Ben Thompson on the Amazon consortium and health care

What would make more sense to me is that, having first built an interface for its employees, and then a standardized infrastructure for its health care suppliers, is that Amazon converts the latter into a marketplace where PBMs, insurance administrators, distributors, and pharmacies have to compete to serve employees. And then, once that marketplace is functioning, Amazon will open the floodgates on the demand side, offering that standard interface to every large employer in America…

This is certainly ambitious enough — basically intermediating U.S. employers and the U.S. healthcare industry — but in fact this only sets the stage for the wholesale disruption of American healthcare. First, Amazon could not only open up its standard interface to other large employers, but small-and-medium sized businesses, and even individuals; in this way the Amazon Health Marketplace could aggregate by far the most demand for healthcare.

And to close the piece:

My expectation, then, is not that the Internet methodically disrupts industry after industry in some sort of chronological order, but rather that the entire edifice lasts far longer than technologists think, only to one day collapse far quicker than anyone expected.

The ultimate winners of this shakeout, then, are not only companies that are building businesses predicated on the Internet, but just as importantly, are willing and able to build those businesses with the patience that will be necessary to wait for the old order to collapse, particularly if that collapse happens years or decades after the underlying business models are rotten.

Here is more, and I do hope you are all subscribing to Stratechery, which is one of the very best regular reads, worth the money.

Comments

The three companies, which bring their scale and complementary expertise to this long-term effort, will pursue this objective through an independent company that is free from profit-making incentives and constraints.

Free from profit-making incentives? I kind of doubt that. Perhaps they do not think that doctors ought to make money out of medicine, but do they have plans to sell our data? Think what a marketing tool our health care records could be. Will be, no doubt.

Anything that moves people away from the WW2 Employer-based health care system is for the better. Although it would take me a moment to think of the silver-lining here. Technology is unlikely to do much as what most of the West needs to do is eat less and exercise more. But let's hope they can.

HMOs have been around for a while, and try to get members to eat less and exercise more.

My first thought was that this was a Henry J. Kaiser kinda thing, and maybe they'll try up-tech the Kaiser Permenente solution.

Most of what the US needs to do is coordinate care, make it more accessible to poor people, proactively treat addiction, and stop expensive treatments with no or very limited evidence. Eating right and exercising would help too.

"proactively treat addiction"

JUST SAY NO

"free from profit-making incentives and constraints" Like the DMV, right?

I reject the premise. to say it is free from "profit-making incentives and constraints" is kind of like saying it will be free from logic and reason too. Will they budget? If not they will go bankrupt and if they do than indeed they have placed profit making incentives and constraints right at the top of their agenda. Do they want to still be around in 10 years? Than indeed they have placed profit making incentives and constraints right at the top of their agenda.

I find the NH DMV great on customer service, much better than many private sector service businesses. They handle the Fed requirements pushed by those who agree with Trumps fear mongering as best as possible (realid).

"Profit-making incentive" =/= "Try to break even."

Perhaps the article means they will run it like Amazon, which indeed historically has had unlimited access to venture capital (no constraints) and whose management and investors have been fully on board with a 'scale before, and to the exclusion of, profits' strategy (no profit-making incentives).

the idea that nonprofits have value because Amazon reinvests profits into itself in order to create more profits later is illogical.

"stop expensive treatments with no or very limited evidence": how very un-American. Or perhaps just un-Human. Certainly un-Physician and un-Surgeon.

Speaking of the American System, a thumbnail:

"American man wins a million dollars [lottery]. His first priority is to go see a doctor, because he hasn't been able to afford one in a while [self-employed carpenter]. Doctor tells he him he has Stage 4 cancer. Man dies. America, you are a weird and broken place."

"Savastano died Friday, 23 days after he won the lottery."

https://twitter.com/reider/status/958841492906434561

He was lucky. Had he gone to the doctor sooner he would have spent those days after the visit in misery and still died at the same time. I hope if I have terminal cancer my first symptom is I die.

"Healthcare" should mean that a person has reasonable options they can take to achieve health. It shouldn't mean frantically throwing money after the Big Gulp crowd yelling: "THIS IS A HUMAN RIGHT!!!"

There's lots of efficiencies. Any business where a colonoscopy in one small state can vary in price from $3500 to $850 (from my company's HR portal) must be massively inefficient.

US healthcare isn't expensive because we're sicker than the rest of the world. It's because we employ too many people. And a pay-for-service model that penalizes process innovation and efficiency will of course be over-staffed and over-priced -- where the excess cash all goes to service the bureaucratic bloat.

I say this in every health care thread: by simple tautology, to lower the cost of health care someone's going to make less money. Doctors, insurers, drug makers, whomever. Someone takes a hit. And the health care industry is probably the last true source of good paying jobs in this country. So, careful what you wish for.

The issue is not about envy that doctor's make more than engineers or plumbers. The issue is that unfettered government health care spending pushes prices for drugs and health care services higher than they would have been in a market dominated by voluntary transactions, where people pay for health care out of their own pocket.

Sorry, doctors, not doctor's!

I didn't say anything about envy. My simple point is: lower health care spending = lower income for the health care industry. In your market dominated by voluntary self-insured consumers paying less (out of their own pocket)...someone makes less.

To me, lower income in health care industry is a feature rather than a bug.

Why do we need to be priced out of various markets by a group that gets first dib on the public coffers, thanks to the "think of the children" fraud?

I don't think GDP is a good proxy for the well being of a nation. We could suddenly issue monopolies to all current electricity producers, subvert all Public utility commissions, and increase the electricity price from 10cents to 100cents per KWh.

This would add $3.6 Trillion to our GDP, my typical monthly electric bill would go from $60 to $600, there would be a huge need for support for families with children. Are we any better off? There would now be more high paid jobs.

4 Trillion KWh times $0.90 per KHw is 3.6 Trillion. I think what we pay for health care is in a similar category, just we are paying double instead of 10 times the free market price.

https://www.eia.gov/tools/faqs/faq.php?id=427&t=3

Yeah shouldn't GDP get lower the more efficient we become? Like if we invent a machine that just churns out smartphones and reduces their price to $5, aren't we better off?

@VolumeWarrior

I don't think economists will reply to this very reasonable (and not stupid) question from laymen like us.

Insurers, departments dedicated to price negotiation, and the maintainers of models to ensure opacity of the price system for the consumer can stand to make less money. I think that's pretty clear.

Perhaps. That's one of the arguments for single payer, get the insurance and opacity layers of cost out of the system. OK, GDP is now lower by that amount, and that industry lays everyone off. Good jobs too. Just saying.

Just because jobs are well-paying and highly skilled doesn't mean they're good for the macroeconomy; they could just be highly sophisticated rent-seeking, and that human capital might be better deployed in other pursuits.

'to lower the cost of health care someone’s going to make less money'

Who cares if Florida's governor makes less money? It isn't as if his profits are not ill gotten at times, as seen from this - 'On March 19, 1997, investigators from the Federal Bureau of Investigation, the Internal Revenue Service and the Department of Health and Human Services served search warrants at Columbia/HCA facilities in El Paso and on dozens of doctors with suspected ties to the company.

Eight days after the initial raid, Scott signed his last SEC report as a hospital executive before resigning. He was succeeded by Thomas F. Frist Jr. Four months later the board of directors pressured Scott to resign as Chairman and CEO. Scott was paid $9.88 million in a settlement, and left owning 10 million shares of stock worth over $350 million. The directors had been warned in the company's annual public reports to stockholders that incentives Columbia/HCA offered doctors could run afoul of a federal anti-kickback law passed in order to limit or eliminate instances of conflicts of interest in Medicare and Medicaid.

In settlements reached in 2000 and 2002, Columbia/HCA pleaded guilty to 14 felonies and agreed to a $600+ million fine in the largest fraud settlement in U.S. history.' https://en.wikipedia.org/wiki/Rick_Scott#Columbia/HCA

msgkings February 1, 2018 at 12:02 pm

I say this in every health care thread: by simple tautology, to lower the cost of health care someone’s going to make less money. Doctors, insurers, drug makers, whomever. Someone takes a hit.

I can live with John Edwards and his ilk taking a big hit. The real low hanging fruit for health care reform is the ambulance chasing scum like Edwards. It pushes up costs in all sorts of ways including defensive medicine that has no useful function at all. So the best place to start is tort reform.

Don't disagree but it's smaller savings than you think. A bigger problem is over-treating because doctors often have ownership interest in various facilities (medical centers, radiology labs) and most simply get paid every time they do something. Hence all the unnecessary back surgeries and knee surgeries and so on. The incentives are out of whack.

Wouldn't it raise everyone else's real wages if healthcare were cheaper? Or does paying our tooth-mechanics six figures somehow make us all richer?

Altruism? From whence the assets, capital, financing?

Free from profit-making incentives - until the day the independent company controls sufficiently large market share to raise premiums and hugely profit.

The announcement knocked down prices of health insurance companies.

HIPAA makes it unlikely they'd attempt to sell their customers' health records.

HIPPA will stop them from selling any info that may identify you, and as DNA testing progresses, that will be an expanding category. There may be a lot of money in the first or second derivative data though. If they start getting an AI to really crunch large medical datasets we may learn a lot.

Yeah, true. Still, unless you can link the data to a specific person (ie, find a guy with sleep apnea and sell him a new CPAP machine or something) it isn't that valuable. Besides, don't we already have large medical datasets? What does Aetna do with their customer's data? What does HCA do with their patient data?

*Probably isn't that valuable. I couldn't say for sure.

Aetna has payment data, which hold diagnosis, but I think real medical data is pretty disjointed throughout all the different providers.

'Free from profit-making incentives? I kind of doubt that.'

Never heard of Kaiser Permanente? https://en.wikipedia.org/wiki/Kaiser_Permanente

"hat is free from profit-making incentives and constraints"

That's just Bezos boilerplate. He refuses to farm profits out of a line of business until he owns all of it, apparently. Hence the still razor-thin margins on Amazon's initial lines of business.

Looks like at least their initial customer pool will be unusually affluent and healthy when compared to the general population; not many pensioners either. Not hard to save on costs in that case. Well played by their PR department.

Well there's no bigger sucker for tech industry PR than Tyler Cowen - except perhaps his co-blogger.

One could argue that these people already have relatively low health costs, so there is less to be squeezed out. Of course, there's plenty to be squeezed in all US health care.

This does sound like a well person HMO. Some money can be saved there as past HMO's have proven with denials of service. If they do it right, with denials in the patients best interests it can work as any HMO cherry picking patients has.

See my comment above. 'Squeezed out costs' means less income for many, and lower GDP. Not saying that's not worth it but there it is.

You're assuming the money saved in healthcare won't be spent on something else when you posit a lower GDP.

Fair point.

If they were going after Amazon's software developers alone, you'd have a point, but the moment you also open this to the people working on the logistic chain, people look less affluent and healthy real quick.

Now, Amazon's PR department is amazing, but mainly because of how well they manage to make most of their failures, and the projects that they close, disappear very quietly. Amazon has made many product mistakes over the years, but nobody remembers them the same way that they remember Google shuttering some of their products.

Stratechery is excellent and some of the analyses offer a novel perspecrtive. Some of the theorizing, however, looks very much "top MBA level" stuff, but not that new if you have been thinking about industry models and frameworks before. So not necessarily worth the money ($100 for one year). Are we indifferent between one year of The Economist and three years of Stratechery? I am happy to read the free articles and would happily subscribe if it were cheaper.

Stratechery has as good a guess as any. I think the key thing to see, as this shapes up, is whether the new organization is more interested in reducing unnecessary care, or whether indeed it is (like much of modern medicine) about taking that skim on economic activity.

I asked a friend of mine how her knee is, after recovering from last year's surgery. "It's the same as before. Doctors." (It was one of those things where the doctor said "cleaning up" the knee with arthroscopic surgery "would help.")

So basically my question is whether the Amazon consortium will help you schedule that surgery more efficiently, or avoid it.

I'm pretty sure I've recently read about a study that showed that indeed arthroscopy is usually useless. But that seems to have been known since 2002.
http://www.nejm.org/doi/full/10.1056/NEJMoa013259

Obamacare!

(More seriously, the PPO structure that Obamacare inherits still encourages surgeons to sell their services.)

Overall numbers may not be favorable. But case by case arthroscopic surgery can be very beneficial. For instance if you can't unlock your knee or it gives way, sometimes arthroscopic intervention can be very useful.

Read the the NEJM article.

It isn't.

I've benefited twice myself. Pain and range of motion. Right now I have as asymptomatic tear on the posterior horn of the medial meniscus right knee. Leaving it alone as it is not bothering me.

I don't know if this would disrupt healthcare, but it would seem possible to disrupt the "insurance" model of paying for healthcare.

"Amazon will open the floodgates on the demand side" ... "untiljustice rolls down like waters and righteousness like a mighty stream."

The real creative work in the disruption of health care is happening in China, specifically with the development of AI: https://www.nytimes.com/2018/01/31/technology/amazon-china-health-care-ai.html Read the article. In China, like what's planned for Amazon, they initially focused on apps to dispense drugs and to arrange appointments for diagnosis and treatment, but those efforts have been mostly scrapped and replaced with the development of AI for the diagnosis of such diseases as cancer and vision loss (the latter mostly attributable to diabetes, which is at a level far above that in the U.S.). Diagnosis is mostly through the use of imaging that relies on AI to make the diagnosis. Of course, China intends to be the world leader in all aspects of AI, from autonomous vehicles to health care. Cowen is no doubt impressed.

So you kowtow before Red Fascism.

Stop impersonating me!

The 50 Cent Party is relentless, but I shall prevail. Red China will be destroyed.

It is sad how the malefactors of great wealth conspire to lick the boots of the fascists for cheap trinkets.

What does this consortium offer on the demand side that Aetna and United do not? Don't PBMs, pharmacies, etc. already compete for business from the large insurers? I don't see how Amazon becoming another small player in the same game is somehow disruptive.

The development of AI in health care, whether here or in China, reflects the humanist side of people everywhere. But get this: AI is being developed for use in autonomous weapons systems that can make choices about killing humans independently of those who created or deployed them. https://www.economist.com/news/special-report/21735477-war-still-contest-wills-technology-and-geopolitical-competition-are-changing Autonomous weapons? That most definitely is not the humanist side. Who would have thought that autonomous vehicles would be just a baby step toward the development of autonomous weapons.

Good luck to them. I'll still bet on 'the field'. But I would have bet on 'the field' 20 years ago when Amazon began selling stuff for barely any profit per unit.

Dominance in pharmaceutical sales should be easy for Amazon, if they can muster political clout. Pricing is all over the place.

Regulatory burdens in health insurance may prove more difficult to overcome.

Not sure how they will deliver health care services in a box to your door, Perhaps mental health services will be delivered through telemedicine.

Amazon may be able to place some price pressure on current markets but improve the system, not sure about that.

"The ultimate winners of this shakeout, then, are not only companies that are building businesses predicated on the Internet, but just as importantly, are willing and able to build those businesses with the patience that will be necessary to wait for the old order to collapse, particularly if that collapse happens years or decades after the underlying business models are rotten."

That's a great way of saying "Amazon likely in no way justifies its share price but just you wait!"

There is a great opportunity in a Health Prime style buyer's group, i.e. "health insurance" without any insurance component.

It's eye opening to see an insurance Explanation Of Benefits report which lists the initial charge, the negotiated price, the amount paid by the insurer, and the amount due from the individual. A $150/yr (for example) Health Prime family membership that got you the negotiated price would sell like hotcakes. I've seen much larger discounts than that on one set of blood tests.

Exactly. If you have a high-deductible plan, you're most of the way there.

My current plan is basically what you describe, plus coverage for hospitalization once I hit the deductible (which, while higher than any reasonable amount I would spend at the doctor's office, probably represents like a 3-day hospital stay excluding the cost of any procedures).

There are also huge opportunities in efficiency, which Amazon might be able to nibble away at. They are good at software and logistics.

Practice management /patient management software appears (from what I can see from a patient portal) incredibly bad. Even the easy stuff (graphing patients vitals or blood test results over time) isn't there, let alone a routine and systematic AI review and diagnostic.

Medical records integration/management (which is admittedly a very hard problem) is horrible; it would kill most other businesses.

The press release makes it sound like AMZ, Berkshire Hathaway and JPM are building a shared self-insured company for their employees. Uhh, practically every large company already does this. 80% of firms with > 500 workers are self-insured. There are Multi-Employer Welfare Arrangements where 2 or more companies join together in the self-insured operation. Where's the innovation? I mean there might be an app, & IT in health care would be such an amazing step forward!

The new company is a "non-profit" in the sense that it doesn't have to make money as a standalone business, but to the extent that it saves JPMorgan, Amazon, and Berkshire Hathaway on labor costs, it's a for-profit operation. Jamie Dimon hints in the press release at eventually extending the benefits to all companies, but why would JPM relinquish its competitive advantage of lower health care spending?

The bottom line on health care is that they can charge exorbitant prices. This new venture sounds big: 1.1 M employees, by one count. But the Health Transformation Alliance, a coalition of 40+ self-insured companies, has over 6 million. Insurance companies have tens of millions of customers. The federal government has even more through Medicare and Medicaid. Providers still command huge prices. By the way, one of Buffett's companies - BNSF Railway - is a member of the Health Transformation Alliance already, so it's unclear if Berkshire's portfolio companies are even in this new venture.

So the next time people with no experience in health care and not nearly enough scale to make a difference in negotiating with providers and ideas that have been tried over and over tell you they're going to revolutionize health care, perhaps you should profess a little skepticism?

Can we please dislodge medical coverage--whatever you think it should be--from employment? Aren't we all in favor of labor market flexibility here?

+1 And one has to wonder how Amazon's new employee tracking bracelets will feed into their health records.
https://www.theguardian.com/technology/2018/jan/31/amazon-warehouse-wristband-tracking

Is someone really arguing in an economics blog that we should keep afloat an inefficient industry because it provides good jobs?
I would never have argued that healthcare is the new coal. What a wondrous time.

Hard to see how adding yet another layer of administration and cost will between the payer and the health consumer will do anything to lower prices. We already have the physician, the hospital they work for, the insurance company, and the employer. Which one of those is Amazon offering to replace?

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