News broke last week that Amazon was planning to expand its virtual health platform for employees, Amazon Care, currently in pilot in Seattle, to all its US employees and to other employers. Often when the $1.6 trillion company has ventured into new segments, stock traders respond, sometimes overzealously, by selling down positions in smaller competitors in the segment. This was no different as the share prices of leading telehealth providers Teledoc and Amwell were down as much as 8% after the announcement. I believe investors were right to do so this time as the digital health initiative could provide significant revenue and margin opportunities which Amazon will assertively pursue.
Genesis of Amazon Care
The US has long been criticised for having one of the most inefficient and expensive healthcare systems in the world, and its problems have only amplified in the past decade. The US currently spends more per capita on healthcare than any other OECD country, many of whom fund universal healthcare for their citizens.
Amazon’s ambitions in revamping the healthcare industry first came to light in January 2018 when it formed a joint venture with Berkshire Hathaway and JPMorgan, called Haven, with the goal of tackling the problem of rising employee health care costs. The announcement sent shockwaves through the industry, which recognised that if any entity could realise efficiencies, it had to be one created by three of corporate America’s most powerful companies with a combined employee base of more than 1 million.
Despite expectations the venture disbanded earlier this year. According to company sources, it faced multiple challenges from the start including data concerns and fuzzy goals. Thus Haven probably cost more than it saved, but the news was no doubt welcomed by the entrenched healthcare providers, insurers, drug makers and middlemen who cost the US $3.8 trillion each year
Although all three companies are reportedly working on their own internal telehealth projects, Amazon is the only one to have officially piloted the service to employees.
“Amazon Care enables employers to provide access to high quality medical care within 60 seconds for employees, including options for care around the clock through messaging or video. Amazon Care gives instant access to a range of urgent and primary care services, including COVID-19 and flu testing, vaccinations, treatment of illnesses and injuries, preventive care, sexual health, prescription requests, refills, and delivery, and much more.” – Amazon Blog
Once again, the move demonstrates Amazon’s superior ability to efficiently incubate and deliver scalable solutions. This is partly due to its exceptional cash flow generation and opportunities to reinvest into its ecosystem.
Amazon’s integrated offering addresses the three primary difficulties faced by users of the US healthcare system: 1) difficulty in accessing care, 2) complexity of the system and 3) high cost of drugs and treatments. Amazon Care leverages the company’s existing competitive advantages in cloud and data capabilities, logistics and fulfillment, and consumer-friendly interfaces such as Amazon Pharmacy (Amazon’s online pharmacy launched in November 2020) to provide an accessible and affordable healthcare experience.
Employees are arguably Amazon’s most important asset, therefore Amazon Care’s expansion to all US employees is primed to deliver huge internal benefits.
Firstly, Amazon can realise cost savings. While it does not disclose the current cost of employee healthcare spending, Walmart, the only US company with more employees than Amazon, has acknowledged that health insurance is its second-largest expense after wages. According to industry reports, annual family premiums for employer health insurance rose 54% between 2009 and 2019 to an average $20,576, and roughly 75% of premiums are paid by employers.
US employers are estimated to spend more than $880 billion on healthcare each year. Experts believe access to cheaper healthcare would encourage employees to seek preventative treatments that would limit the potential of future health problems, thereby reducing the likelihood of higher future costs and eventually lowering premiums. Amazon can also achieve greater transparency in healthcare costs and data by removing the middlemen and inefficiencies which undercut the current health care value chain. Secondly, Amazon can realise productivity gains. The service should help reduce the spread of infectious diseases and the severity of illnesses. Additionally, including Amazon Care in its workplace benefits package boosts Amazon’s desirability as an employer.
Valuing the opportunity
While the potential value of the service is not quantifiable, simple assumptions point to the benefit to Amazon’s bottom line. If the cost savings and productivity gains reduce total healthcare expenses by just 1%, Amazon saves roughly $4 billion annually.
In the early 2000s, the rapid growth of Amazon’s ecommerce business caused scaling problems, forcing the company to build internal systems to power the growth. In 2006, Amazon opened its cloud infrastructure service to other companies. Fast forward to today, and AWS has become a $51 billion run rate business.
Similarly, Amazon Care was created to reduce the company’s growing employee healthcare expenses. Costs and complexity, which impeded the ability of developers to build applications before cloud infrastructure services existed, also challenge the provision of company-specific healthcare to employees. It is not difficult to see the appeal of utilising an external telehealth infrastructure to implement enterprise healthcare initiatives.
Telehealth companies Teledoc and Amwell estimate an addressable market of around $35 billion annually in the US. This is likely underestimating the reach of the telehealth sector as it amounts to just 0.8% of the $3.8 trillion healthcare industry. Online prescription company GoodRx has valued the market at $250 billion.
We believe it is likely Amazon Care will be subscription based, with companies paying a fee to access Amazon’s technology and services. Additionally, with approximately 62 million Americans lacking access to primary care physicians, Amazon Care could potentially be offered directly to consumers and Amazon Prime members, further boosting the stickiness of Amazon’s recurring subscription revenues. Because the market values recurring revenues on a higher multiple, as seen with the average multiples of SaaS and streaming companies, this could provide further upside to Amazon’s valuation.
Beyond consultations, users will likely purchase prescribed medication directly from Amazon Pharmacy as part of the seamless interaction. Approximately 5.8 billion 30-day equivalent prescriptions are dispensed in the US each year. The US Centres for Medicare and Medicaid Services (CMS) expects the US prescriptions market to reach $560 billion by 2028 and this excludes the value of prescriptions written but not filled, most commonly due to cost concerns and accessibility.
Other opportunities in the Amazon ecosystem
Amazon’s endeavours in the healthcare industry extend beyond patient care including:
- Halo ― a health-focused membership service which provides comprehensive personal health and wellness monitoring and advice.
- Alexa ― Amazon’s voice assistant powering smart home devices is constantly building its health and wellness related skills.
- HealthLake ― an AWS service enabling healthcare and life sciences organisations to store, transform and analyse data in the cloud.
- Amazon Business Healthcare ― a business facing ecommerce platform to help digitise the healthcare supply chain.
Beyond opportunities in the US, Amazon’s established global ecommerce foothold provides a platform to launch Amazon Care globally. Interestingly, Amazon recently registered the trademark ‘Amazon Care’ in Australia. Who knows, we could be skipping the terrible wait at the doctors very soon.
Valuing the opportunity
Even a 0.5% share of the US healthcare market of $3.8 trillion could value the business at $475 billion (EV/Revenue multiple of 25x; Teledoc trading at 27x; GoodRx trading at 26x). As Amazon currently penetrates over 60% of US households, it is likely its market share could be much higher.
Multiple ways to win
While Amazon’s leading ecommerce and cloud businesses continue to deliver outsized growth under strong market-driven tailwinds, the company continues to utilise cash flows to reinvest into its infrastructure and ecosystem to further deepen and expand its moat. Amazon’s newer and often underappreciated businesses such as Amazon Advertising, Amazon Logistics and now Amazon Care are primed to deliver incremental return for the shareholders in the next 10 years.