Why Big Tech is Taking Big Steps into Healthcare

No one ever lies to their search engine. People don’t filter themselves when searching online, so they can more efficiently extract what they want to know. This means that search engines are privy to sensitive information, information that no one else would know. It’s the ideal database to provide a corporation with a read on someone’s health.

While the Big Tech firms know this and already leverage it in their advertising businesses, Amazon is taking it to the next level. (Cue theme music from 2001: A Space Odyssey). Amazon agreed last week to buy primary care provider One Medical for $US3.9 billion.

This has expanded the tech titan’s healthcare business, known as Amazon Health Services, into bricks-and-mortar medical offices for the first time. This follows Amazon’s 2018 acquisition of online pharmacy, PillPack, for $US750 million and the launch of Amazon Pharmacy, an online drug store enabling customers to order medication and prescription refills for delivery to their front door. Only last year, it began offering its Amazon Care telemedicine programme to employers nationwide.

Amazon is serious about healthcare, having publicly stated it’s on a list of experiences needing reinvention.

US Healthcare Disruption 

When it comes to disruption, no industry is more at risk than US healthcare. Its costs are going up, while “customer” outcomes are getting worse. For the first time since the industrial revolution, America has witnessed a decline in life expectancy. They lost 2.26 years in the past year alone.

This is at a time when modern medical miracles like vaccines have never been more advanced and available. The US suffered more deaths due to COVID than any other developed nation, now pegged at more than one million people. They have the lowest vaccination uptake of all developed nations, currently ranking 64th in the world. They are the most obese nation in the world, with 42.4 per cent regarded as clinically obese. In the year 2000, this number was just 30.4 per cent.

For the first time in history, US children are not expected to outlive their parents.

The crazy thing about healthcare in the US is that they spend more on it than any other developed nation. The price of healthcare in the US has increased faster than inflation for the past 40 years, yet only one out of five US citizens are currently satisfied with their healthcare. As a nation they spend $US4.1 trillion on health annually – $US12,530 per person – which is increasing at 9.7 per cent per year. However, there is little to show for it, other than the worst health outcomes in life expectancy and chronic disease compared to other OECD countries -- most of the spending is diverted to insurance companies.

Just think about that: a top line revenue growth nearing double digits, plus an ageing population and a major efficiency and customer solution problem. It’s the perfect candidate for radical change from a more customer-focused business model. Of course, when it comes to customer centricity, no firm in the world is more dynamic than Amazon.

Digitisation and Dispersion

Two of the biggest trends in business is the shift to digitisation and dispersion. Digitisation is now facilitating all manner of remote work and our culture is embracing it. Dispersion is what seems like a permanent shift where many industries decentralising, from the work from anywhere movement to seeing a doctor online.  

Healthcare is an industry that benefits significantly from both trends. Ironically, it took a pandemic for telehealth to finally go mainstream in Australia even though it has been technologically possible for over a decade. The future of healthcare is moving away from doctors’ offices and hospitals and towards remote and preventative care. It’s hard to see how Amazon’s foray into healthcare would not accelerate other technological possibilities to improve people’s health, reducing the cost of accessing care.

Subscriptions, Data and Delivery

Amazon can bring a lot to the acquisition of One Medical. Not only could Amazon deliver much needed capital to a loss-making firm, One Medical has a wonderful fit with the Amazon Prime model. One Medical has 715,000 paying subscribers that Amazon could plug into Prime and immediately offer remote healthcare to the largest subscriber base in business history. One Medical would then become a feature of Prime, offering same-day medicine fulfilment at the guaranteed lowest price. Amazon 101 for preventative healthcare: from one-click ordering to one-click healthcare.

This is even before we consider the impact of loading Amazon with personal medical data into the healthcare equation. Once healthcare is added to Prime, Amazon could create a valuable heat map of who is sick, where and with which maladies. Given how much Amazon already knows about our online behaviour and purchasing patterns, it’d also have a pretty good understanding of how people became sick and who is likely to become ill. This would fit perfectly with the lower cost model of preventative healthcare.

Big Tech Needs Big Growth

The thorny problem that Amazon faces is the pressure to keep growing. Their price earnings ratio dwarfs those of traditional retail and industrial stocks. Amazon is currently trading at a PE of 59x, in contrast to Walmart which is only trading at 19x at a much lower annual growth rate. In order to maintain its share price, Amazon needs to add $US500 billion to top line revenue in the next five years. The obvious choice is to hunt for big targets like healthcare and other industries that are both big enough and broken enough to benefit from a technology overhaul.

In fact, all of Big Tech needs to make Big Moves into adjacent industries. As the world shifts to a yield economy, anything less than massive growth will put downwards pressure of share prices especially when most of Big Tech are presently trading at much higher multiples than the market is.

From an investing perspective, one of our best moves might be watching where Big Tech will head next. We could benefit from holding firms that may be targeted for acquisition. Think Apple and the auto industry. Or going short on stocks in disruptable industries prior to Big Tech arriving with their fat cheque books.