Prime Health: Should Amazon Purchase a Hospital Chain?

Cross-posted from Medium.

By Nicolas Terry

The devotees of digital health and disruption recently lit up the Internet after reports that Amazon had deployed a secret health tech team codenamed 1492 (presumably a reference to healthcare visionary Columbus). The real surprise would be if Amazon did not have such a team in place. Other tech companies, Alphabet, Apple, IBM, Samsung, et al, understand that, while a latecomer to technologies, future healthcare will be data-driven and that there will be multiple opportunities to sell cloud storage, analytics services, and immodestly-priced wearables.

But, let’s pose a far more interesting question. What if Amazon decided to go beyond participating in upstart digital health with its interest in wellness, and took a swing at traditional healthcare and sickness? What, in other words, if Amazon purchased a hospital chain or network? Let’s assume that “1492” is the internal code name for Prime Health. On its face, the idea of what only a few years ago was just an online bookseller entering the healthcare field seems ridiculous. After all, healthcare is more complicated by several orders of magnitude than any other industry. Also, healthcare is particularly hard for outsiders to disrupt due to intrinsic market failures, overarching structural issues, the illiquidity of healthcare data, provider and patient heterogeneity, underperforming HIT technologies, third-party reimbursement, and so on. Saliently, healthcare is not about warehousing hard goods and distributing them with AI-based logistics. Rather, healthcare is all about bricks-and mortar facilities, services more that goods, face-to-face interactions, neighborhoods, customer needs that cannot be left to “spoil,” and a “last mile” problem that is incredibly hard to solve with technology. In other words, it’s quite like selling groceries. However, here’s the thing, Amazon recently purchased the upscale grocery chain Whole Foods for $13.4 Billion!

At this point we could get seriously bogged down in a discussion about how healthcare and groceries are completely different (yes, I understand you’d give me supplements and maybe butchery, but after that there would be an ugly argument about fresh produce, freezer aisles, and shopping carts). But, let’s play out the hypothetical more broadly. First, why did Amazon buy Whole Foods and what’s going to happen next? Business analyst Ben Thompson argues that Amazon’s business model is “to take a cut of all economic activity.” Well, U.S. healthcare is a $3.3 billion business, groceries were at about $1.5 billion, while total retail was around $5.5 billion. Anyway you look at it, gaining a cut of healthcare revenues is an attractive proposition. The obvious takeaway from the Amazon-Whole Foods deal is how it minimizes the last mile problem because “40 million households are located within five miles of a Whole Foods store.” But, peering deeper, Thompson identifies two dominant Amazon strategies. On the enterprise side there is Amazon Web Service (AWS or the Amazon cloud), which is “well-placed” to profit from most businesses. The consumer-facing strategy is Amazon Prime which makes buying, particularly impulse buying, simple and not particularly price sensitive. Amazon’s “strategic hole” according to Thompson was the grocery sector, a “persistent opportunity for other retailers to gain access to Prime members and remind them there are alternatives.” Assume Prime Health and that Amazon has or will have healthcare consumer-facing products and services, does it not follow that Amazon would need to deal with a similar strategic hole and offer retail healthcare to its Prime Health members? If so, it could establish and maintain Prime Health dominance just as professional hegemony once held sway?

Second, and this is the most interesting part of Thompson’s analysis, Whole Foods stores will not merely become a series of Amazon grocery distribution points. Rather, Whole Foods will become a customer of the transformative Amazon infrastructure (logistics, warehousing, web services, etc.). It is more than a decade since Stephen Spear argued that healthcare should adopt the technologies and practices of successful businesses and “tightly couple the process of doing work with the process of learning to do it better as it’s being done.” Yet, how many healthcare providers have heeded or implemented that message? In contrast, any Amazon-owned healthcare providers would become customers of such key strategies and technologies, rapidly improving areas where healthcare institutions suffer from under-investment or lack of scale such as procurement, secure IT, and data analytics. Equally, the Amazon mothership itself presumably would become a major customer of Prime Health, reducing benefit costs provided to Amazon employees.

Prime Health either has or could quickly acquire important consumer (patient)-facing assets. Amazon already sells medical supplies and equipment, offers one-hour delivery on some OTC drugs, is already selling prescription drugs in Japan, and the Amazon mothership reportedly is acquiring expertise in selling prescription drugs in the U.S. Obviously, it could also add bricks-and-mortar pharmacies to its Whole Foods stores. In short, Amazon probably has the infrastructure to support drug and device distribution at a scale far exceeding any existing Pharmacy Benefit Manager. After all, how many PBMs have their own air and road transportation fleets?

Amazon also has some intriguing customer-facing assets that have been built on top of and cemented the Prime membership lock-in. Echo devices are now installed in millions of homes allowing access to Prime products. It should be relatively simple to add new “Alexa skills” that respond to health inquiries and medical emergencies. Also, because Echo-Alexa is a platform, its voice commands are now tightly integrated with myriad home automation products. So, for example, when Prime Health first responders arrive a Prime home they could request that its front door be remotely unlocked and house lights turned on. To many this is a dystopian vision, but Amazon has convinced its most loyal (Prime) customers that it deserves their trust either because of an instrumental trade-off between privacy and convenience or the dubious proposition that Amazon doesn’t sell data to third parties, merely exploits them for its own purposes. Amazon also sells the somewhat creepy Echo Look, a fashion-oriented body camera and the Echo Show, a video communication device. Little re-tooling should be required to make these the basis for an effective telemedicine platform (suggested ad copy, “Prime Health members get three free medical consultations every month”).

The road from speculation to practice is a long and difficult one. What kind of bricks-and mortar hospital purchase should Prime Health make? Should it be a hospital chain or a network? Or would urgent care or some other, more obviously retail or more cash-based business be sufficient to close or minimize any competitive hole? Would a local or regional pilot program be the place to start? Certainly Amazon has a history, with Amazon Fresh and bricks-and-mortar bookstores starting locally before expanding. National acquisitions are harder given the fragmented nature of healthcare and its regulated environment but, eventually, could become inevitable for a company that values scale above all else.

Of course, the other major question concerns that awkward regulatory environment. Prime Health likely would not have to worry about antitrust scrutiny anytime soon, although some smart commentators might disagree. However, less esoteric barriers, such as the regulation of professional and institutional licensure, certificate of need laws, and the corporate practice of medicine doctrine, could be difficult to navigate. Of course, gig-economy companies have tended to ignore pesky state laws, embracing regulatory disruption during their startup phase. This is a strategy they may well have learned from Amazon which exploited the Quill Corp. v. North Dakota sales tax loophole until it achieved scale, at which point it traded sales tax immunity for tax credits or other state largesse.

Then, of course, there is the question of reimbursement. Prime membership skews nicely (for Amazon) to the middle class and wealthy. But, very few members of even those demographic groups are cash buyers of healthcare services (although don’t rule out a future Prime Health-Concierge). As a result, Amazon Health would be forced to confront third-party reimbursement and the nightmare scenario of dealing with Medicare, Medicaid, and group or individual insurers. One partial solution would be to purchase an HMO, essentially taking on the insurance and financing of healthcare as well as its delivery. But, would even Amazon relish such a multi-faceted challenge? It might be preferable for the company to accept Thompson’s “strategic hole” and content itself with the less complex environments and higher margins associated with drug sales and digital health. On the other hand, Amazon has shown itself to be an astute student of the long game. The company might decide to embark on a decade or two of predatory pricing and regulatory pain if the end result was the establishment of Prime Health as our de facto single-payer provider. Of course, if the U.S. ever reached that tipping point there are warning signs from other healthcare systems that outsourcing “public” care to private technology-based companies can be quite unpopular.

These kinds of theoretical discussions are current with regard to many industries that, even in modern times, had been thought of as relatively immune to technology-based disruption. For example, the interest in autonomous vehicles has raised the question whether “car manufacturers [will] learn to become tech companies more quickly than a tech company learns to be an automotive player?” At the moment, the idea of Prime Health and any related investment in bricks-and-mortar health should probably be dismissed as just a thought experiment. But, for how long?

Nicolas Terry is the Hall Render Professor of Law & Executive Director, Hall Center for Law and Health at Indiana University Robert H. McKinney School of Law. Podcast: Twitter: @nicolasterry. Thanks to Frank Pasquale for his incisive comments on an earlier draft. Cross-posted from Medium.

Nicolas P. Terry

Nicolas Terry is the Hall Render Professor of Law at Indiana University McKinney School of Law where he serves as the Executive Director of the Hall Center for Law and Health and teaches various healthcare and health policy courses. His recent scholarship has dealt with health privacy, mobile health, the Internet of Things, Big Data, AI, and the opioid overdose epidemic. He serves on IU’s Grand Challenges Scientific Leadership Team, working on the addictions crisis and is the PI on addictions law and policy Grand Challenge grants. His podcast is at, and he is @nicolasterry on Twitter.

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