Reposted from April 2018, as it is Chinese New Year for Zarc Gin, our regular Insurtech Expert based in China.
A couple of weeks ago, there were rumors of Walmart purchasing U.S. Health Insurer Humana.
I’ve written about the U.S. healthcare market a few times and thought this news was rather interesting.
As I started researching this topic, I decided to take a look at the U.S. healthcare market a bit more broadly.
During my research on Walmart and Humana, I uncovered some interesting facts and figures which help to further shape my opinion on the opportunities I see in the future of the U.S. healthcare industry.
While the initial sections are numbers focused (be prepared for a lot of numerical data!), I do touch on technology as well later on.
As such, I have structured this week as follows:
- Getting a bigger slice of the $3,300,000,000,000 pie
- What do all these (potential) mergers mean?
- How Technology can help
- Amazon vs. Walmart – which ‘category killer’ will it be?
Getting a bigger slice of the $3,300,000,000,000 pie
There have been a number of large potential mergers in the U.S. Health Insurance & healthcare space, including:
- Walmart & Humana
- CVS & Aetna – which still has some hurdles to go through
- Cigna & Express Scripts (also mentioned in the article above and has some hurdles themselves)
As I read more and more about these various deals, both qualitatively and quantitatively, it became more clear what was going on.
And then, I read in this article, the following quote from Walgreens Chief Medical Officer Dr. Patrick Carroll:
“Why not use those locations as a strategy for healthcare?”
Then it all made sense. Allow me to share.
According to the Center for Medicare and Medicaid Services (CMS) National Health Expenditure Data (NHE), NHE grew 4.3% to $3.3 trillion in 2016, or $10,348 per person, and accounted for 17.9% of Gross Domestic Product (GDP).
Healthcare expenses are $3.3 trillion in the U.S. alone. That’s $3,300,000,000,000, folks.
I was curious as to what that $3.3 trillion broke down into, so I started digging deeper.
Included in the CMS link above are tables that have a number of ways to analyze this expenditure data (24 different ways to be exact).
If you are interested, please look for this link on the page:
Table 4 in the Zip file had some really interesting data:
Zooming in on that data, I found some even more interesting numbers:
Of the $3.3 trillion being spent on Health related expenses, $2.8 trillion was being spent on Personal Health Care ($2,800,000,000,000).
That’s a lot of money.
And of that $2.8 trillion, $2.2 trillion is being funded through Health Insurance.
That doesn’t tell the whole picture though.
What do all these (potential) mergers mean?
In addition to the research I found above, I found some more stats which painted a much broader idea about the conclusions that I was beginning to draw.
US Health Insurer market share
According to Health Payer Intelligence, in 2016, the top 5 health insurers payers in the U.S. are:
- United Health Group – with $184.8bn in revenue and 70 million subscribers
- Anthem – $89.1bn in revenue and 39.9 million subscribers
- Aetna – $63.1bn in revenue and 23.1 million subscribers
- Humana – $54.3bn in revenue and 14.3 million subscribers
- Cigna – $39.7 bn in revenue and 15 million subscribers
With a population of 326m people in the US, these 5 companies have coverage for 162 million people (or 49.7% of the population).
Pharmacy market share
In terms of prescription revenues, the pharmacies in the US are split as follows:
And in terms of number of pharmacies, the top 10 can be found here (according to SK&A Pharmacy Data):
Pharmacy Benefit Manager market share
Pharmacy Benefit Managers (PBMs), according to Wikipedia, are third party administrators that ‘are primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims’ and ‘As of 2016, PBMs manage pharmacy benefits for 266 million Americans.’ (that’s managing the prescriptions for 81% of the population…)
According to Statista, in 2016, the market share is as follows:
Pulling it all together
Looking back at the potential mergers mentioned in the first section, we have a high possibility of:
- Walmart (#4 in terms of number of pharmacy locations and #5 in terms of total prescription revenue), partnering with Humana (#4 Health Insurer in terms of revenue and # of subscribers, and which also happens to be the 4th largest PBM).
- Aetna (#3 Health Insurer in terms of revenue and # of subscribers) partnering with CVS (#1 in terms of number of pharmacy locations, prescription revenue and the largest PBM)
- Cigna (#5 Health Insurer in terms of revenue and # of subscribers) partnering with Express Scripts (#3 in terms of prescription revenue and the largest PBM, tied with CVS).
Not to mention the fact that United Health Group (#1 Health Insurer in terms of revenue and subscribers) owns Optum Rx (third largest PBM). They have upped their health care presence in the past few years by buying MedExpress Urgent Care, which has 203 locations.
One may think that Anthem (#2 Health Insurer in terms of revenue and # of subscribers) is missing out, but maybe they have some benefits to sitting on the sidelines and it’s no wonder there is some chatter relating to potential antitrust violations within these deals.
If I look at all of these facts and figures, it looks like these companies are aiming to build mini ecosystems for their customers, in an effort to start getting a bigger piece of the $3.3 trillion mentioned before…most specifically, the $2.8 trillion being spent on personal health care.
After all, if these companies can offer it all ‘in-house’; meaning prescriptions, simple doctor visits through their in-store clinics and a mechanism to have it paid for through Insurance benefits, then consumers may only need to go to hospitals for specialist visits and more serious ailments. This should ultimately lower the cost of health care, while also shifting some of that $2.8 trillion to some different hands.
How Technology can help
Technology will play a key role in enabling this to happen.
From that article, I analyzed the Online to Offline (O2O) capabilities within their Ecosystem:
Online through use of the Good Doctor app, a policyholder can:
- Search for, and book doctors. This can be either online consultations or in-person (i.e. offline)
- Have an online consultation with a doctor
- Purchase medicine
- Get access to information about various health topics – either general or specific to me
- Monitor their own health plan
Offline, Ping An has developed a network of hospitals, physicians, pharmacies and more, which will allow the policyholder access to services they can’t get through the online platform
All of these players are aligning the essential businesses in order to build these ecosystems. The Insurers already have relationships with the hospitals as well, which should help in bringing it all together.
- Wearables – ‘Technology started to enter in our lives with several players developing wearables focused on fitness, sport and wellbeing.’
- Data – ‘By trying to collect more customers’ data, they (insurers) hope to better understand their needs and increase the level of engagement they have with them by adding numerous touch points.’
- Teleconsultation – ‘To increase number of touchpoints and offer additional services, teleconsultation is now a must-have for most of insurers and mutuals’
- Data Privacy and sharing – ‘To better predict and prevent diseases, technology requires a huge amount of data to be relevant, and we see many startups monitoring behaviors on a real-time basis. This raises the first challenge for both insurers and startups: make people agree to share their personal data.’
Having more information on customers and being able to ‘track’ their health, will help to fuel the ecosystem. This will enable all the participants in the value chain (doctors, pharmacies and Insurers) to know more about their customers on a real time basis, hopefully helping with more preventative measures and ultimately bring costs down. As Florian states, ‘Insurers need to develop an ecosystem of technologies and startups around them to address their current challenges: increase number of touchpoints with customers ; understand behaviors to better prevent risks ; and reduce costs of healthcare.’
I highly suggest reading the full article.
Health Insurance probably has the most amount of data being transferred than other lines. This is due to the numerous amounts of players involved in the process as well as the amount of information on a customer that can be available.
Further, Health Insurance data is the most personal of personal data.
As such, something like blockchain, to help with the transfer and security of data seems like a solution that can help.
A Blockchain Health Alliance including Humana, Quest Diagnostics, Multiplan, and UnitedHealth Group’s Optum and UnitedHeathcare units has formed recently in an effort to ‘improve data quality and reduce administrative costs associated with changes to health care provider demographic data’.
Further, CB Insights has done a study on ‘5 Blockchain Startups Working To Transform Healthcare’.
Which ‘category killer’ will reign supreme (if at all)?
When it comes to ‘category killers’, two of the biggest and most famous are Walmart and Amazon.
We have been focused on Amazon coming into Insurance so much. I wrote about this earlier this year, when Amazon, JP Morgan & Chase and Berkshire Hathaway teamed up to announce that they would be ‘partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs’.
I am still bullish on the prospects of this venture and I know Amazon knows a thing or two about building an ecosystem and how to use data. However, the potential of Walmart buying Humana does have me very intrigued.
They have a massive head start to Amazon in terms of building their healthcare ecosystem. After all, it was only 3.5 years ago that they announced the goal ‘To Be The Number One Healthcare Provider In The Industry’. This includes:
- The Clinic at Walmart – They only have 90 locations currently and could leverage their 4,500 stores to build more
- Pharmacy distribution – In addition to it’s 4,500 pharmacies, customers can order prescriptions online and Walmart is also looking to increase this with a potential acquisition of online pharmacy startup PillPack. They may also benefit from their addition of FedEx to 500 stores.
- Investments – in addition to the potential investments they are seeking, they have made a number of other investments to enhance their overall ecosystem.
Further, earlier this week, Walmart announced a redesign of its website and Amazon ‘put a pause on its plan to sell prescription drugs to hospitals’.
OK, are you still with me? I know this has been a long article.
This topic interests me because it has been the single most mind-boggling item for me to deal with since moving back to the U.S. I can’t believe how complex the system is here as well as how expensive it is.
It is really an area that needs a lot of help.
I know some of these mergers as well as Amazon’s foray into the larger picture of U.S. Health Insurance are still hypothetical. However, they are important to monitor for the future of healthcare for people living in the U.S.
In addition to these events from the large Health Insurance incumbents and tech players, I also wouldn’t discount some of the work that Oscar are doing, as well as AXA, which has recently entered an agreement with Oscar and also acquired Maestro Health.
Now that I have looked at the breakdown of spending a bit more, I do believe the companies spearheading these large mergers are aiming to provide their customers with preventative measures, ‘offline’ one-stop shops (clinic plus pharmacies) and online facilities (teleconsulting and pharmacy refill/delivery).
This will ultimately help them with getting a bigger piece of the $2.8 trillion.
Let’s hope all these efforts also help to reduce that actual dollar amount from a consumer spend perspective.
Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.
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