The approach technology companies are taking to transform healthcare requires a fresh perspective.
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Are you all getting a little tired of hearing about all the great things big tech companies are trying to do in healthcare?
Google, Apple, Amazon: I simply admire these companies and their leaders, and in some cases, I literally can’t imagine life without the products and services they provide.
And yet, it seems like every few months, another rumor surfaces that one of these companies is going to change healthcare forever. Bloggers write about the rumors, reporters make the calls, excitement grows. And then…
In fact, big tech companies have consistently underperformed when it comes to investing in healthcare.
The main reason is that these companies have consistently undervalued four factors related to the American healthcare system:
1. Healthcare operates in a multi-matrix environment that is difficult to scale. An individual’s health care outcomes depend on many different parties, including insurers, healthcare providers, drug prescribers, hospitals, and dialysis providers.
Last year, Haven, a health-care venture launched by Amazon, Berkshire Hathaway and JPMorgan Chase, collapsed. Many of the ideas that emerged from the three-year effort were compelling, but in the end, Haven and its member companies (which employed more than 1.2 million people across the US) never captured enough market share to bypass health-care incumbents, nor the incentives to pay them.
And even if we are successful in building new primary care services or pharmaceutical benefit management services, these new services will need to interface with the traditional health care system. So almost all promises of massive, immediate disruption are vastly overstated. It’s like the old saying: How do you eat an elephant? One bite at a time. And health care is the biggest elephant.
2. We live in a fee-for-service world that is changing more slowly than anyone expected. I take the tech companies at their word: they want to improve health. But if we look closely at the health care system, we see that it is dominated by a model that doesn’t actually prioritize improving health. Frankly, the system gets rewarded when people get sick and hospitals, doctors, and many other stakeholders get rewarded. I suspect that well-intentioned tech companies that are passionate about improving their customers’ health continue to find themselves stepping into an unfortunate world where profit motives and improving health don’t necessarily align. That’s great. Your new device keeps patients healthy and avoids hospitalization. So how do you actually get rewarded?
3. Managing health care means you must manage risk. Creating search engines, high-tech gadgets, and award-winning television shows is hard. All of these endeavors cost money and require coordination among numerous groups far beyond my level of knowledge. These endeavors certainly involve considerable risk, but risk management, or “insurance,” as it is more commonly known, is not involved.
In healthcare, on the other hand, risk determines cost. Insurance companies negotiate rates on behalf of large numbers of patients, helping to control costs and ensuring that risk is calculated at an enterprise level to provide care to both the sickest and the healthiest. For technology companies, this part of the healthcare system is an unfamiliar concept and has yet to be embraced.
4. Low profit margins. Apple recently announced that its profit margins are 28%. Google’s are 27% and Amazon’s are 10%. Meanwhile, the entire healthcare services industry had a margin of just 4% in 2021. In fact, healthcare is a low-margin business, and Silicon Valley is built on high-margin, rapidly scalable businesses. I suspect the reason so many technology companies enter and exit (and re-enter) this industry is because they realize there isn’t much room to pursue profits at the speed and margins typically expected.
The way forward
So should tech companies give up? Absolutely not. Big tech companies can deliver great things for the healthcare industry (which is why they usually generate so much excitement in the healthcare industry) with their focus on quality, affordability, customer satisfaction, and ease of use.
But they need to stop messing around with the limits. Tim Cook, a leader I respect a lot, talked about a letter he received from a customer on an earnings call saying, “Apple Watch saved my life when I couldn’t call 911.” That’s great news. But what happens after the watch calls 911? The response to the customer needs to be coordinated among at least 12 different organizations, none of which have anything to do with Apple.
And while I’m excited about the company’s new service of providing on-demand primary care to employees, I’m not sure how the company will avoid the costs that all the other players its services must rely on impose on the health care system.
It’s time for technology companies to get serious about reforming healthcare in the U.S. They must show us what’s possible by transforming healthcare from the inside as owners, not customers. They can do this by acquiring large health systems and integrating advanced, technology-driven healthcare solutions with solid risk management practices. With this model, they can show how operations can be streamlined, how whole-patient care can replace fee-for-service care, how payers and providers can be integrated, and how administrative burdens can be reduced.
There is precedent for what I’m looking for: Amazon has been dabbling in the grocery business for years, but it wasn’t until Amazon bought Whole Foods that the tech company truly demonstrated it could combine low costs, delivery, technology and brand loyalty to create a compelling business.
Healthcare currently accounts for 20% of the U.S. GDP. Every day, millions of dollars in private equity funds flow into a multitude of companies focused on telemedicine, risk management solutions, and treating a variety of illnesses. The result is disruption. Now is the time for large, wealthy technology companies to jump into the space, buy up large health systems, and execute on a coherent vision to improve the quality of care while reducing costs.
Until that happens, hold off on the press release.
