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Will Amazon's Entry Into Healthcare Disrupt the Market?

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The much talked about and widely speculated foray of Amazon.com, Inc. (AMZN - Free Report) with Berkshire Hathaway Inc. (BRK.B - Free Report) and JP Morgan (JPM - Free Report) into the healthcare space is shaping up, with the appointment of the CEO of their healthcare company.

The three heavyweights formed a healthcare alliance early during the year and have been hunting for the best fit to helm its affairs. Dr. Atul Gawande, a Harvard surgeon and staff writer for The New Yorker magazine, will head the new company, to be based out of Boston, from Jul 9.

Despite no prior background in running a healthcare company, the company will bank on Gawande’s analytical acumen to cope with issues plaguing the current healthcare practices in the United States. Per Jeff Bezos, the CEO of Amazon, Gawande possesses the qualities of “an expert’s knowledge, a beginner’s mind, and a long-term orientation”

Frustrated with soaring healthcare costs, the three companies have come together to primarily take care of the healthcare needs of more than a million of their employees.  Warren Buffett recently called healthcare cost "the hungry tapeworm on the American economy."  Amazon has, however, expressed interest in the pharmacy space also.

The  new company will operate as an independent entity, free from profit-making incentives and constraints.

The news of the possibility of these companies making an entry into healthcare space late last year sent shockwaves through the industry with the existing players fearing a disruption. Led by concerns of market share loss and a tough competitive environment that might be the beginning of a number of mergers and acquisitions have been announced and taken place since then, setting the trend of cross consolidation in the healthcare industry.

Existing companies in the space are making all efforts to gain in size and scale to tightly hold on to their ground when the winds of change blow.
Some of the deals in this vein are that of Aetna Inc. (AET - Free Report) by CVS Health Corporation, Express Scripts by Cigna Corp., purchase of the primary care unit of DaVita by UnitedHealth Group Inc., Rite Aid’s merger with Albertson's, and Walgreens Boots Alliance partnership with Humana to set up primary care clinics. All these companies are seemingly doing their homework and getting ready to face the radical changes to be bought by the new comers.

There is no doubt that the entry of these most influential companies (especially Amazon, which has successfully turned the tide in its favor in whatever business it has laid its hands on thus far) is a shot across the bow to the traditional healthcare system in the United States and could unsettle the industry. While the companies have come together to manage healthcare costs for their own employees, it would not come as a surprise if they start providing service to the public at large.

These companies, with their established brands, huge customer data, cutting-edge technology and superior product and services, should lead to a radical healthcare transformation. It is expected that the solutions created by them will to a large extent solve the three main challenges of the healthcare sector — access, quality and cost.  A shift from “one-size-fits-all” care treatment to “tailor made care” should be in vogue, as these customer-centric companies try to design customer-specific products and services compared with traditional healthcare players that have hardly ever extended such care to customers.

Considering the health insurance industry, which was concentrated on a handful of big players that command product pricing and service offerings, and had an upper hand in dealing with customers, will find themselves in a radically changed scenario. Players in this space have already had to make fundamental changes in their business operations and attitude since the enactment of Obamacare in 2010 that put a check on malpractices to protect customers’ interest. Now, the entry of players that are already well established in their own fields and enjoy customer loyalty, will give traditional healthcare players a jolt.

It will, however, not be a cake walk for these new entrants to establish themselves very soon in the healthcare industry. The need of the hour for healthcare entities is razor-sharp focus on innovation and service to protect their share in a market that they have ruled for ages.

Among the companies mention above, Amazon sports a Zacks Rank #1 (Strong Buy), Berkshire Hathaway carries a Zacks Rank of 2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.


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