-pocket for 11% of NHE. Amazon’s original core strengths in selling and delivering goods to consumers don’t match well with “where the money is” in healthcare.

What are the big levers in healthcare economics? There are three: coordination, clout and behavior.

Coordination refers to the flow of information in the healthcare system, which often breaks down. It is hard for a payer, provider, or individual to assemble and analyze the complete picture of information relevant to the health of one person, or a group of people, so as to draw conclusions, take action or allocate resources in a way that produces the best outcome. Partly this is a technology problem, but many of the barriers to information flow arise from ingrained behavior, regulations, and economic or political incentives. Poor coordination drives higher costs due to repeated tests and wasted time, and it leads to poor patient outcomes.

Clout speaks directly to economics and incentives. Healthcare providers and insurers cultivate clout; hence it is hard for health plan sponsors like the Triad to pressure them for better terms or services. Healthcare services are a regional business: most are delivered in the metro area where the patient lives. Regulation impedes out-of-region competitors because they must obtain multiple licenses and comply with varying rules: doctors, hospitals, and medical insurers are primarily regulated by the states. Hospitals have merged into a handful of chains per region, and they have bought physician practices making most doctors hospital employees, creating very strong competitive positions in their regional markets. This helps explain how the price of medical services continues to rise faster than general inflation, even as businesses and the government attempt to slow it, and why the U.S. spends about 75% more on healthcare (as a % of GDP) than other comparable advanced economies. The main driver of this higher spend is higher prices for healthcare services and drugs.

Behavior matters because the most important factor determining a person’s health status is how s/he behaves: eating, exercise, risky behavior like smoking, and compliance with medical advice. Chronic diseases like diabetes drive about 80% of U.S. healthcare spending. To a large extent these diseases are driven by behavioral choices: smoking, eating the wrong food and too much of it, sedentary lifestyle, etc. Major action on these factors, similar to the reduction in U.S. smoking prevalence from 50% to 20% that occurred in recent decades, could by itself reduce U.S. healthcare spending by up to 20%.

So, how much of a difference can the Triad make to the cost of healthcare and their employees’ satisfaction with it, and what does this mean for others? What the triad intends to do is vague at this point: “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”.

How much clout does the triad actually have? The triad companies have about 1 million employees out of about 150 million Americans who receive employer sponsored health insurance (ESHI), and each company has employees in many places across the U.S. Probably their strongest regional position is Amazon in Seattle, where it is the #5 employer, about 1/3 the size of Boeing, the #1 employer. Neither company has yet revolutionized the healthcare system in Seattle.

Bezos speaks of taking out middlemen in the system, like insurers and pharmacy benefit managers (PBMs). Big companies like the Triad already self-insure their healthcare, so taking out insurers matters little. Building a private supply chain for prescription drugs is an intriguing idea: drug company CEOs complain that the pharma supply chain absorbs 40% of drug spending. However, the Triad companies probably spend less than $3 billion on drugs each year, while ExpressScripts, the leading PBM, does about $100 billion of prescription drug business. ExpressScripts has a huge scale advantage purchasing drugs and building the systems needed to process the billions of prescriptions that it handles. If Amazon takes this on, they could develop an attractive service based on their tech and logistics capabilities, but they will need to make huge investments and will probably want to make their service available to other companies to gain scale. That would be good news entrepreneurs.

Communication among providers and the user interfaces for providers and patients are the places where tech solutions can probably make the greatest difference. This is not a green field. Most medical records are electronic now (but in hundreds of systems with dozens of access protocols/data formats). Many small and large companies are working on systems to improve data flow among providers and payers. Some large integrated health systems, like Kaiser Permanente, have a complete picture of a patient’s medical record today. And efforts to improve coordination still face major friction from privacy regulations, doctors’ reluctance to spend time learning new systems and entering data, and the incentive institutions have to hold on to data and use it for competitive advantage, particular in the dawn of the age of artificial intelligence, for which data is the main fuel. Perhaps the Triad can create a medical data superhighway for its employees, however, it’s likely to be a costly slog and benefit mainly the Triad, not other companies.

The patient user interface, on the other hand, has received much less attention and offers significant opportunities. Typical patient portals offered by providers today are the tech equivalent of a 1960’s Dodge Rambler: outdated, underpowered, and just plain ugly. And multi-media communication between patients and providers (internet video, photo + phone, apps, text, etc.) that is tightly coupled to the core care process is a large, under-developed opportunity. Here the Triad can use tech savvy to make big improvements in both cost and employee satisfaction. Triad employees will be the first beneficiaries, but the Triad may be able to accelerate provider adoption of these technologies, and other vendors will pick up on ideas that succeed, much as large and small companies learned from Amazon’s pioneer work in e-commerce. This will bring these benefits to most employers.

Behavior is the conundrum of modern healthcare. It is one of the most powerful levers for both cost reduction and health status improvement. The U.S. has shown the world how to reduce smoking, one of the worst behavior-based health problems. But behavior is not at the top of the healthcare agenda: U.S. companies’ spending for employee wellness is less than 10% of spending for healthcare. This reflects the underlying U.S. health culture in which many people expect to do whatever they wish with their bodies and, when a problem happens, get “fixed” by medical magicians, with the bill paid by a third party. There is also a problem of timeframe: employers and insurers often have employees for a few years, but behavior-induced health problems develop over decades, so investment in behavior change does not have an ROI for them.

Tech and financial services companies and leading companies in other industries are investing more in employee health now. This arises from increased competition for high value employees (e.g., top engineers and data scientists), and probably also enlightened awareness of the link between behavior and health. Google, for example, complements its 3-meals-a-day food benefit with a cloud/mobile system that taps into employees’ medical status (with opt-in), their taste preferences, and the menus of its restaurants to offer healthy eating suggestions at the moment of decision via mobile phone. This approach has proven quite effective in both engaging employees and improving their health on measurable dimensions. Hopefully the Triad will raise the ante for employer investment in and impact on behavior-based health.

Don’t expect that Jeff Bezos and the Triad will revolutionize the U.S. healthcare: it’s too much, even for such a powerful entrepreneur. Do expect that they will push the frontier forward in important specific areas. And look for opportunities to benefit from their innovations and take advantage of the new products and services they will create.

First published @ on February 20, 2018.