Challenges of Internet Giants in Healthcare: Insights from Amazon's Strategic Struggles

This article was first published on: Village Doctor's Diary LatitudeHealth, by Latitude Health,Reprinted with authorization from VCBeat. Header image: 123rf.

Since 2017, Amazon has been attempting to achieve breakthroughs in the healthcare sector, but with little progress to date. As an e-commerce giant adept at consumer-facing (B2C) operations, Amazon’s lack of competitive advantage in the business-to-business (B2B) healthcare market is the core issue—a challenge that confronts all internet companies entering the healthcare industry.

Since the establishment of modern social security systems in major global economies, payers have become the primary driving force behind healthcare systems, with payment policies influencing both medical services and pharmaceuticals and consumables. Each payer reform triggers a reshuffling of the entire market. Online healthcare is precisely a product of such payer reforms, driven primarily by business-to-business (B2B) dynamics, leaving internet companies that rely on massive consumer-to-consumer (C2C) user bases with little room to maneuver.

Amazon has also recognized this issue and has begun to prioritize its business-to-business (B2B) service model.. Recently, YaAmazon in the Healthcare SectorAmazon has launched an online medical service—Amazon Care—entering the healthcare sector by providing video consultations and in-home visits for corporate employees. This is its latest endeavor following its entry into the prescription drug retail market, aiming to drive its overall growth in the healthcare industry by expanding into medical services.

As an e-commerce player, Amazon’s priority lies in pharmaceutical retail rather than healthcare services, where it lacks expertise. However, prescription drug distribution in the United States is controlled by Pharmacy Benefit Managers (PBMs), a highly monopolized market. Following the merger of major PBMs with insurance companies, Amazon has found it difficult to make headway in this sector. Consequently, it has had to advance slowly by acquiring PillPack and targeting the narrow niche of self-pay consumers. As a result, Amazon has shifted its focus to expanding online healthcare services, aiming to capture a share of the growing corporate health benefits market in the U.S., and intends to leverage online healthcare to drive prescription drug sales.

Although Amazon Care has been operating internally at Amazon for 18 months, it is not easy to gradually gain a foothold and continue expanding in the national market. Moreover, the expansion speed of online medical services cannot be very fast, nor can it drive the scaling of prescription drug retail.

First, from a market strategy perspective, Amazon is likely to emphasize its price advantage, using low prices to penetrate the market. However, the costs associated with online healthcare are highly transparent; unless physician costs can be further reduced, capturing market share through low pricing will inevitably result in sustained losses. For enterprises, most have already procured online healthcare services in the wake of the pandemic. While price remains an important consideration, companies tend to evaluate their overall medical benefits procurement more holistically. According to the financial reports of Teladoc, the largest online healthcare platform in the U.S., customer acquisition primarily occurs through B2B channels such as insurance companies and Pharmacy Benefit Managers (PBMs). Given the importance of maintaining relationships with these channels, enterprises are reluctant to switch suppliers arbitrarily. This brings us back to the same dilemma faced by prescription drug retail: the distribution channels for healthcare services remain controlled by the same large institutions that dominate pharmaceutical distribution.

Therefore, Amazon may be attractive to small and medium-sized enterprises (SMEs), but the resulting scale is limited. Moreover, online healthcare has traditionally been a benefit offered by large and medium-sized enterprises; small businesses with very limited revenue scales and profits are unlikely to procure such services independently.

Secondly, the B2B segment struggles to achieve rapid scale, representing a market with relatively slow growth. Even Teladoc, after nearly 20 years since its founding, has only reached $1 billion in revenue. It is therefore not easy to capture customers and rapidly expand in this market within a short timeframe. Moreover, Teladoc’s primary revenue source is membership fees rather than actual consultation volumes, which offers little reference value for other companies that can only charge on a per-visit basis.

The 2020 pandemic spurred an explosive growth in online consultations. Teladoc’s membership fee revenue accounted for less than 80% of its total revenue for the first time, yet still constituted 79%. Although consultation fee revenue surged by 134%, it represented only 19% of the total. In contrast, companies such as Amwell and Doctor on Demand, which rely solely on per-visit fees, have significantly smaller revenue scales, ranging from only 10% to 20% of Teladoc’s.

Moreover, while the online healthcare market appears vast in scale, its primary volume has now shifted from third-party platforms to medical institutions. Although Teladoc conducted over 10 million consultations in 2020, the total number of online consultations by the top ten hospital groups in the United States during the same period surpassed that of Teladoc, with some hospital groups exceeding 2 million online consultations. Before the outbreak of the pandemic, the online consultation volume of these hospital groups was less than 1% of their current levels.

Finally, the online healthcare market is receding. As the pandemic becomes more controllable, a large number of patients have returned to offline care. According to the latest report released by the Commonwealth Fund, even though the pandemic remained severe in the fourth quarter of last year in the United States, the volume of offline consultations has recovered to the level seen in the fourth quarter of 2019. Entering the online healthcare sector at this juncture is not a favorable opportunity; as demand gradually declines, the market share of third-party platforms faces contraction.

Although Amazon has also launched on-site services, the actual demand for such services remains low due to their high costs and fees. Consequently, corporate demand is not particularly urgent, making these services suitable only for a small segment of high-margin enterprises.

Overall, first, the online healthcare market exhibits strong enterprise welfare characteristics; similar to prescription drug retail, sales channels remain controlled by large B-side entities such as insurance companies and PBMs. Second, Teladoc’s membership fee model is difficult to replicate. Third, the online healthcare market is receding. These factors collectively constrain Amazon’s growth potential in this sector, while also limiting its ability to leverage online healthcare services to drive prescription drug retail.

In fact, Amazon’s challenges reflect the dilemmas faced by all major internet companies entering the healthcare sector.

Healthcare is a B2B market dominated by payers, with significant differences in both channel strategy and operations compared to the consumer-centric internet sector. Although healthcare spending appears to be growing substantially, the market is not controlled by end consumers; therefore, even large-scale consumer traffic from external sources cannot easily leverage or disrupt it. Furthermore, if internet companies enter the healthcare sector following traditional B2B rules, their inherent advantages disappear, and the possibility of rapid scaling is entirely lost.

Consequently, internet companies have consistently faced challenges in achieving growth and scalability within the healthcare sector. The slow growth on the B2B side and the resulting sluggish scaling are misaligned with the inherent DNA of internet companies, creating a long-standing paradox for their entry into the healthcare industry.

As a consulting firm focused on the healthcare industry, Latitude Health has launched the 2021 edition of its independent healthcare think tank, LH Insights. The new edition will continue to uphold the principles of independence and objectivity, providing comprehensive healthcare industry research centered on healthcare payment and spanning payers, providers, and product manufacturers. In-depth healthcare research reports will be delivered throughout the year. For procurement inquiries and detailed proposals, please email info@lathealth.com. Be sure to include your company name and contact information in the email.