- Paul Black
Amazon Makes Another Attempt At Healthcare
Amazon spends $3.9 billion to acquire medical provider One Medical.
The acquisition marks Amazon's latest attempt to enter the healthcare industry.
What One Medical does that appeals to Amazon.
A Can't Miss Collaboration
In 2018, Jeff Bezos, Warren Buffett, and Jamie Dimon joined forces to tackle the American healthcare system. The announcement of the project, called Haven, got the fanfare it deserved at the time. Jeff Bezos, Amazon’s ($AMZN) founder and CEO and the king of technology-retail, Warren Buffett, the CEO of Berkshire Hathaway ($BRK-A) and long time investor who had extracted billions of dollars from the stock market, and Jamie Dimon, the CEO of JP Morgan Chase ($JPM), one of the world’s largest financial institutions, were joining forces to benefit us all. In addition to the billionaires, there was well respected surgeon, researcher, and writer Atul Gawande, who was chosen to lead project Haven. This was the business version of the 1992 USA Basketball Dream Team that featured Michael Jordan, Larry Bird, Magic Johnson, Scottie Pippen, and Charles Barkley. Bezos, Buffet, Dimon, and Gawande were a can’t miss team, but they did… or did they?
In February 2021 the Haven project ceased operation, and what the public got from Haven was that the project gained insights, and that the leaders of the project would continue to collaborate informally. The leaders of Haven never revealed what insights they gained from the project, but it seems that Haven's founders are acting on the insights they've gained.
Last week Amazon announced its acquisition of One Medical ($ONEM) for $3.9 billion. One Medical operates a national chain of primary care clinics, and it represents Amazon’s latest push into healthcare.
What Makes One Medical Appealing to Amazon?
There’s a lot to like about One Medical from Amazon’s point of view. The company has over 700,000 consumers, 8500 enterprise clients, and over 180 medical offices in 25 markets. It also has a subscription service that grants patients a certain number of telehealth visits and in-person visits for a yearly fee. But if I had to take a guess, it would be that One Medical’s technology, its data, and its price are what appealed to Amazon.
Founded in 2007 by Tom Lee and headquartered in San Francisco, One Medical is one of several companies within healthcare that leans heavily on technology to run a healthcare business. A focus of the Haven project when it was up and running was to find technology solutions for the problems within healthcare. One Medical has built its own electronic health records (EHR) system, using a modern tech stack of Rails, GraphQL, and ElasticSearch, and it uses Amazon’s AWS infrastructure to deploy the EHR. If you don’t know what tech stack, Rails, GraphQL, ElasticSearch, or AWS means, don’t worry about it, you don’t have to know how the sausage is made to enjoy it. Rails, GraphQL, ElasticSearch, and AWS are the technology platforms that One Medical has used to create its own EHR, something that most medical providers buy from a third party.
Operating a tech company with a healthcare focus allowed One Medical to gather a sizable amount of patient data, which Amazon could use to develop products and treatments as well as gain insight into health trends and healthcare costs.
The $3.9 billion acquisition costs represents a 110% premium above where One Medical opened trading last week ($1.85 billion). Last February One Medical traded to an all-time high of $58.70 per share, which gave the company a $7.94 billion market valuation. Days after hitting the all-time high the stock price went into decline, months before the overall markets started to decline. The decline in the stock price followed the company’s Q4 2020 earnings report, where One Medical announced it had grown membership by 30% year-over-year, grown Q4 revenue 57% year-over-year, and increased yearly revenue by 38% year-over-year. Q4 2020 did end with a $2.7 million net loss, which was the third straight quarter the company reported a decline in net losses. In addition, Amazon’s announcement in March 2021 that it would offer home visits and telehealth appointments to its employees as a company benefit, put even more pressure on One Medical’s stock price.
The Haven project ended with the founders gaining insight into the U.S. health system, and now it appears those insights are being acted upon. In March, Warren Buffett’s Berkshire Hathaway acquired Allegheny Insurance. For a holding company that owns several insurance companies, the acquisition of Allegheny didn’t seem out of the ordinary, but Allegheny does sell health insurance. The insurance companies under the Berkshire Hathaway umbrella are mostly property and casualty insurers. There is a malpractice insurance provider for medical providers under Berkshire, and CSI offers a medicare supplement product, while Gen Re offers reinsurance for life and health insurance providers, but no companies have a health insurance focus. The insights from the Haven project may have been what led Berkshire to Allegheny and Amazon to One Medical. Maybe, Haven was a miss in terms of producing publicly available solutions for the issues within the U.S. healthcare system, but it appears to have been a mild success for a few of the Haven founders.
Healthcare, the Next Frontier
Healthcare is an industry that could provide tech companies like Amazon a long runway for growth, if they can successfully break in. CMS reported that U.S. healthcare spending reached $3.81 trillion in 2019, and was expected to grow at an annual rate of 5.4%. And Amazon isn’t the only tech company that’s trying to break in. Early last week Apple released a report which detailed how Apple’s technology can be used to support personal health, research, and care.
It’s too early to tell how One Medical will impact Amazon. In an interview with Yahoo Finance, private equity Investor and health care professor Meghan Fitzgerald expressed that she felt the smart play would be for Amazon to leverage its marketing ability to grow One Medical’s clientele, while letting One Medial continue to work independently. Investors should be aware that this isn’t Amazon’s first push into healthcare. After starting the Haven project Amazon purchased online pharmacy PillPack, and in the 90s Jeff Bezos invested in Drugstore.com. The One Medical acquisition cost of $3.9 billion is the entrance fee Amazon felt it needed to pay this time around to gain access to the trillions of dollars being spent annually within healthcare.