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Kevin O'Leary

The Amazon / One Medical Deal

July 24, 2022
Company Research

The healthcare industry collectively went bezerk this week as Amazon announced that it is acquiring One Medical for $18.00 per share, implying a valuation of ~$3.9 billion. Only a few weeks ago, news came out that CVS had pulled out of talks to buy One Medical, and we speculated in the newsletter that there weren’t many other logical buyers out there for One Medical. Turns out we vastly underestimated Amazon’s ability and interest in launching another healthcare initiative.

We’re sure everyone reading this has already seen the summary of the deal elsewhere and lots of opinions on the strategic rationale, so we’ll focus on the couple of things we found most interesting strategically…

The massive questions for Amazon Care and Crossover

We’ve always heard that Amazon has a “survival of the fittest” culture with various initiatives competing in a rather cutthroat manner internally. See, for example, Amazon’s willingness to launch Amazon Care, while working with JP Morgan and Berkshire on Haven, while building on-site clinics with Crossover Health. All of those efforts could have been seen as strategically conflicting with each other. Yet that doesn’t appear to have stopped Amazon before, and doesn’t seem to be stopping Amazon from making a similar move today. One has to imagine that with an acquisition of this size (at $3.9 billion it is Amazon’s third largest acquisition of all time) it creates questions regarding the future plans for these other efforts.

This deal seems like a strong indicator that the national rollout of Amazon Care wasn’t happening quickly enough for Amazon’s ambitions to push into healthcare. As recently as September 2021, Amazon Care was talking about a national rollout. If that rollout were going as planned, it seems like there’d be very little reason to make this acquisition - why acquire another platform if your internal platform is working? If Amazon Care were scaling as planned, it seems like logically you’d look at a different acquisition candidate. This deal seems to chop Amazon Care off at the knees – it’d be odd to sell two different primary care offerings to employers at the same time, and we’d expect that eventually they’ll move to integrate these approaches. The tech and care teams are going to have fun integrating Amazon Care + One Medical + Iora tech platforms for the foreseeable future (and beyond) trying to figure out which technology and care model wins out. And when we say “fun”, we really mean “not fun”.

For Crossover Health, this seems like a major shot across the bow given the strategic importance of the Amazon relationship. Crossover launched 17 on-site / near-site health centers with Amazon over the past few years, providing services to 115,000 Amazon workers. In 2021, 26% of Crossover’s members were Amazon workers, which would be roughly $43 million of Crossover’s 2021 revenue of $165 million (according to BI). That’s a massive hit. This isn't the first time Crossover has seen major clients slip away. In 2018, Apple (a then major client) scaled back its contract with Crossover when it decided to build its own clinic group, AC Wellness. 

It doesn’t seem like this deal would preclude Amazon from also purchasing Crossover and rolling it into the broader platform it is building here. However,  if Amazon doesn’t do that, presumably it will eventually decide to move primary care services for Amazon employees over to One Medical. 

If you’re looking for the opposite perspective on this point, Jay Parkinson provides a nice argument on Twitter for why this deal might actually have no impact at all on Amazon Care and Crossover. He suggests that Amazon is going to leave ONEM as is, and just look to grow membership via Prime members, while leaving Crossover and Amazon Care to serve other populations. It seems like a logical possibility given Amazon’s historical approach to letting competing initiatives exist. 

But even if Amazon hasn’t had a broader strategy to expand the populations that ONEM serves, ONEM leadership has demonstrated big ambition here (i.e. acquiring Iora to enter the senior market). I’d imagine that if Amazon’s HR team is looking at expanding clinics for employees, ONEM would raise its hand as being able to do that instead of Crossover. That sounds a lot like a massive internal political battle that I’d expect the company you just acquired for $3.9 billion to win eventually. 

What happens to Iora moving forward and the broader VBC strategy?

It was a little over a year ago, June 2021, that One Medical announced it was acquiring Iora for $2.1 billion. Of course, that deal was in equity, and at the time $2.1 billion consisted of 36 million shares at a stock price of $35.59. Hopefully Iora’s shareholders sold their shares before now, as Amazon acquired ONEM for $18 per share, implying a valuation of just over $1 billion for Iora. Iora presents a really interesting case study for how we define “success” in healthcare innovation. Arguably no startup has had more impact in terms of improving care delivery (between its impact and its trailblazing for other startups), but given it took $350 million in venture capital funding to get to this point, it seems hard to argue that it was a great outcome for venture investors. 

Even at the time of One Medical’s acquisition of Iora, there clearly were a number of questions about the integration of the two organizations. ONEM was attempting to integrate its FFS model targeting commercial populations with Iora’s VBC model targeting the senior population. Given the differing patient populations, care delivery approaches, organizational cultures, and tech stacks, among other things, it was always going to be a multi-year process to bring together these two organizations in a meaningful way. Now that only one year later, the combined ONEM is joining Amazon, it invites questions as to what will happen with Iora moving forward. 

We saw in HTN Slack a number of folks suggesting that Amazon will divest Iora. We’d be surprised if Amazon went that far - given how hard it is to recruit quality clinical teams, it would seem that Amazon would be doing everything it can to keep Iora (and One Medical) providers engaged post-acquisition. In our poll (n = 98), a slight majority of the community respondents agreed that Amazon would keep Iora. We were surprised to see so many folks suggesting they might divest Iora. 

While we don’t think an outright divestiture is likely, we wouldn’t be surprised to see Amazon de-emphasize Iora’s value-based care model and focus on scaling the core One Medical business. In the current state, it’s hard to envision Amazon leaning into growing a capitated Medicare Advantage primary care business. Unless, of course, this is just the first strategic move for Amazon and it follows it up by acquiring an insurer to give it a footprint in the Medicare Advantage space. While it might seem far-fetched, it wasn’t all that long ago that we were talking about a Walmart and Humana merger (and then Walmart subsequently launched and exited a rather ill-timed partnership with Clover Health to offer MA plans). What if Amazon and Humana started having conversations about going down a route similar to CVS and Aetna? If you haven’t read Mark Bertolini’s take on why he sold Aetna to CVS and the logic between combining a retailer and a health insurer, it’s worth reading here. If Amazon has any ambition to go down a similar path, obviously it would make sense to retain Iora.

Can Amazon really change the consumer experience for the better in healthcare?

Given Amazon’s run over the past few decades, obviously it commands attention for disrupting industries by providing consumers with a more convenient experience. And certainly, healthcare consumers would benefit from more convenient experiences. Given the quote below from the press release, it seems that Amazon thinks it can drive a similar change in the healthcare industry:

“We think health care is high on the list of experiences that need reinvention. Booking an appointment, waiting weeks or even months to be seen, taking time off work, driving to a clinic, finding a parking spot, waiting in the waiting room then the exam room for what is too often a rushed few minutes with a doctor, then making another trip to a pharmacy – we see lots of opportunity to both improve the quality of the experience and give people back valuable time in their days” Neil Lindsay, SVP of Amazon Health Services

It is not hard to imagine a world where Amazon makes certain aspects of healthcare more convenient. We can all sketch in our head a user journey that starts with Alexa connecting us to a provider that leverages data from devices in our home to diagnose us with a condition, send us medications in our home, and then coordinate our recovery from said condition. It all sounds like a really great utopic future state, but also one that couldn’t be further removed from the realities of the challenges of healthcare delivery in this country. 

Yet, the underlying issue here is that those challenges stem from the fact that at the end of the day, the care delivery infrastructure in this country has been built around the interests of the healthcare system (and more specifically, healthcare providers) and not the interests of the patient. Many other organizations have tried to drive this change over the last decade and failed, not for a lack of competence or for a lack of will, but because of the incompatible nature of provider interests with patient interests at scale.

Layer on top of that the underlying mistrust the public has with big tech players having access to personal data, and you have an even bigger potential problem for Amazon here. Of course, it’s worth remembering the point above that Amazon has a “survival of the fittest” organizational culture, so coordinating teams and efforts internally to leverage PHI in nefarious ways might be really practically challenging for Amazon to execute on. But even if they struggle with the execution, it still might give consumers a reason not to trust ONEM with their health care information. 

We’re skeptical here.

Does Amazon know what asset it is building in care delivery? 

Here’s an interesting thought experiment: instead of acquiring ONEM, why didn’t Amazon instead attempt to outbid Optum for Atrius Health or Kelsey-Seybold? Presumably, with the Amazon Care tech platform that Amazon has been building, it could have acquired both the clinicians and patients of an organization like Atrius, leveraged Amazon Care’s platform to drive scale, and acquire similar provider groups in other geographies. Leaving aside whether Amazon could have actually bid on this deal, assuming they could have bid, would Amazon have considered acquiring Atrius for more than the $236 million that Optum paid.

We think this is an interesting thought experiment because it begs the question - what asset does Amazon perceive ONEM as having that is worth paying $3.9 billion for, instead of attempting to acquire primary care organizations like Atrius at a 10x lower valuation? 

For care delivery organizations, the assets that you’re building aren’t that hard to sketch out - the list seems like something along the following lines:

  • Clinician workforce
  • Patient loyalty
  • Clinic footprint
  • Brand
  • Technology
  • Care processes
  • Payor / Employer contracts

Now, let’s use Atrius as a comp to One Medical. Atrius sees 745,000 patients in Massachusetts and has 700+ PCPs, while One Medical has 767,000 patients nationally (I’m not sure the latest number of PCPs, but presumably it’d be close to Atrius or lower given the similar patient population size). Given this, it doesn’t seem like the deal was about the provider workforce.. Does One Medical have a brand or clinical footprint that is that much better than Atrius? ONEM has a national brand and clinical footprint that would be appealing to Amazon for obvious reasons, but Atrius seems to have a much deeper presence in Massachusetts. Why not seek to build out an approach over time that acquires incumbent provider organizations in various markets with similar profiles to Atrius in Massachusetts versus acquiring a newer but national brand? One Medical’s own strategy seems to acknowledge this brand issue implicitly as they recognize they need to contract through local health systems that can command higher rates with local payors. Particularly given that Amazon already has been building out the Amazon Care platform internally, it would seem logical to combine the national scalability of Amazon Care with the depth of local providers. 

Does ONEM have a better tech stack? It’s not hard to imagine that ONEM has a superior tech stack to Atruis, but that seems like the wrong question here when Amazon Care has been building its own primary care delivery tech stack. Is ONEM’s tech stack – functionally now two tech stacks with Iora – that much better than what Amazon Care has built? Perhaps, but now you’ve got three tech stacks to navigate. Does ONEM have better care processes? They do seem to have figured out how to implement an NP-centric model for care delivery, so perhaps there is some operational efficiency associated with that. But I’d be hard-pressed to imagine anything that Atrius doesn’t already know. Does ONEM have better provider contracts? This actually seems like a negative for ONEM compared to Atrius. Perhaps the health system relationships are viewed as a net positive by Amazon, but they also seem like the antithesis of Amazon’s low cost strategy.

So, what exactly is it about ONEM that makes it worth acquiring for $3.9 billion when Atrius was acquired for only $236 million? When you look at what ONEM has built as an acquirable asset, it is essentially that it has a national footprint of providers who all use a new technology platform. Why you pay almost $4 billion for that when you’re also investing in building out a similar technology platform internally is pretty confusing to us. 

Ultimately, our hunch is Amazon doesn’t yet have a clear picture of what exactly it is building in healthcare and what asset it needs in order to get there. We think the primary asset within ONEM is the clinical team that is staffing the nationally operated clinics.

As other corporations seeking to scale care delivery have found time and again, it is incredibly hard to consistently staff clinics with high quality, empathetic providers. Those providers don’t tend to want to work for massive organizations that turn the art of clinical practice into a series of yes/no decisions in a standardized workflow dictated by a faceless corporate office. UHG in particular has shown that there is one quite effective way to combat this issue - scaling your workforce by acquiring provider organizations. ONEM does this for Amazon, but it’s not yet clear if Amazon really understands this yet.  

What playbook does Amazon follow from here?

Regardless of whether Amazon knows what asset it is creating at the moment, this acquisition opens a number of interesting strategic doors for Amazon. Business Insider featured an article a few months back on Amazon’s healthcare strategy, which included these couple sentences that provide some good insight on where Amazon might be heading here:

Amazon's healthcare business largely consists of three main components: primary care, online pharmacy, and health diagnostics. The company has a grand vision of ultimately blending the three separate entities into a one-stop shop for all things health-related, one person said.

It’s a pretty logical vision for a retailer’s healthcare strategy, and one that isn’t all that far off from what UHG and CVS are working on, at least if you squint hard enough. Of course, each has a different set of assets they are bringing to the table. However, when you think about UHG’s recent commentary about wanting to meet people as consumers via Optum before selling them a UHC insurance product, all of a sudden it becomes pretty clear that these companies may not be all that different. If Amazon is serious about getting into healthcare, we could see a few routes forward:

  1. Focus on organic ONEM growth by rolling out ONEM retail clinics in Whole Foods. Why not follow a HealthHUB style path and leverage each of the ~500 Whole Foods locations in this country to scale up ONEM’s footprint quickly? If it did so, it’s not hard to imagine a narrative inside of Amazon where it benefits the same way retailers have always benefited from having clinic presences in stores - leveraging foot traffic to sell more pharmacy products. ONEM may not be a retail pharmacy today, but would it be that hard to reimagine its growth as a MinuteClinic copy-cat? In our survey of HTN community members, folks were split almost dead even on whether we’ll see ONEM clinics inside of Whole Foods locations in the next two years. We wouldn’t be surprised to see a few pilot locations open, at the very least.

  1. Acquire an insurer and go head to head with CVS and UHG. This would be an incredibly bold strategy, and as such seems less likely. But as we discussed above, what if Amazon did buy Humana? Imagine the shockwaves that would send through the industry - all of a sudden UHG and CVS would have another major competitor. A smaller acquisition of an organization like Oscar (assuming Oscar articulates a path to viability) seems like a more likely first step here, and still an interesting one. By taking this approach, Amazon would be focused on owning not only the whole healthcare dollar in the traditional insurance sense, but the whole person dollar (consumer + patient) as CVS is. Going down this route, it seems like we could see Amazon make a number of acquisitions, as In order to effectively manage the entire healthcare dollar, Amazon would need to expand beyond just primary care and consider acquiring other assets that people engage with from a patient perspective such as MSK solutions, chronic disease management, etc. One Medical started doing that last quarter with the Healthy Mind and Healthy Heart programs and acting more as a navigator. But go back to the Kelsey Seybold / Atrius thought exercise - those are valuable to insurance because they are multi-specialty groups that can impact the whole patient dollar. Acquiring an insurer would force Amazon to start thinking like one and making moves like that.
  1. Acquire an MSO for primary care. It always seemed that the Amazon Care play was going to be as a tech platform for the industry, rather than Amazon trying to win in care delivery itself. ONEM seems to put that concept on notice - I’m not sure why you’d acquire ONEM if that is the route you’re going down. But, that isn’t to say that you couldn’t attempt to go down a VillageMD route and support both your own internal and external providers. Amazon acquiring a Privia or Aledade next would be quite interesting in this regard.

Each of these approaches could be viable for Amazon to pursue, but will require discipline and organizational commitment to see them through. Nobody wants to be the next Walmart with industry observers questioning whether the 5th time will be the charm in regards to their entry into care delivery. From our vantage point, it seems like a massive mistake for Amazon to acquire One Medical and let it sit without trying to drive a clear strategy forward in one direction.

Our Takeaway:

It seems fairly obvious to say this is a signal that Amazon is in healthcare to win and will be here to stay - a $3.9 billion acquisition would be a colossal failure if that weren’t the case. But our best guess is that 5 - 10 years from now we’ll look back on One Medical as a quaint notion about the concept of changing care delivery in this country for the better, but Amazon will be yet another giant corporation struggling to provide high quality care consistently.

We’re skeptical that Amazon will be a game changer in driving triple aim style outcomes - better patient experience and better outcomes at lower costs. Unless Amazon has the most culturally competent change management team specializing in bringing together clinical staff and technology out there, we highly doubt they’ll drive meaningful change when compared to other large organizations in the space. We also think it’s unfair to place that expectation on Amazon - this is a challenging industry to operate within, and we should expect them to be stymied by the same challenges that have plagued every other organization trying to drive significant change in the industry.

Either way, Amazon has positioned itself as one of the key players in the healthcare landscape over the next decade. The big question now is what they do next. Certainly they could let ONEM sit and not do much with it other than try to turn it into a cash flow generating line item for Amazon. But that’d be unfortunate for all parties involved. We hope, and expect, to see Amazon continue bolting on capabilities here in a meaningful way. If it does so, it seems there is a path to competing with UHG and CVS for healthcare dominance in this country. Of course, there’s also a million ways this could fall apart. Either way, it’ll be fun to watch. As the HTN poll results indicate, people think there is a wide variety of potential outcomes for this deal:

Two other side notes:

  1. We think it’s worth pondering why ONEM decided to sell now in an all cash deal at $18 per share, only a year after it was trading at $36 per share and acquired Iora to enter VBC as a next phase of growth. It’s not hard to envision a scenario where ONEM leadership was looking at the macro environment over the next few years and got nervous about ONEM’s ability to execute on its strategy as a standalone entity while attempting to move toward profitability. It seems that a deal like this provides shelter to weather the upcoming storm.
  2. On a selfish note, we are bummed to see ONEM get rolled up into Amazon as presumably that means we’ll get less insight into ONEM’s model moving forward. We think it’s good for the space as a whole to have pure play public companies that help illuminate what is (and isn’t) working in care delivery innovation. Wrapped up inside of Amazon it’s going to be a lot harder to tell.