When Amazon, Berkshire Hathaway and JPMorgan announced in 2018 a joint venture aimed at cutting the cost of employee healthcare, the news wiped off tens of billions of dollars from the market values of leading healthcare companies on the day.
Fast forward four and a half years. Amazon on Thursday said it would buy primary care provider One Medical for $3.9bn, including debt. The all-cash deal would add a high-end chain of bricks and mortar doctors’ offices to the retail giant’s portfolio of healthcare services.
Yet healthcare stocks have largely shrugged off the news. The absence of a market spasm this time around is telling. For all the talk about Big Tech’s impact on America’s dysfunctional, inefficient and archaic healthcare system, the $4tn-plus a year industry has proved hard to disrupt.
Amazon’s JV with Berkshire and JPMorgan closed down last year. Since then the ecommerce giant has focused on expanding its other healthcare offerings, including an online pharmacy and telehealth services.
But Big Tech’s foray into healthcare has only triggered consolidation that conferred more pricing power on the industry. The biggest private health insurers — UnitedHealth Group, Cigna, Elevance Health (formerly known as Anthem) and Humana — collectively made $31.7bn in profits last year. That is 59 per cent higher compared to 2018.
Shares in the four stocks are up between 53 per cent to 168 per cent over the past five years.
For Big Tech, the regulatory environment has also changed. Washington has grown wary of their market power. Despite the Biden administration’s focus on lowering healthcare costs, Amazon’s deeper push into healthcare will most likely attract regulatory scrutiny.
Markets are thus sceptical of a deal. Shares in 1 life Healthcare, One Medical’s owner, currently trades at $17.20, below Amazon’s offer of $18 a share.
With $42bn of cash and cash equivalents at the end of March, Amazon can easily afford to splash out a 77 per cent premium for One Medical. Its reasons for muscling into the healthcare market are sound. As one of the biggest employers in the US, Amazon is not only looking to make savings with its own service (though this deal is not about cost cutting). It hopes to sell its services to other companies as well.
Amazon may well grab a share of the healthcare spending pie. Just don’t expect it to shrink it.
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