I’m a whole four days late posting this, but I went down a rabbit hole, so it took a bit longer. To review the obvious, Amazon recently announced that it will be acquiring One Medical (NASDAQ: ONEM) for just under $4B, a 77% premium to how ONEM was trading a day before the announcement. My reaction to this wouldn’t be complete without at least brief financial commentary on the deal size: the acquisition price represents a ~5.2x on TTM revenues. While publicly traded digital health businesses, including tech-enabled healthcare services, have lost well over two-thirds of their market cap in the last 12 months (thereby making a 5.2x TTM well above comp medians), the multiple isn’t out-of-whack based on historical trends. We could debate all day whether a 24% gross margin services business is really worth 5.2x, but in mid-2021, the median digital health revenue multiple was over 15x, making 5.2x in the neighborhood of reason.
The real significance of the upcoming transaction, however, is well beyond the purchase price:
· First and foremost, ONEM is a portfolio company of ours (good call on that one, Dan Galles), so I’m biased to get especially excited :)
· Amazon is now ahead of Google, Facebook, Microsoft, and Apple with respect to pure-play healthcare execution
· Amazon is uniquely positioned to win in healthcare delivery vs. other Big Tech players because of its strength in capital-intensive, brick-and-mortar strategies that will always be necessary in the healthcare industry (eg. logistics, distribution, inventory management)
· The transaction is introducing one of history’s most disruptive companies into an industry that arguably can’t be disrupted
· Amazon will now be competing directly against health systems and other provider groups, joining Optum as potentially now one of two organizations with enough resources, sophistication, and reach to force health systems to modernize their relationships with consumers
Thoughts on each below:
Amazon’s lead in healthcare vs. its Big Tech peers
Every Big Five Tech Firm (“B5”) — Google, Microsoft, Apple, Facebook, and Amazon itself — has either suffered setbacks with or has made limited investments in pure-play healthcare strategies (ie. excluding industry-agnostic offerings, such as AWS/GCP/Azure, that have penetrated healthcare). Facebook is the outlier: the firm actually never entered healthcare in a meaningful way. Notable failures include Haven (Amazon, JPMorgan, Berkshire Hathaway joint initiative), Google Health, and Microsoft’s HealthVault. Apple Health Records is still a question mark.
In contrast, Amazon owns a full-service pharmacy (Amazon Pharmacy/PillPack), Primary Care clinics for its employees and a small handful of outsiders (Amazon Care), and now a nationwide network of Primary Care clinics serving 800,000 consumers across 25 markets with its acquisition of ONEM. While other B5 firms have focused primarily on software-only healthcare solutions, Amazon now has formidable capabilities and reach in pure healthcare delivery.
Amazon’s unique brick-and-mortar-based competencies position it to succeed in healthcare
Amazon is unique among the B5 with its mastery in “old world” strategies: logistics, distribution, inventory management. Amazon has over 305 fulfillment centers in the US alone and accounts for nearly 10% of all US retail sales (not just e-commerce sales — all retail sales). This positions Amazon uniquely because the success of healthcare delivery (including pharmacy) in large part depends on the same strategies: optimizing unit economics in a capital-intensive environment, managing complex supply chains, understanding the needs of consumers at the local level, managing production lines, and more.
Healthcare is not Silicon Valley. Rather, healthcare is a web that stretches to nearly every locale around the world, each with its own dynamics. Healthcare is both at the forefront of innovation and stubbornly stuck in the 20th century. With its obsession with consumers and strength in 20th century business models, Amazon is uniquely poised to advance the healthcare industry forward.
Healthcare’s aversion to disruption
The most controversial claim in this post is likely this: healthcare can’t be disrupted. Healthcare has breakthroughs, but that’s not disruption. Disruption occurs when the industry structure transforms, which may be driven by major incumbents being completely displaced and/or a new market of customers emerges due to a new innovation, thereby seriously compromising the prevailing incumbents. To provide a few examples, Netflix disrupted video rentals, Apple disrupted the commercial music industry (not music itself — that would be Beethoven!) and internet access, and Amazon disrupted retail.
Does disruption occur in healthcare? The healthcare industry has remained the same structurally since the 1960s when Medicare was introduced. Since then, the industry has simply become more fragmented, more inefficient, and incumbents have grown in power. Why might this be? Is healthcare just hard? The products and services that characterize the industry are indeed the most complex of any industry, but there are three other healthcare-specific traits tell the rest of the story: (1) regulation, (2) third-party gatekeepers, and (3) government involvement (all of which are related).
First, healthcare is the most regulated industry in the world. People’s lives are at stake, information is extremely complex and asymmetric, and costs easily get out-of-hand. Therefore, both the government and payors put systems in place to (try to) ensure quality, access, and affordability, since profit incentives don’t always align with consumers’ interests. In such a heavily regulated and complex environment, market entrants rely on market incumbents, such as health systems, payors, pharma, and others to get things done.
Second, third-party gatekeepers appear at every turn, largely holding the keys to product adoption. Written prescriptions and orders by physicians and other authorized clinicians are required to dispense medication and run lab tests; almost all services and medication require payor coverage to enjoy wide-scale adoption; costly (and sometimes innovative) services and medication require payor authorization for each diagnosis per patient to be reimbursed, to name a few. The requirements of these gatekeepers necessarily allow for only incremental innovation.
Third, the US government is more than regulator in the healthcare industry — it’s also the largest customer of healthcare in the country and arguably the largest incumbent. It is also the largest funder of basic scientific research in the world. In fact, government regulation and thought leadership are also widely understood to be among the most dominant determinants (and sometimes the only determinant) of innovation adoption in healthcare (eg. Affordable Care Act, CMS’ alternative payment models, EHR adoption incentives from the HITECH act, interoperability requirements from the 21st Century Cures Act). While the government fosters innovation in healthcare, it also plays a role in impeding disruption due to not only every industry stakeholder’s dependence on it (whether organic or mandated), but also by virtue of its assured continued existence. How do you disrupt an industry without displacing or at least fundamentally changing the role of a major incumbent?
Will Amazon change this? Will Amazon displace or restructure major incumbents? I doubt it. But it is well-poised for innovation.
Health systems will face formidable competition beyond just Optum
Provider organizations fear Optum the most. The fear margin is wide: according to a Kauffman Hall survey of nearly 2,000 provider executives in Q4 2021, 48% viewed Optum as an “extreme competitive threat”, vs. only 9–18% viewing other threats the same way:
With Amazon now doubling down not only on healthcare but on healthcare delivery, Amazon is now unquestionably in direct competition with the healthcare delivery incumbents: health systems. Like Optum and unlike most other new healthcare delivery market entrants (eg. Oak Street, even One Medical), Amazon has essentially unlimited resources and wide reach because of its core business. The now compounded competitive threat created by Optum and Amazon will not result in health system displacement, but rather act as a catalyst for health systems’ movement toward consumer-centric care, as they’re in need of it. The NPS for the “healthcare industry” (a broad categorization, I know) is 58, according to one source. That same source ranks Amazon with an NPS of 73. Amazon’s engagement and loyalty metrics are an even stronger testament to its consumerism mastery: 197 million people visit Amazon.com every month, 95 million Americans hold Prime membership, and Amazon’s e-commerce sales were 4x that of Walmart in 2018.
Hopes vs. reality
The big question: what will Amazon do with ONEM? No one knows for sure, but the plan likely includes leveraging ONEM’s existing footprint and care delivery capabilities to complement Amazon Care because of the two assets’ shared goal of providing consumer-centric primary and urgent care. First, a quick review of ONEM and Amazon care:
ONEM was founded in 2007 to address a significant pain point in healthcare: reduce total cost of care by improving access and quality of Primary Care. Primary Care is rife with challenges related to wait times, geographic access, provider supply, and provider burnout. In 2018, the average wait time to see a PCP was 24 days, the average visit was 17.5 minutes, 51% of patients expressed dissatisfaction with their Primary Care experience, and 48% of family doctors reported burnout.,,, As a result, many patients resort to the Emergency Department (ED) for low acuity, urgent needs, leading to unnecessary high-cost events; and lack a continuous healthcare “quarterback” (ie. PCP) to monitor long-term health, potentially leading to costly, chronic conditions over time. ONEM solves these challenges effectively: the company carries NPS scores of over 90, member retention rate of 89%, employer-client retention rate of 97%, and has reported total cost of care reduction of up to 8% on behalf of its employer-clients. Its reach is also robust: over 125 locations across 25 markets, serving over 8,000 employers and 800,000 members. Within the Company’s secret sauce is its proprietary EHR and other software tools that streamline charting, scheduling, care coordination, and provider-to-member communication, among other critical workflows. Lastly, ONEM’s go-to-market is notable: the Company offers its services through two channels: DTC membership-based model and as a employer-sponsored benefit. ONEM DTC members pay $199/year to enjoy 24/7 access to on-demand virtual care, same- or next-day in-person appointments, in-app prescription requests and renewals, online access to personal health summaries and care plans, and more. Most insurance plans are accepted.
Amazon Care is similar, just more nascent. Launched in September 2019, Amazon Care offers both Primary and 24/7 Urgent Care, including prescription services, like ONEM. While on-demand virtual care has been available nationwide since February 2022, in-person care is only available in select geographies and is performed through home visits only (ie. no clinics, like ONEM). Earlier this year, prior to the ONEM acquisition announcement, Amazon announced that it would be rolling out in-person services to 20 new cites in 2022.
My prediction on what will actually happen once ONEM is integrated (not an exhaustive list — there are so many possibilities!):
· Amazon will leverage ONEM’s technology to reproduce ONEM’s workflow, retention, and satisfaction results
· ONEM’s physical clinics will jumpstart Amazon Care’s real estate strategy by accessing IP related to location selection criteria and layout design
· Amazon and ONEM will share best practices to optimize margins in a capital-intensive, brick-and-mortar business
· Either Amazon or ONEM will leverage the payor contract rates of the other — whichever is more attractive
· Amazon will learn from ONEM’s care model to achieve commensurate clinical, financial, and experience outcomes
· Cross-selling across employer-clients may occur, so long as the additional offering isn’t duplicative
· ONEM may integrate Amazon Pharmacy as one of multiple options for its members
· If ONEM’s brand is modified, it will likely by a brand extension (eg. “One Medical, by Amazon”)
What many hope will happen, but likely won’t:
· ONEM clinics will be outfitted like AmazonGo stores: ambient sensors will follow members’ every movement and interaction with providers to optimize real estate layout, automate provider charting, measure and study vocal biomarkers, and more.
o Why unlikely: Most of this isn’t a technical challenge — it’s a consent and privacy challenge. Do providers and patients want Alexa listening to their conversations? Do nurses want to be monitored continuously to ensure their every movement is efficient? I don’t think so.
o What’s more likely: Amazon will outsource an amenable subset of this vision to solve for privacy concerns and leverage existing technologies that focus on, say, medical transcription.
· Access to ONEM and Amazon Care will be extended to Prime members for free
o Why unlikely: Margins, willingness-to-pay (WTP), and the challenge of lower-profit customer segments.
§ Margins: Healthcare services is not a high-margin business. ONEM’s gross margins have hovered around 30–40% between 2017 and 2021. They’re at a local minimum right now: margins are at 24.2% for the TTM through March 2022. These unit economics are a result of recurring membership fees (including employer partnership fees) and reimbursement for medical services as drivers of revenue, net of provider and care support employee salaries. DTC membership fees account for 17% of ONEM’s revenue (adding in employer-sponsored membership fees, the collective total is 64% of revenue). If Amazon removed DTC membership fees, gross margins would drop from 32% (conservative midpoint) to 18%. While Amazon hasn’t disclosed employer pricing for Amazon Care, I’m taking a wild guess that margins are currently lower than those of ONEM. As of June 2021, Amazon Care had only one employer-client with 385 employees, plus Amazon itself. Even though Amazon Care’s scale isn’t burdened by brick-and-mortar clinics, healthcare services margins still take time to optimize, especially in growth mode, since you’re constantly adding fixed costs (ie. providers) to accommodate demand. When mobile care is added to the mix (ie. home visits, which Amazon Care offers), optimizing driving distances play a significant role in margins. On top of all this, to my knowledge, Amazon Care is not yet offered DTC, so Amazon will face a learning curve when faced with ONEM’s consumer offering, which includes Medicare and Medicaid patients.
§ WTP: Why remove ONEM’s membership fees when there’s a clear WTP for the service? I’m guessing ONEM has enough operating history and data by now to know profit-maximizing price point is (currently, $199/year).
§ Lower-profit customer segments: As soon as you begin lowering the price, profit isn’t only compromised for the current target customer segment (commercially- and employer-insured patients), but ONEM would also attract Medicare and Medicaid populations, who generally have much lower reimbursement rates than Commercial/Employer populations, hurting profit twice.
o What’s more likely: You’ll be able to pay for membership fees with your Amazon Credit Card and get cash back! I’m joking, but also serious: did prices change after Amazon acquired PillPack or Whole Foods? No! Whole Foods should still be called Whole Paycheck. My main challenge with seeing lower membership fee pricing is provider supply: the healthcare provider shortage is severe, so Amazon (like ONEM) should market its healthcare services to the highest-WTP customer segment. Even though incremental, lower-paying segments may be profitable, the opportunity cost is too high: those segments take away the already-low supply from higher-paying segments. If supply weren’t an issue, then it would make sense to lower prices to reach a larger market.
· Amazon is a disruptor and has distribution reach everywhere, so they’ll figure out the healthcare access challenge in rural geographies
o Why unlikely: I can’t emphasize how severe the provider shortage supply is, and it’s most pronounced in rural geographies. Furthermore, people who live in rural America are often sicker, older, come from a lower socioeconomic level, less well-insured, and suffer from more chronic conditions, complicating care needs and frustrating margins if not managed correctly. While Amazon has over 305 fulfillment centers all over the US, they mean little in solving rural healthcare challenges.
o What’s more likely: Amazon will continue ONEM’s current strategy of focusing on urban MSAs with high population density…and Walmart will go after rural healthcare! Walmart Health already has 24 locations across four states: Georgia, Arkansas, Florida, and Illinois. Equally impressive, 90% of the US population is located within 10 miles of a Walmart, with 4,000 of its stores located in HRSA designated medically underserved areas.
In summary, Amazon’s pending acquisition of ONEM is a landmark transaction. It has potential to move the entire industry forward in the right direction: closer to consumers. But it won’t be disruptive — hopefully it does help healthcare catch up with the rest of industry.
 I don’t consider Facebook’s “Preventive Health” tool a meaningful investment in healthcare, but, for completeness, I’m mentioning it here
 Mother of Invention, Robert Field
 Transforming Health Care”, Amir Dan Rubin, June 26, 2018
 “Why You Have to Wait Longer to Get a Doctor’s Appointment”, Healthline. 2018
 “Physician Activities During Time Out of the Examination Room”, Annals of Family Medicine. January 2019
 “National Physician Burnout & Depression 2018 Report”, Medscape. January 17, 2018
 Company website, SEC filings