WEBVTT - Will Amazon Disrupt Health Care?

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<v Speaker 1>In the nineteen nineties, Amazon dot Com was a quirky

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<v Speaker 1>online book selling start up looking to take advantage of

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<v Speaker 1>the early days of the World Wide Web. Now having

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<v Speaker 1>long moved on from ripping apart the book business, Amazon

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<v Speaker 1>is a retailing and technology behemoth with an impact felt

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<v Speaker 1>throughout many other industries and around the world, not to

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<v Speaker 1>mention the daily lives of most Americans. Just recently, Amazon

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<v Speaker 1>joined forces with two other big names, Berkshire Hathaway and J. P. Morgan,

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<v Speaker 1>to figure out how to bring down healthcare costs. Today

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<v Speaker 1>on Benchmark, we'll talk about whether Amazon can disrupt healthcare

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<v Speaker 1>like it's disrupted the rest of the economy. Welcome to Benchmark.

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<v Speaker 1>I'm Scott Enman, economics editor with Bloomberg News in Washington

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<v Speaker 1>with Daniel moss Is traveling this week, So let's talk

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<v Speaker 1>about Amazon. I'm old enough to remember when it was

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<v Speaker 1>brand new and only sold books online. Now it's founder,

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<v Speaker 1>Jeff Bezos, is the world's richest person, with a net

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<v Speaker 1>worth estimated by Bloomberg at more than a hundred billion dollars.

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<v Speaker 1>It's even started opening actual bookstores that you can walk into.

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<v Speaker 1>They have their own video service and some pretty entertaining

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<v Speaker 1>original shows and movies. Even my kids like to ask

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<v Speaker 1>Alexa to play songs and tell jokes. But one area

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<v Speaker 1>that Amazon has basically shied away from his healthcare, particularly

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<v Speaker 1>the byzantine, expensive employer linked system that's a hallmark of

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<v Speaker 1>life in the United States of America. It accounts for

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<v Speaker 1>several trillion dollars of gross domestic product, which is about

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<v Speaker 1>eighteen percent of the economy. Amazon is just starting to

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<v Speaker 1>dip its toes into this area. We'll talk in a

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<v Speaker 1>couple of minutes with Laura Rosner, an economist who will

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<v Speaker 1>discuss how Amazon could affect prices in this industry and

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<v Speaker 1>the broader economy. But first I want to bring in

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<v Speaker 1>my colleague, Spencer Soaper. He's a reporter for Blomberg in

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<v Speaker 1>Seattle who covers Amazon. Spencer, thanks for joining us on

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<v Speaker 1>Benchmark today. Glad to be here. So Spencer, can you

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<v Speaker 1>just tell us a little bit about this new healthcare

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<v Speaker 1>venture that Amazon announced. What exactly are they doing? We

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<v Speaker 1>we don't know exactly what they're doing other than making

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<v Speaker 1>a lot of waves. Um. They announced a partnership with

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<v Speaker 1>Berkshire Hathaway and JP Morgan. All we know is that

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<v Speaker 1>they're frustrated with the growing costs of providing health care

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<v Speaker 1>for their workers and the complexity around providing health care

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<v Speaker 1>for their workers. This is something that Amazon CEO Jeff

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<v Speaker 1>Bezos and Berkshire Hathaway CEO Warren Buffett, and JP Morgan

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<v Speaker 1>CEO Jamie Diamond have commiserated with uh you know about

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<v Speaker 1>for some time now, um, and now they've decided to

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<v Speaker 1>team up to see what they can do. But beyond

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<v Speaker 1>them teaming up and collaborating, we really don't know how

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<v Speaker 1>far this could go. It could be as simple as

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<v Speaker 1>simply combining their employees and insured you know, estimated to

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<v Speaker 1>be about maybe two and a half million people insured

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<v Speaker 1>by the three companies together, if you include their employees

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<v Speaker 1>and dependence to have you know, just better bargaining power

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<v Speaker 1>in the marketplace. And it could be as complex of

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<v Speaker 1>them actually reaching into the healthcare industry and providing services,

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<v Speaker 1>whether it be UH pharmacy services or urgent care services,

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<v Speaker 1>or even on site healthcare services. So we're really not

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<v Speaker 1>sure how far and deep they're willing to go. Now,

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<v Speaker 1>why do you think Amazon has waited this long to

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<v Speaker 1>do something in the healthcare industry, Well, we know they've

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<v Speaker 1>been interested. At least Jeff Bezos has been interested in

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<v Speaker 1>healthcare for some time. Many years ago, the company actually

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<v Speaker 1>invested in drug store dot Com, which was ultimately purchased

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<v Speaker 1>by Walgreens and and shuttered, But at that time Bezos

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<v Speaker 1>was interested in drug store dot com and pharmacy in

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<v Speaker 1>particular as a gateway to older shop rs. UH. It

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<v Speaker 1>was a time when you know, maybe the fifty plus

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<v Speaker 1>crowd was a little wary of e commerce, wary of

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<v Speaker 1>putting their credit card information online, and saw a more

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<v Speaker 1>convenient pharmacy experiences a way to get them acclimated to

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<v Speaker 1>e commerce. That vision never really materialized, and to this day,

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<v Speaker 1>Amazon's lack of a pharmacy service when you consider them

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<v Speaker 1>getting into groceries and think about all of the big

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<v Speaker 1>box retailers and grocers that have pharmacy options in their

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<v Speaker 1>stores like Walmart and Kroger and Target and Costco. This

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<v Speaker 1>is a disadvantage for them because every time you go

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<v Speaker 1>to or even a CVS or Walgreens, every time you

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<v Speaker 1>go to one of these stores to refill a prescription,

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<v Speaker 1>you have to walk through abundant choices of other retail

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<v Speaker 1>products that you can buy, and and Amazon capitulates those

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<v Speaker 1>purchases to to these pharmacies. But the reason they haven't

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<v Speaker 1>gotten into it is it's very common. Plex is highly regulated,

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<v Speaker 1>and so that differentiates it from their core business of

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<v Speaker 1>selling you know, largely unregulated products online. There there are

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<v Speaker 1>layers of middlemen and government bureaucracy to fight through, which

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<v Speaker 1>would be a new frontier for for Amazon. I think

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<v Speaker 1>this is a good time now to bring in Laura Rosner.

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<v Speaker 1>Laura as a senior economist and partner with Macro Policy

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<v Speaker 1>Perspectives LLC, a research firm in New York. Previously, she

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<v Speaker 1>was a researcher at the Federal Reserve Bank of New York,

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<v Speaker 1>as well as an economist at Barclay's and BNP Power Box.

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<v Speaker 1>She joins us by phone today. Laura, thanks so much

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<v Speaker 1>for coming on our podcast. Hi, thank you very much

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<v Speaker 1>the pleasure. Laura. We've heard Spencer just now talking a

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<v Speaker 1>bit about the healthcare business, about drug prices. You've done

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<v Speaker 1>some research into this area. Can you tell us a

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<v Speaker 1>little bit about how drug prices work, or how healthcare

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<v Speaker 1>prices work, and how someone like Amazon could potentially affect

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<v Speaker 1>change in the sure So, I mean, let's start with

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<v Speaker 1>some context for so for more than a decade, growth

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<v Speaker 1>and healthcare spending has outfaced growth in total GDP, and

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<v Speaker 1>health care inflation has outstripped total inflation in our economy.

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<v Speaker 1>So rising healthcare costs is not something new. I think

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<v Speaker 1>it's combining with changes in demographics and is creating some

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<v Speaker 1>urgency to uh to improve the situation in general. You

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<v Speaker 1>know again, I'm h and let me start over here.

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<v Speaker 1>I mentioned that total health care prices in our our

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<v Speaker 1>economy have been growing faster than overall inflation. Despite that,

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<v Speaker 1>we've seen the differential narrow over the last several years.

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<v Speaker 1>And one reason for that is that the government has

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<v Speaker 1>been taking a more active role in negotiating down healthcare prices,

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<v Speaker 1>both both services and potentially drug prices too. So now

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<v Speaker 1>if we have a new partnership with potentially a private

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<v Speaker 1>sector firms playing a more active role in negotiating down

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<v Speaker 1>those prices, I would think that that could really add

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<v Speaker 1>to some of the disinflationary forces in the economy. Right now, Lord,

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<v Speaker 1>can you tell us a little bit more, I mean,

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<v Speaker 1>how could these companies negotiate prices in the private sector.

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<v Speaker 1>Wouldn't they really need some massive size and scale or

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<v Speaker 1>is that something that you know based on your research,

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<v Speaker 1>they might be able to accomplish. So sure. Let me

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<v Speaker 1>first say when I mentioned the government is using their

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<v Speaker 1>market power to negotiate prices lower. The government can do

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<v Speaker 1>that because it accounts for about thirty seven percent of

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<v Speaker 1>total healthcare expenditures through its Medicare and Medicaid programs, so

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<v Speaker 1>it has a huge footprint and it can set prices

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<v Speaker 1>rather than just take them. Now, the three companies that

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<v Speaker 1>have formed this partnership, they're very large too, but not

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<v Speaker 1>as large as the government, so they'll probably my guests

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<v Speaker 1>is they'll probably look to other ways to increase efficiencies

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<v Speaker 1>and force uh lower prices. And again we know we

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<v Speaker 1>know very little at the at the time, but some

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<v Speaker 1>possibilities are using the dominance of Amazon in e commerce

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<v Speaker 1>to introduce things like comparison shopping to healthcare insurance and

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<v Speaker 1>also prescription drugs. Also just creating electronic marketplace that increases

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<v Speaker 1>transparency and price discovery, also public information about health care services.

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<v Speaker 1>We could see UH it open up the door to

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<v Speaker 1>suppliers to provide services to a broader range of customers,

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<v Speaker 1>um and tying these prices more to supply and demands.

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<v Speaker 1>So a lot of the changes was seeing Amazon already

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<v Speaker 1>implement in other products. Um again, the frequency of price change,

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<v Speaker 1>the data collection, all of this has really disrupted a

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<v Speaker 1>lot of different industries, including textbooks where it started, also apparel.

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<v Speaker 1>Now it's just getting into groceries. So I don't see

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<v Speaker 1>any reason why we couldn't see some of those tactics

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<v Speaker 1>also applied to healthcare, despite some of the hurdles and

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<v Speaker 1>obstacles that were mentioned earlier. And I'll also say, as

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<v Speaker 1>an economics editor, I frequently edit stories about the current

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<v Speaker 1>phenomenon of low inflation, not just in the United States

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<v Speaker 1>but in the global economy, and we've written about how

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<v Speaker 1>Amazon has played a role, or at least some people

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<v Speaker 1>blame Amazon for keeping prices down, which you know, may

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<v Speaker 1>in turn, you know, make global economic growth a little

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<v Speaker 1>more sluggish in this part of the cycle than it

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<v Speaker 1>had been in previous decades. Laura, do you agree with

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<v Speaker 1>that thesis? And as much as holding down healthcare prices

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<v Speaker 1>is a good thing, is that something that could further

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<v Speaker 1>hold down inflation the global economy and keep us talking

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<v Speaker 1>about this topic in years to come. Sure it's a

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<v Speaker 1>great question. So first of all, yes, I think Amazon

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<v Speaker 1>definitely has had an effect on retail pricing and core

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<v Speaker 1>goods inflation. However, we should keep in mind that's only

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<v Speaker 1>a small share of our total inflation goods prices excluding

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<v Speaker 1>food and energy, or only of our total consumer basket. Um.

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<v Speaker 1>So Amazon has had an impact and I would expect

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<v Speaker 1>that impact to continue over time. Another source of the

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<v Speaker 1>disinflation that is related to this partnership but isn't directly

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<v Speaker 1>a consequence of Amazon by any means, is just the

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<v Speaker 1>government and again our nations desire to lower healthcare costs

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<v Speaker 1>across the board. Healthcare is a our share of our economy.

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<v Speaker 1>Healthcare costs has been rising faster than total inflation. The

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<v Speaker 1>said that its inflation target at a time when healthcare

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<v Speaker 1>costs were rising a lot faster. Now they're not, and

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<v Speaker 1>the Amazon partnership looks like it could bring more disruption

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<v Speaker 1>to those prices and maybe even bring them down even further.

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<v Speaker 1>So we're going to see a period where, due to this,

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<v Speaker 1>in part innovation and changes in business models, we're seeing

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<v Speaker 1>less health care inflation, and that's lowering total inflation. It's

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<v Speaker 1>not a sign that the economy is weak. It's not

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<v Speaker 1>a sign that we're losing momentum or that we're near deflation.

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<v Speaker 1>It's just going to make it harder for the FED

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<v Speaker 1>to achieve its inflation target. And it and it says

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<v Speaker 1>that all health equal, the FED can afford to be

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<v Speaker 1>a little more patient and normalizing its policy in order

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<v Speaker 1>to get overall inflation up to that two percent level.

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<v Speaker 1>And we're talking just after the stock market has undergone

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<v Speaker 1>a pretty steep drop, and you know, partly on fears

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<v Speaker 1>that the Fed was going to race rates faster because

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<v Speaker 1>inflation was rising, because wages were rising a little faster.

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<v Speaker 1>So this, all things being equal, would lean a little

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<v Speaker 1>bit against the narrative of inflation rising at a faster

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<v Speaker 1>pace than the FED having to raise rates. Right absolutely.

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<v Speaker 1>In fact, I really think the market is going to

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<v Speaker 1>be disappointed if it's looking for an acceleration and inflation.

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<v Speaker 1>There are a lot of forces that will likely keep

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<v Speaker 1>inflation lower this expansion, even as we move towards the later,

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<v Speaker 1>the later phases of this expansion, Even if we see

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<v Speaker 1>actual weakness in the stock market and tightness in the

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<v Speaker 1>labor market, there are forces such as technology such as healthcare,

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<v Speaker 1>that are lowering inflation, depressing it relative to where it

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<v Speaker 1>should be given where we are in the cycle, and

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<v Speaker 1>and I think ultimately the market will be a little

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<v Speaker 1>disappointed when inflation comes in more muted. Again, it's not

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<v Speaker 1>a bad thing. I think any central banker would love

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<v Speaker 1>to have, you know, the puzzle of pretty low, stable

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<v Speaker 1>inflation and a tight labor market and a booming economy.

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<v Speaker 1>Those are that's a great problem to have. A lot

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<v Speaker 1>of people would like to have that problem. But let's

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<v Speaker 1>talk a little bit more about Jeff Bezos and what

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<v Speaker 1>he wants. I want to go back to Spencer again.

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<v Speaker 1>I know you said that the details are kind of

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<v Speaker 1>scant on this partnership. Bezos is working with Buffett and

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<v Speaker 1>Diamond on this new venture. But knowing Jeff Bezos and

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<v Speaker 1>how he gets into a business and disrupts it, takes

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<v Speaker 1>it over. Is Jeff Bezos looking for anything less than

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<v Speaker 1>some kind of total domination in the healthcare industry? Spencer,

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<v Speaker 1>I don't know about total domination, but definitely increased efficiency,

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<v Speaker 1>lower prices, and greater selection. When you think about healthcare,

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<v Speaker 1>if you're in an employer sponsored plan, which much of

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<v Speaker 1>the country is, your choices are locked in. And Amazon's

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<v Speaker 1>entire business model has been giving customers the most abundant

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<v Speaker 1>inventory at affordable prices with the greatest convenience. And so

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<v Speaker 1>you can think of any number of friction points in

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<v Speaker 1>your experience that they'll be targeting. They'll be looking at

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<v Speaker 1>any inefficiency, looking at eliminating middlemen. Um and Laura mentioned earlier,

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<v Speaker 1>just this notion of transparency, that's something that Amazon really

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<v Speaker 1>brought to retail goods with where people are even show

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<v Speaker 1>rooming on their smartphones. You know, you're in the aisle

0:14:53.560 --> 0:14:56.200
<v Speaker 1>of target looking at a product and you can check

0:14:56.240 --> 0:14:57.560
<v Speaker 1>on your phone to see if you get a better

0:14:57.560 --> 0:15:00.960
<v Speaker 1>deal from Amazon. This notion of price transparency that they

0:15:01.000 --> 0:15:05.680
<v Speaker 1>brought to the retail world is really absent in healthcare,

0:15:06.120 --> 0:15:09.160
<v Speaker 1>where you basically get a prescription, go to a pharmacy,

0:15:09.200 --> 0:15:11.520
<v Speaker 1>show him your health plan, and and pay what you're

0:15:11.520 --> 0:15:14.320
<v Speaker 1>told you're you're you're pretty much locked in. And so

0:15:14.360 --> 0:15:16.640
<v Speaker 1>if there are there are a number of opportunities that

0:15:16.680 --> 0:15:23.040
<v Speaker 1>they'll be looking for to increase consumer choice, eliminate inefficiencies,

0:15:23.240 --> 0:15:27.080
<v Speaker 1>and and and lower prices. Now, Spencer, they also said

0:15:27.120 --> 0:15:30.080
<v Speaker 1>that they're going to do this through an independent company

0:15:30.120 --> 0:15:34.400
<v Speaker 1>that's free from profit making incentives and constraints. How does

0:15:34.440 --> 0:15:38.480
<v Speaker 1>that jibe with Amazon's philosophy. Jeff Bezos is desired to

0:15:39.040 --> 0:15:42.560
<v Speaker 1>also give shareholders profits, and you know same for Buffet

0:15:42.600 --> 0:15:45.760
<v Speaker 1>and Time and as well well. Bezos isn't really known

0:15:45.760 --> 0:15:49.080
<v Speaker 1>for giving shareholders profits, so it aligns with his strategy.

0:15:49.120 --> 0:15:51.640
<v Speaker 1>That's where there may be some tension with UH, with

0:15:51.720 --> 0:15:54.480
<v Speaker 1>his partner C. E O S and his venture, but

0:15:55.040 --> 0:15:57.680
<v Speaker 1>he has a famous saying, your margin is my opportunity.

0:15:58.080 --> 0:16:00.160
<v Speaker 1>And so if you look at the double digit off

0:16:00.160 --> 0:16:03.280
<v Speaker 1>at margins of the insurance industry, you know that's certainly

0:16:03.280 --> 0:16:05.520
<v Speaker 1>a place where where they're going to be looking for

0:16:05.560 --> 0:16:08.880
<v Speaker 1>some fat that that can be trimmed. And Laura, that

0:16:09.040 --> 0:16:11.760
<v Speaker 1>same thing would hold for inflation. If you're looking to

0:16:12.400 --> 0:16:14.600
<v Speaker 1>reduce profit margins, if you don't have that kind of

0:16:14.640 --> 0:16:17.680
<v Speaker 1>margin pressure, that's something else that's probably going to be

0:16:17.800 --> 0:16:21.480
<v Speaker 1>weighing on prices, right, Yeah, I would expect So I

0:16:21.480 --> 0:16:25.200
<v Speaker 1>think I think again, if you look at the examples

0:16:25.280 --> 0:16:32.560
<v Speaker 1>in the retail industry, apparel, appliances, digital textbooks, I mean,

0:16:32.800 --> 0:16:37.560
<v Speaker 1>there are a lot of examples of where technology has

0:16:37.560 --> 0:16:41.680
<v Speaker 1>reduced inflation rates, not just the price level, but actually

0:16:41.720 --> 0:16:45.680
<v Speaker 1>it's changed price setting behavior. And I think that there's

0:16:45.800 --> 0:16:48.800
<v Speaker 1>scope and it will be interesting to see how this

0:16:48.920 --> 0:16:53.880
<v Speaker 1>partnership UH evolves in what what implications it has for

0:16:53.920 --> 0:16:59.840
<v Speaker 1>this much larger share of the consumer basket, which is healthcare. Well,

0:17:00.080 --> 0:17:02.440
<v Speaker 1>twenty years ago, I'm not sure most of us could

0:17:02.440 --> 0:17:05.000
<v Speaker 1>have envisioned how Amazon would be part of our daily

0:17:05.040 --> 0:17:07.520
<v Speaker 1>lives today, and I'm sure we're going to be saying

0:17:07.680 --> 0:17:11.359
<v Speaker 1>something similar to twenty years from now. Laura Rosner, Spencer Soaper,

0:17:11.400 --> 0:17:13.840
<v Speaker 1>thank you so much for joining us on Benchmark today.

0:17:14.280 --> 0:17:20.600
<v Speaker 1>Thank you. Benchmark will be back next week. Until then,

0:17:20.680 --> 0:17:23.720
<v Speaker 1>you can find us on the Bloomberg terminal, Bloomberg dot com,

0:17:23.800 --> 0:17:26.560
<v Speaker 1>or Bloomberg app, as well as wherever you enjoy podcasts,

0:17:26.560 --> 0:17:30.400
<v Speaker 1>including Apple Podcasts, Bloombercast and Stitcher. Please take the time

0:17:30.440 --> 0:17:32.439
<v Speaker 1>to rate and review the show while you're there, and

0:17:32.480 --> 0:17:34.760
<v Speaker 1>you can also find us on Twitter. You can follow

0:17:34.800 --> 0:17:38.520
<v Speaker 1>me at at scott Landman and Spencer. Your handle is

0:17:39.000 --> 0:17:42.800
<v Speaker 1>at Spencer Soaper. Benchmark is produced by tofor for HEAs

0:17:42.880 --> 0:17:46.359
<v Speaker 1>the head of Bloomberg Podcasts is Francesca Leaving. Thanks for listening.

0:17:46.520 --> 0:18:05.240
<v Speaker 1>See you next time. Stat Paper or a boy