Amazon’s $3.9B Acquisition of One Medical and Why Jeff Bezos Could Change Healthcare

Picture of Omar Khateeb, Author
Omar Khateeb, Author


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Remember at the end of last year when Oracle bought Cerner? I predicted this was a major signal that more big tech would move into healthcare.

It’s not much of a prediction when you realize that when a company is doing billions in revenue there are few places left to grow that will yield outsized returns.

Recently, Amazon made its next move into healthcare, announcing an agreement to acquire primary care provider One Medical in a deal valued at about $3.9 billion.

The deal allows the company to integrate its bread and butter — technology enablement, convenience and low costs — into primary care to increase access for patients across the country.

The deal is the latest on an increasingly long list of moves Amazon has made in the healthcare industry. These include buying PillPack, the company’s online pharmacy, and launching Amazon Care, its telehealth business for employers. 

Nathan Ray, partner at consulting firm West Monroe, commented that “this move tells us both that Amazon is aware of what they lack, but also that they really may not have a grand strategy as of yet but are continuing to find value buying — particularly on the downbeat of the market here — and developing both solutions and services within the healthcare space that give them options.”

Others have also said the same.

I disagree and feel that there’s a grand strategy at play that is more than just what you see on the surface.

When we look at Amazon’s path and view One Medical as a vehicle for them to get into healthcare, then we can see a bigger strategy at play.

Granted it’s full of risk but if anyone is a master of “Return-on-Risk” it’s Jeff Bezos and Amazon.

What is One Medical?

One Medical is an Advance Primary Care Company with 188 clinics across 17 metroplexes such as as San Francisco, Phoenix, Dallas, Houston and Atlanta.

It is also a publicly traded company whose stock opened at $12 a share a few years ago, grew to $60. Within the past twelve months it had a 70% free-fall to $18 where Amazon purchased it.

That all said, One Medical’s position as a well-known early player with strong brand equity outweighs these shortcomings, according to Deena Shakir, partner at Lux Capital.

She even noted she has seen many startups be pitched as “the One Medical for X, Y, and Z.”

It will be the third most expensive acquisition Amazon has ever made, following Whole Foods for $13.6B in 2017 and MGM at $8.45B earlier this year.

What is Advanced Primary Care?

Advanced Primary Care (APC) is a medical practice that shifts the focus of primary care toward quality.

Rather than focusing on numbers, APC ensures patients are provided with high-quality care. APC also allows providers to be free of traditional time constraints due to the need of seeing a high volume of patients.

The goal is to allow clinicians to spend more time and provide more comprehensive care to their patients.

Plus, if a patient needs to be referred to a specialist for more additional services, APC practices can maintain that relationship and ensure that the patient’s care is thoroughly coordinated throughout the treatment process.

The improved effectiveness of primary care at the population level leads to substantial decreases in cost for the patients. 

What Does One Medical Do?

One Medical is actually two businesses; one that makes a lot of money from a small percentage of customers and the other that makes the same amount but requires more customers.

Last year One Medical acquired Iora Health, a value-based primary care group with built-for-purpose technology focused on serving Medicare populations who are adults 65+ enrolled in Medicare Advantage and other at-risk reimbursement models.

The acquisition was in an all-stock transaction valued at approximately $2.1 billion.

In a statement from One Medical, here are the strategic and financial benefits listed to justify the transaction. I’ve bolded key phrases from specific points that I feel are notable:

  • Extends One Medical’s platform to deliver multi-modal care with 24/7 national digital health and in-person care across a combined 28 markets and beyond;
  • Expands potential market opportunity to $870 billion across Commercial and Medicare segments, including the new Medicare Direct Contracting program;
  • Enhances One Medical’s risk-taking capabilities and extends One Medical into full-risk Medicare reimbursement models;

How Does One Medical Make Money?

After acquiring Iora, we can fast-forward to this year and look at One Medical’s quarterly earnings.

The company made $254 million in Q1 2022, up 109% from $121 million in the first quarter of 2021. The company’s first-quarter revenue exceeded the high end of its guidance range by more than $4 million.

$130M of that revenue came from 95% (728K+) members come from contracting with employers to provide primary care services and charging Fee-for-Service.

The other half is likely why Amazon purchased them.

Almost the same amount ($120M) or the other half of One Medical’s revenue came from 5% (39K) of it members comes from risk-bearing, capitated payments from Medicare Advantage Plans to provide primary care services for their beneficiaries.

The revenue per member from the risk taken with Medicare Advantage brings more revenue per member compared to its enterprise business ($12,300 per Medicare Advantage member compared to only $714 per enterprise member)

Dr. Eric Bicker does a fantastic detailed breakdown in this video of the details.

Those Medicare Advantage Members are a direct result of One Medical’s acquisition of Iora Health last year.

As a result, One Medical’s Year-Over-Year Revenue is up 100% because of that.

However, One Medical’s Organic Member Growth is only up 28% even while it lost money every quarter and had $28M in losses in Q1 2022.

Where is the Money in Healthcare?

As we saw with One Medical, having the right model can make a huge difference in your revenue.

Keep in mind, after acquiring Iora, half of One Medical’s revenue came from only 5% of its members, which were from Medicare Advantage.

If you look at the chart below it’s obvious; the older the person, the more is spent on their healthcare. There’s just more revenue per person when you go above 65+.

When it comes to Advanced Primary Care, the key is utilization of the services, just like everything else in medtech.

Who would have the highest utilization? Younger healthier people or older, sick people?

Why Did Amazon Buy One Medical?

The One Medical Acquisition might be Amazon’s pivot into the Medicare Advantage Risk business.

The acquisition, which brings almost 190 clinics, a subscription telehealth service, an electronic health record and contracts with thousands of employer clients under Amazon’s umbrella, should fast-track the e-commerce giant’s goal of assembling a vertically integrated healthcare business to penetrate the employer market

The deal also helps One Medical by giving a deep pool of capital to drive growth during a time of acute economic uncertainty.

Amazon built its own health-care service for employees called “Amazon Care”.

Amazon Care is a service allows employees and their families to text or video chat with health-care providers, usually within 60 seconds of their request, and in some cases, it sends doctors to make home visits.

The employers that were acquired as customers weren’t impressive outside of a few large ones like Hilton Hotels.

This came at the heels of the Amazon-Berkshire Hathaway, JPMorgan joint healthcare venture dissolving.

The breakup occurred for various reason but when it happened Matt Hawkins, CEO of health technology company Waystar, told FierceHealthcare what might be the right model;

“A winning model will first solve the challenge of reducing administrative expenses by leveraging these impressive companies’ access to advanced technology, understanding of consumer behavior, and the ability to safely store and analyze data,” Hawkins said.

“The best course of action is to combine the resources available to these large, scaled companies with those of healthcare-focused players who demonstrate deep subject matter expertise and have experience navigating the complexities of the industry.”

The move to buy One Medical might be the model where instead of building a healthcare organization on its own, Amazon acquires one and uses its own technology to enhance it.

There are also “interesting synergies” to think about now that Amazon has footholds in pharmacy, grocery and now primary care.

Is the One Medical Acquisition a Pivot for Amazon Care?

I have to give credit where credit is due, Eric Bicker of AHealthcareZ predicted that Amazon Care was going to fail back in September 2021.

The reason is that the business model focused on providing healthcare services to employers whose average median age was in a bracket that based on healthcare costs is not profitable.

Here’s a look at some companies that Amazon might have gone after. The point is that with lower patient age comes lower utilization of healthcare services.

As I mentioned, anything in medtech that has low utilization also has low revenue.

One Medical is a business model platform for Amazon to bring its talents in tech and see what it can learn then improve on.

The possible outcome from this aside from increased revenue due to having the right ideal customer profile (65+ with high healthcare utilization) this also allows for Amazon’s technology and data talents to shine.

If there’s more utilization then Amazon can start to understand what levers exist for it to improve healthcare.

If healthcare waste can be solved and quality improved with those who are the sickest in our population, those insights in theory can be translated to other populations who are younger, healthier and utilize healthcare services less.

When that is achieved, you have now put that population in a position to have lower healthcare costs when they are 65+ through the simple concept that if you get your health right earlier on you can prevent chronic illnesses later.

Can Amazon Change Healthcare? The Proof is in the Track Record

Jeff Bezos is a master of risk.

In the book “The Bezos Letters” Steve Anderson analyzed all the shareholder letters and identified 14 principles that Bezos used to grow Amazon.

The first 3 focused on “Testing” and specifically encouraging successful failures and betting on big ideas.

Bezos has made billions of dollars of failures at Amazon.

Literally billions of dollars.

You might remember Pets.com or Kosmo.com. Bezos compared those to “getting a root canal without anesthesia.”

Granted, those things were probably not fun. But they also don’t matter.

Because Amazon has built a culture that constantly tests and that can results in huge failures, such as the time they tried to compete with eBay by creating Amazon Auction or when they burned $170M in one quarter creating the FirePhone.

In a 2014 shareholder letter Bezos said

After two decades of risk taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. Each of these offerings was a bold bet at first, and sensible people worried (often!) that they could not work. But at this point, it’s become pretty clear how special they are and how lucky we are to have them. It’s also clear that there are no sinecures in business. We know it’s our job to always nourish and fortify them.

If we look at how Amazon used its other two major acquisitions, we can get an idea of what they will do with One Medical.

Amazon acquired Whole Foods and used its platform trifecta (AWS, Prime, Marketplace) to then:

  • Optimize Whole Foods
  • Use data to deliver a better customer experience
  • Leverage a physical storefront for other Amazon services
  • Help third-party sellers make more money (shelf placement, delivery etc)
  • Leverage data to see what makes money
  • Create Amazon products to compete for price
  • Get more data
  • Open a better grocery store – AmazonFresh, which has no cashiers and optimized for the customer.

You can see a similar path with MGM, as Bezos told shareholders the day the deal was announced in May 2021, that it bought MGM because of its “vast, deep catalog of much beloved intellectual property,” and that it plans to “reimagine and develop that IP for the 21st century.”

Can Healthcare Get “Amazon”ed?

Public companies are expected to grow in order to return shareholder value.

When you do billions in revenue, you can’t just enter random markets that don’t promise huge returns.

With technology and SaaS “eating the world,” big tech has turned its eyes on healthcare for a reason;

Per CMS historical records, 19.7% of the United States’ gross domestic product (GDP) is spent on healthcare.

U.S. health care spending grew 9.7% in 2020, reaching $4.1 trillion or $12,530 per person. As a share of the nation’s Gross Domestic Product, health spending accounted for 19.7%.

For Amazon to enter a new market, specific criteria must be met.

Bezos has always had criteria and tests that have to be passed for Amazon to enter a new business market. In a 2014 shareholder letter he said:

  • Customers love it
  • it can grow to very large size
  • it has strong returns on capital
  • and it’s durable in time-with the potential to endure for decades

Taking the failures but also learnings from AmazonCare and now having purchased a better healthcare vehicle, Amazon can get to work doing what it does best, which is applying it’s trifecta platform to learn and optimize operations and revenue of a newly acquired platform.

Then, it can reimagine and launch its own.

Amazon MedTech Basics?

Amazon can (and will) quickly find ways to outcompete traditional medical device companies that supply commodities such as MedLine, Cardinal Health, etc.

How easy will it be for Amazon to develop its own line of commodity medical devices and disposables at a fraction of the cost?

Around 2009, Amazon quietly entered the private label business by offering a handful of items under a new brand called AmazonBasics.

Early offerings were the kinds of unglamorous products that consumers typically bought at their local hardware store: power cords and cables for electronics and, in particular, batteries — with prices roughly 30 percent lower than that of national brands like Energizer and Duracell.

The results were stunning. In just a few years, AmazonBasics had grabbed nearly a third of the online market for batteries, outselling both Energizer and Duracell on its site.

That same model will be applied to healthcare as

This is a golden opportunity for Amazon to pivot into a better business model that generates revenue.

As we see often in startups, the first model fails but you can take those learnings and experience to the next iteration of your startup business model.

Amazon might have a chance to do just that.

And when it comes to healthcare, who better to take it on than Amazon?

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