Will Amazon Disrupt Health Care?

to figure out how to bring down healthcare costs. Today on Benchmark, we'll talk about whether Amazon can disrupt healthcare like it's disrupted the rest of the economy. Welcome to Benchmark. I'm Scott Enman, economics editor with Bloomberg News in Washington with Daniel moss Is traveling this week, So let's talk about Amazon. I'm old enough to remember when it was

brand new and only sold books online. Now it's founder, Jeff Bezos, is the world's richest person, with a net worth estimated by Bloomberg at more than a hundred billion dollars. It's even started opening actual bookstores that you can walk into. They have their own video service and some pretty entertaining original shows and movies. Even my kids like to ask

Alexa to play songs and tell jokes. But one area that Amazon has basically shied away from his healthcare, particularly the byzantine, expensive employer linked system that's a hallmark of life in the United States of America. It accounts for several trillion dollars of gross domestic product, which is about eighteen percent of the economy. Amazon is just starting to

dip its toes into this area. We'll talk in a couple of minutes with Laura Rosner, an economist who will discuss how Amazon could affect prices in this industry and the broader economy. But first I want to bring in my colleague, Spencer Soaper. He's a reporter for Blomberg in Seattle who covers Amazon. Spencer, thanks for joining us on Benchmark today. Glad to be here. So Spencer, can you just tell us a little bit about this new healthcare

venture that Amazon announced. What exactly are they doing? We we don't know exactly what they're doing other than making a lot of waves. Um. They announced a partnership with Berkshire Hathaway and JP Morgan. All we know is that they're frustrated with the growing costs of providing health care for their workers and the complexity around providing health care

for their workers. This is something that Amazon CEO Jeff Bezos and Berkshire Hathaway CEO Warren Buffett, and JP Morgan CEO Jamie Diamond have commiserated with uh you know about for some time now, um, and now they've decided to team up to see what they can do. But beyond them teaming up and collaborating, we really don't know how

far this could go. It could be as simple as simply combining their employees and insured you know, estimated to be about maybe two and a half million people insured by the three companies together, if you include their employees and dependence to have you know, just better bargaining power in the marketplace. And it could be as complex of them actually reaching into the healthcare industry and providing services, whether it be UH pharmacy services or urgent care services,

or even on site healthcare services. So we're really not sure how far and deep they're willing to go. Now, why do you think Amazon has waited this long to do something in the healthcare industry, Well, we know they've been interested. At least Jeff Bezos has been interested in

healthcare for some time. Many years ago, the company actually invested in drug store dot Com, which was ultimately purchased by Walgreens and and shuttered, But at that time Bezos was interested in drug store dot com and pharmacy in

particular as a gateway to older shop rs. UH. It was a time when you know, maybe the fifty plus crowd was a little wary of e commerce, wary of putting their credit card information online, and saw a more convenient pharmacy experiences a way to get them acclimated to

e commerce. That vision never really materialized, and to this day, Amazon's lack of a pharmacy service when you consider them getting into groceries and think about all of the big box retailers and grocers that have pharmacy options in their

stores like Walmart and Kroger and Target and Costco. This is a disadvantage for them because every time you go to or even a CVS or Walgreens, every time you go to one of these stores to refill a prescription, you have to walk through abundant choices of other retail products that you can buy, and and Amazon capitulates those purchases to to these pharmacies. But the reason they haven't

gotten into it is it's very common. Plex is highly regulated, and so that differentiates it from their core business of selling you know, largely unregulated products online. There there are layers of middlemen and government bureaucracy to fight through, which would be a new frontier for for Amazon. I think this is a good time now to bring in Laura Rosner. Laura as a senior economist and partner with Macro Policy

Perspectives LLC, a research firm in New York. Previously, she was a researcher at the Federal Reserve Bank of New York, as well as an economist at Barclay's and BNP Power Box. She joins us by phone today. Laura, thanks so much for coming on our podcast. Hi, thank you very much the pleasure. Laura. We've heard Spencer just now talking a bit about the healthcare business, about drug prices. You've done

some research into this area. Can you tell us a little bit about how drug prices work, or how healthcare prices work, and how someone like Amazon could potentially affect change in the sure So, I mean, let's start with some context for so for more than a decade, growth and healthcare spending has outfaced growth in total GDP, and health care inflation has outstripped total inflation in our economy.

So rising healthcare costs is not something new. I think it's combining with changes in demographics and is creating some urgency to uh to improve the situation in general. You know again, I'm h and let me start over here. I mentioned that total health care prices in our our economy have been growing faster than overall inflation. Despite that, we've seen the differential narrow over the last several years.

And one reason for that is that the government has been taking a more active role in negotiating down healthcare prices, both both services and potentially drug prices too. So now if we have a new partnership with potentially a private sector firms playing a more active role in negotiating down those prices, I would think that that could really add

to some of the disinflationary forces in the economy. Right now, Lord, can you tell us a little bit more, I mean, how could these companies negotiate prices in the private sector. Wouldn't they really need some massive size and scale or is that something that you know based on your research, they might be able to accomplish. So sure. Let me first say when I mentioned the government is using their

market power to negotiate prices lower. The government can do that because it accounts for about thirty seven percent of total healthcare expenditures through its Medicare and Medicaid programs, so it has a huge footprint and it can set prices rather than just take them. Now, the three companies that have formed this partnership, they're very large too, but not as large as the government, so they'll probably my guests is they'll probably look to other ways to increase efficiencies

and force uh lower prices. And again we know we know very little at the at the time, but some possibilities are using the dominance of Amazon in e commerce to introduce things like comparison shopping to healthcare insurance and also prescription drugs. Also just creating electronic marketplace that increases transparency and price discovery, also public information about health care services.

We could see UH it open up the door to suppliers to provide services to a broader range of customers, um and tying these prices more to supply and demands. So a lot of the changes was seeing Amazon already implement in other products. Um again, the frequency of price change, the data collection, all of this has really disrupted a lot of different industries, including textbooks where it started, also apparel.

Now it's just getting into groceries. So I don't see any reason why we couldn't see some of those tactics also applied to healthcare, despite some of the hurdles and

obstacles that were mentioned earlier. And I'll also say, as an economics editor, I frequently edit stories about the current phenomenon of low inflation, not just in the United States but in the global economy, and we've written about how Amazon has played a role, or at least some people blame Amazon for keeping prices down, which you know, may in turn, you know, make global economic growth a little more sluggish in this part of the cycle than it

had been in previous decades. Laura, do you agree with that thesis? And as much as holding down healthcare prices is a good thing, is that something that could further hold down inflation the global economy and keep us talking about this topic in years to come. Sure it's a great question. So first of all, yes, I think Amazon definitely has had an effect on retail pricing and core

goods inflation. However, we should keep in mind that's only a small share of our total inflation goods prices excluding food and energy, or only of our total consumer basket. Um. So Amazon has had an impact and I would expect that impact to continue over time. Another source of the disinflation that is related to this partnership but isn't directly a consequence of Amazon by any means, is just the government and again our nations desire to lower healthcare costs

across the board. Healthcare is a our share of our economy. Healthcare costs has been rising faster than total inflation. The said that its inflation target at a time when healthcare costs were rising a lot faster. Now they're not, and the Amazon partnership looks like it could bring more disruption to those prices and maybe even bring them down even further. So we're going to see a period where, due to this, in part innovation and changes in business models, we're seeing

less health care inflation, and that's lowering total inflation. It's not a sign that the economy is weak. It's not a sign that we're losing momentum or that we're near deflation. It's just going to make it harder for the FED to achieve its inflation target. And it and it says that all health equal, the FED can afford to be a little more patient and normalizing its policy in order to get overall inflation up to that two percent level.

And we're talking just after the stock market has undergone a pretty steep drop, and you know, partly on fears that the Fed was going to race rates faster because inflation was rising, because wages were rising a little faster. So this, all things being equal, would lean a little bit against the narrative of inflation rising at a faster pace than the FED having to raise rates. Right absolutely.

In fact, I really think the market is going to be disappointed if it's looking for an acceleration and inflation.

There are a lot of forces that will likely keep inflation lower this expansion, even as we move towards the later, the later phases of this expansion, Even if we see actual weakness in the stock market and tightness in the labor market, there are forces such as technology such as healthcare, that are lowering inflation, depressing it relative to where it should be given where we are in the cycle, and and I think ultimately the market will be a little

disappointed when inflation comes in more muted. Again, it's not a bad thing. I think any central banker would love to have, you know, the puzzle of pretty low, stable inflation and a tight labor market and a booming economy. Those are that's a great problem to have. A lot of people would like to have that problem. But let's talk a little bit more about Jeff Bezos and what he wants. I want to go back to Spencer again. I know you said that the details are kind of

scant on this partnership. Bezos is working with Buffett and Diamond on this new venture. But knowing Jeff Bezos and how he gets into a business and disrupts it, takes it over. Is Jeff Bezos looking for anything less than some kind of total domination in the healthcare industry? Spencer, I don't know about total domination, but definitely increased efficiency, lower prices, and greater selection. When you think about healthcare, if you're in an employer sponsored plan, which much of

the country is, your choices are locked in. And Amazon's entire business model has been giving customers the most abundant inventory at affordable prices with the greatest convenience. And so you can think of any number of friction points in your experience that they'll be targeting. They'll be looking at

any inefficiency, looking at eliminating middlemen. Um and Laura mentioned earlier, just this notion of transparency, that's something that Amazon really brought to retail goods with where people are even show rooming on their smartphones. You know, you're in the aisle of target looking at a product and you can check on your phone to see if you get a better

deal from Amazon. This notion of price transparency that they brought to the retail world is really absent in healthcare, where you basically get a prescription, go to a pharmacy, show him your health plan, and and pay what you're told you're you're you're pretty much locked in. And so if there are there are a number of opportunities that they'll be looking for to increase consumer choice, eliminate inefficiencies,

and and and lower prices. Now, Spencer, they also said that they're going to do this through an independent company that's free from profit making incentives and constraints. How does that jibe with Amazon's philosophy. Jeff Bezos is desired to also give shareholders profits, and you know same for Buffet and Time and as well well. Bezos isn't really known for giving shareholders profits, so it aligns with his strategy.

That's where there may be some tension with UH, with his partner C. E O S and his venture, but he has a famous saying, your margin is my opportunity. And so if you look at the double digit off at margins of the insurance industry, you know that's certainly a place where where they're going to be looking for some fat that that can be trimmed. And Laura, that

same thing would hold for inflation. If you're looking to reduce profit margins, if you don't have that kind of margin pressure, that's something else that's probably going to be weighing on prices, right, Yeah, I would expect So I think I think again, if you look at the examples in the retail industry, apparel, appliances, digital textbooks, I mean, there are a lot of examples of where technology has reduced inflation rates, not just the price level, but actually

it's changed price setting behavior. And I think that there's scope and it will be interesting to see how this partnership UH evolves in what what implications it has for this much larger share of the consumer basket, which is healthcare. Well, twenty years ago, I'm not sure most of us could have envisioned how Amazon would be part of our daily lives today, and I'm sure we're going to be saying

something similar to twenty years from now. Laura Rosner, Spencer Soaper, thank you so much for joining us on Benchmark today. Thank you. Benchmark will be back next week. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com, or Bloomberg app, as well as wherever you enjoy podcasts, including Apple Podcasts, Bloombercast and Stitcher. Please take the time to rate and review the show while you're there, and you can also find us on Twitter. You can follow

me at at scott Landman and Spencer. Your handle is at Spencer Soaper. Benchmark is produced by tofor for HEAs the head of Bloomberg Podcasts is Francesca Leaving. Thanks for listening. See you next time. Stat Paper or a boy