Anticipating Movements from Well-Funded Disruptors in Healthcare

I have been beating the virtual healthcare drum for several months. Of all of the different things I have seen proposed around improving healthcare, I believe virtual healthcare is one of the few interventions that can address all four elements of the quadruple aim (patient experience, population health, reducing costs, work life of healthcare providers) and help address some of the inequalities in our care delivery system (e.g., racial, income, rural health). Although payers and providers can develop payment and care delivery models to support virtual healthcare, if people do not use the tools, then the idea’s potential will not be realized.

The retail marketplace could inform those of us in healthcare how other companies increase engagement with customers. Ben Thompson, Stratechery author, described how Costco’s membership fee generates more revenue than its annual profits (in 2015, Costco’s net income was $2.3 billion and its membership revenue was $2.5 billion). In contrast, Amazon shoppers believe the company aggregates the most sellers on its marketplace to help an individual identify the right product or service they might need. Walmart shoppers believe the company identifies suppliers with the lowest costs to display on their virtual and physical shelves (disclaimer: I shop at Amazon, Costco and Walmart).

Each company uses different tools to appeal to their customer base. Costco severely restricts vendors who can sell on their platform. Costco members, in turn, believe they are receiving higher-than-average quality products for a lower-than-average price. Amazon uses its online review system to help its customers determine the value of specific goods that are difficult to view physically than when shopping at a competitor (18 Amazon Go stores and 479 Whole Foods locations [2019], Costco [527 (2018)] or Walmart [4769 (2019)] in the United States). Walmart continues to refine its business model to supplement is broad geographic reach with some of the greatest foot traffic of any American retailer (140 million Americans visit a Walmart virtually or physically each week).

Walmart is considering different ways to engage in healthcare. After the success of their Center of Excellence program directing its 1.1 million employees and dependent to six medical centers for specific cardiac and orthopedic procedures (Medicare accountable care organizations account for 1.2 million lives across 88 hospitals). Although their efforts to deliver primary care through their physical locations have gone through fits and starts, the company has not given up. They opened a facility in Georgia with prices 30-50% lower than nearby hospitals. If Walmart’s experience with $4 prescriptions shifting the pharmaceutical industry is any indication, the rest of us are in for a rough ride. If Walmart becomes the default place for most Americans to get their primary care, they could direct most of chronic disease management through their online and physical locations. Medical centers may lose their grip over patients. Even if they offered their Center of Excellence program to only a fraction of their customer base, it could directly affect the financial health of hospitals dependent on cardiac and orthopedic procedures to stay afloat. Payers may struggle to understand their members’ early healthcare behaviors and Walmart may manage most “simple” conditions without triggering an insurance claim.

How might Costco respond? The company already seems to offer lower prices for many pharmaceuticals compared to Walmart. Bundled with the fact that individuals who are not Costco members can purchase prescriptions, the company seems to be earnest about confronting Walmart as well as anyone else in the pharmaceutical space. In 2018, Costco had 0.6% of the 2018 prescription revenues, compared with 3.2% for Kroger, 4.9% for Walmart and 24.2% for CVS Health (OptumRx, a subsidiary of UnitedHealthGroup, my employer, had 6.1% of the 2018 prescription market share by revenue). Costco could consider deploying primary care clinics near its gas stations and food courts, but they would have to make an argument that their primary providers made diagnoses more efficiently with fewer downstream costs than Walmart or other competitors.

Amazon’s stronger online presence suggests that they might be better positions to provide online second opinions or connect patients with relevant delivery teams based on customer-based ratings. Some Americans are already comfortable using online ratings in healthcare to choose providers for elective procedures, so developing a marketplace for other types of healthcare may not be such a stretch. If Amazon’s PillPack subsidiary continues to evolve within the larger organizational framework, patients may see a value in seeing the company provide a “best-of-breed” for medical service and product delivery instead of what a single provider or pharmacy might be able to deliver.

Where does that leave existing healthcare systems and payers? Like all industry incumbents, we have to consider redefining how we position ourselves to employers and patients/members. If the traditional moats of poor health information interoperability and patient deference to their primary care providers no longer hold, health systems will need to make stronger arguments to justify why patients should stay. As health care insurance premiums continue to rise with no distinction between routine and unexpected care (insurance’s traditional role), more members will forgo traditional insurance and consider alternative coverage models instead.