Amazon, Berkshire Hathaway, and JPMorgan fired a very loud shot heard ‘round the markets this week when they announced an alliance aimed at helping to reduce their own healthcare costs – the immediate reaction to which was the perceived threat and expected disruption caused by Amazon entering healthcare markets.
In our view, healthcare in the US is already being disrupted, through regulation change, the rethinking of business models, the accelerated introduction and use of cloud-based technologies, and via mergers and acquisitions that reshape the payer-provider continuum. And given the unique combinations of profit and inefficiencies that exist in this market, we not only see it as ripe for disruption, but we also see that disruption coming from an increasingly broad range of potential competitors.
Amazon’s entry into healthcare has been expected. As Aetna and CVS were negotiating their recent M&A, rumors swirled regarding Amazon making a market splash – although they were expected to do so through acquisition rather than via alliance with non-healthcare firms like JP Morgan and Berkshire Hathaway.
We began hearing concerns from senior payer-side executives about Amazon disrupting healthcare markets as far back as 2014. Those concerns centered on two aspects of healthcare where Amazon tends to be extremely capable: large volumes of transactions and utilizing Big Data to create and improve business. And just this week, immediately after the alliance was announced, we heard other executives expressing concern about how they were going to be able to improve their own efficiencies even faster and better in order to compete with Amazon. “We’re going to have to become more of a technology company” asserted one executive.
We agree, but not only because the conversations include Amazon. Healthcare marketplaces are exceptionally complex, with vast and growing amounts of structured and unstructured data, an immense volume and range of transaction types, and an ever-shifting mix of providers, payers, pharmaceutical benefits managers, regulators and regulations affecting transactions, interactions, systems and services. Such a multifaceted set of compound structures and relationships is practically required to be disrupted, and in many ways.
All that being said, it is not a given that Amazon will re-invent healthcare in the U.S. Key questions yet to be answered include the following:
- Will Amazon, either with or without Berkshire Hathaway and JPMorgan, even enter commercial healthcare outside of the announced alliance? The marketplace assumption is that Amazon will, and we concur – but “when” is a more important question. Competitors are already rethinking and reinventing themselves, and the threat of Amazon as a competitor is accelerating that. How much time will they have to improve themselves?
- Does expertise in online retail supply chain efficiency translate well to the much more complex business relationship model of US healthcare? Amazon is already experiencing challenges translating its online retail efficiency practices to its Whole Foods brick-and-mortar subsidiary. Which brings up another question…
- Can a company built to minimize direct, personal customer interaction succeed in a business built around in-person interaction? Even IF Amazon stays away from the provider side of healthcare, the payer side still requires significant customer/patient and provider interaction and relationship management.
- What does Amazon need to succeed? In our view, the company requires a tremendous amount of knowledge and expertise that Amazon lacks. They could acquire firms, but M&A results over the past few decades suggest that acquiring firms to acquire their talent and expertise rarely works. In our view, the best indication of intent and potential success will be if and when Amazon begins poaching experienced executives – real thought leaders - from payers and/or providers. Any firm must have forward-looking, experienced leaders to succeed in healthcare.
Finally, let’s not forget Amazon’s partners. While Amazon certainly possesses important advantages that current healthcare players want and need – e.g., technology, transaction processing, Big Data, cloud – the alliance also includes Berkshire Hathaway’s unparalleled expertise in M&A and JP Morgan’s market-leading presence and expertise in finance, both critical elements to any firm seeking to enter a market where they lack presence (or practical experience).
ISG will continue to monitor and analyse this important development as part of our Healthcare practice areas, and our ISG Research clients will see more in-depth analyses with guidance regarding the extent of market disruption expected, sources of disruption, and the collective impact on our clients. For more information on ISG Research, or to become a client, please click here: https://research.isg-one.com/.
Momentum MTI 2017 Verticals Report - Healthcare Equipment and Services
About the authors
In his role as leader of ISG Insights’ overall research agenda, Bruce Guptill coordinates analysts’ focus on guidance regarding digital disruption, emerging technologies, market shifts and the changing value of enterprise IT for clients’ changing business needs. His own analysis and guidance focus on how disruptive technologies enable business innovation and improvement for enterprise clients, and how these in turn disrupt and reshape software and IT services providers’ business and markets.Bob Krohn is a Partner and Healthcare Practice Lead at ISG. He has an extensive background in business process optimization, organizational design and execution including the direct oversight of numerous outsourcing contract negotiations. His background also includes the design, implementation and subsequent management of operations of ERP solutions and the management of large Information Technology infrastructure organizations.
Peter Magagna is a Business Development Executive at ISG.