Amazon: Prime Time for Healthcare
By: Amy Li & Arshdeep Toor
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Amazon’s Current Healthcare Strategy
Amazon has dominated digital business, which touches almost every industry; the company is currently well positioned to lateral into any other segment where it can add value. Amazon’s interest in healthcare is fuelled by three factors: the industry is large and growing, the segment is characterized by waste and inefficiency, and consumer expectations are forcing incumbents towards being more responsive and consumer-focused. In the U.S., healthcare is not universally accessible and its fragmentation makes seeking treatment a frustrating experience for consumers. Amazon has identified this industry as an area where its expertise in transforming traditional business models through technology can prove useful in achieving market success.
The company has begun to move into healthcare but has yet to aggressively pursue growth. To date, it has made several investments and has formed Haven, a nonprofit joint venture with JPMorgan Chase and Berkshire Hathaway. Haven’s stated goal is to improve the overall healthcare system, focusing first on U.S.-based employees of the three companies. Rather than scaling this company to compete with insurance existing providers in America, Amazon should purpose it as a proof-of-concept for its health products and services.
Chaos in the American Healthcare System
The U.S. healthcare industry is extremely inefficient; hospitals, clinics, and insurance companies operate independently from one another, leading to high administrative costs and a lack of data sharing. Insurance coverage of prescription drugs, for example, often requires lengthy pre-authorization and reimbursement procedures. Time is wasted on billing and processing insurance claims as private insurance plans can have vastly different terms and conditions. Patients are sometimes required to pay out of pocket if the procedure does not meet coverage terms.
Historically, healthcare coverage in the U.S. has been provided through a combination of private health insurance and public health coverage. Both sides have different incentives and balancing these interests has left consumers trapped in an overly complex healthcare system. Patients are frustrated with the poor service and lack of price transparency. A 2017 CVS Health survey found that most Americans believe the current health system works only somewhat well or not at all well; of those who believe that the system does not work well, 65 per cent believe that it is too expensive.
The industry seems primed for disruption and Amazon is uniquely positioned to enter this space. By introducing a package of products and services that would reduce the operating cost of health insurance providers and in turn, the premiums paid by consumers, Amazon could establish itself as a behemoth in yet another industry.
Amazon’s Insurance Play
Haven, Amazon’s joint venture, should enable new innovations in healthcare using JPMorgan’s financing expertise, Berkshire’s insurance experience, and Amazon’s technological capabilities. Although the venture represents a step in the right direction, it would still take Amazon too long to realize the benefits of scale. Within healthcare, Amazon is better positioned as a facilitator of health services in its mission to dominate the space. However, the benefits extend beyond the potential profit from dominating the space. By facilitating health care, Amazon will be able to add more Prime customers, who spend almost three times as much every year as their non-Prime counterparts. Since 2011, Amazon has been adding more services such as music and video streaming to incentivize people to join this program, even if it means less profit in the short run.
Amazon’s approach should be to build and sell a healthcare ecosystem, which will be referred to as “Prime Health.” Prime Health would be a package of products and services for personal healthcare, such as an Alexa-enabled device that creates an online user profile with medical history. Insurance companies would attach this online profile to an individual’s plan, allowing the companies to collect more consumer data and gain deeper insights into the individual’s health. Amazon entered the cloud computing market under Amazon Web Services (AWS) by charging enterprises a fee for its service—Prime Health can be to healthcare what AWS was to cloud computing.
Haven would be an incubator for the Prime Health package where all of Berkshire’s investments in insurance would utilize the ecosystem. Once proof-of-concept is established, Amazon could scale Prime Health outside of the nonprofit company. Since the size of America’s health insurance industry is directly linked to that of the American population, customers lost by one provider can be gained by another competitor. Eventually, most, if not all, insurance companies in the U.S. would be inclined to incorporate Prime Health into their operations to remain competitive on price. The total market size for U.S. healthcare is projected to be approximately $6.0 trillion by 2027, outpacing GDP growth over this period. By partnering with insurance companies, Amazon would solve the need for a coordinated and organized solution, as Prime Health would help address inconveniences in the value chain.A successful insurance provider collects more in premiums than it pays out in claims. Existing providers are focused on targeting revenues by growing customers or increasing premiums. Amazon could act on the cost side of the equation by using Prime Health to help insurance companies reduce the frequency and size of claims paid out.
The Amazon Advantage
Existing incumbents in the health insurance industry generally service consumers by providing financial assurance in three healthcare areas: ailment diagnosis, healthcare issuance, and extended care facilitation. Ailment diagnosis includes doctor visits, healthcare issuance includes drug dispensation, and extended care includes hospital stays.
Major pain points for insurance players include customer frustration arising from the industry’s complexity, difficulty in preventing consumer health issues resulting in high payouts, and the high cost of care in America. To alleviate these pain points, Amazon should introduce Prime Health as an ecosystem that collects and analyzes user data to provide insurance incumbents with new predictive measures for consumer health, increased accuracy of consumer health profiles, and reduced health care administrative costs. This can be done through Amazon’s consumer-facing interfaces, data storage and analytics capabilities, and distribution channels.
Preventative Measures to Healthcare
To make a profit, insurance companies charge high enough risk premiums to all consumers in order to distribute risk as insulation from financial loss. However, they are unable to materially influence consumer behaviour and control health risks to lower payouts. Preventative medicine is not in the insurance company’s toolbox, but it is a key capability that Amazon can offer.
To increase preventative measures for sustaining consumer health, Amazon can capitalize on the over 100 million Alexa-enabled devices sold as well as Americans’ openness to using smart home devices. Amazon has already filed for a patent on software enabling Alexa to analyze a user’s voice to determine physical and emotional condition; the company is primed to use this technology to personalize healthcare recommendations for each individual end consumer.
As part of Prime Health, insurance companies would provide their clients with an Alexa-enabled device. Amazon could then use Alexa’s reach and healthcare analysis technology to catch illnesses early and recommend doctor check-ups or over-the-counter (OTC) drugs to prevent the escalation of ailments and their respective insurance payouts. Alexa could also recommend healthier food options and exercise regimens by analyzing search history data and health data from external Alexa skills (add-on capabilities). By taking a proactive approach to consumer health and personalizing preventative measures for each consumer, Amazon will be able to catch potential major illnesses earlier, when treatment costs less, and prevent some illnesses from occurring altogether.
Using Data to Enhance Insurance
Amazon excels in both data collection and data analysis. Through these competencies, Amazon can bolster current risk modelling capabilities of health insurance players. This will, in turn, result in a more accurate calculation of premiums, leading to an overall lowering of costs for end consumers.
Real-time consumer data such as user behavior, purchasing patterns, and exercise habits are constantly being collected by Alexa. Additionally, data collected through the insurance application and submission process such as claims history, doctor’s notes, and patient records will provide additional sources of information about a consumer’s life.
Amazon should feed these data points into its proprietary analytics software, Comprehend Medical, to provide insurers with tangible insights. Comprehend Medical is a natural language processing service that uses machine learning to extract relevant information from unstructured text. Comprehend has recently become Health Insurance Portability and Accountability Act eligible, which enables the use and storage of protected health information (PHI) such as name, age, and medical record number. Feeding real-time data sources to Comprehend combined with Amazon’s data analysis capabilities allows the company to build an accurate and comprehensive health profile for insurance companies that enables personalized preventative medical and wellness recommendations.
Unparalleled Distribution, Unbeatable Convenience
To further increase consumer convenience and reduce health care administrative costs, Amazon should incorporate its existing abilities to distribute both over-thecounter and prescription drugs. Its Basic Care line provides OTC drugs through the Amazon Marketplace, with product offerings that are approximately 20 per cent cheaper than retail pharmacies. Amazon also owns PillPack, a fullservice online pharmacy that mails prescription drugs.
By capitalizing on PillPack and Marketplace’s existing delivery infrastructure, Amazon can help insurance companies deliver low-cost OTC and prescription drugs to consumers within one to two days. This existing distribution system is more convenient for Prime Health customers than traditional insurance processes and would offer a competitive price.
A Day in the Life
Meet David, a customer of a healthcare insurance company who has partnered with Prime Health. David uses Alexa through the Echo Dot, which was mailed to him as part of his insurance package, on a daily basis to complete mundane tasks. On the back-end, Alexa is slowly building out a health profile on David, based on his voice tone, day-to-day searches and purchasing habits.
David asks Alexa to set an 8:00 a.m. alarm for the next day. Alexa processes David’s communication and follows up with a comment about how raspy David’s voice sounds, prompting David to tell her how he’s feeling. Alexa decides that David seems to have caught a cold and asks David if he would like to book a consultation with an online healthcare professional. David complies, and books an afternoon consultation the next day. The online healthcare professional prescribes some cold and sinus drugs for David, and Alexa immediately checks if the prescription is covered by his insurance.
After the call, Alexa informs David that the medication is fully covered by his insurance and asks if he would like to place an order for the prescribed medication. David responds affirmatively, and Alexa places an order through the Basic Care product line. Charges are automatically deducted from David’s insurance plan, and the medication arrives with next-day shipping. This entire process is added to David’s health profile, which will help Alexa provide David with personalized healthcare advice and incentives for a healthier lifestyle in the future.
From a cost perspective, such early preventative medicine can provide health and wellness recommendations at a nominal cost using OTC drugs. This is far cheaper than an outpatient visit to the hospital, which costed $478 on average as of 2016.
The Future of Prime Health
Through the Prime Health service offering, Amazon will have access to a plethora of user data and additional insights into both the client and healthcare provider space. Using this data, Amazon can build a comprehensive healthcare ecosystem, where consumers may one day find themselves asking Dr. Alexa what they should do about their cold, or logging into Amazon Prime to review their medical documentation. Consumers would receive recommendations from Alexa for treatments, hospitals, and doctors based on their own preferences. Healthcare would be completely personalized, with every piece of content received relating to consumers’ existing conditions or habits. With this first step, Amazon can begin its ascent towards a full-service offering and becoming the dominant player in the healthcare space.