Insurers face an imminent threat from Amazon, but other nontraditional competitors are rushing to shake up the health care industry, as well.

Make no mistake; outside disruptors like Apple, Google and Amazon will have a serious impact on benefit advisors in the near future. Currently, most advisors' revenue models depend on only a few major health insurance carriers for the majority of their commissions. But what happens if these technology giants quickly put some of these carriers out of business? A look at recent business history shows us that this scenario is more likely than you might think.

In 2018, Amazon, Berkshire Hathaway and JPMorgan Chase formed Haven Healthcare, a Boston-based nonprofit with the short-term goal to provide health care/health insurance to the combined 1.2 million employees of the joint-venture's parent companies. But the larger, longer-term goal was to eventually offer other small and mid-sized independent companies health insurance, as well, essentially creating alternatives to traditional health insurance carriers.

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One year later, with what seems like lightning speed, Haven has made significant steps forward. On November 15 of 2019, Haven announced a partnership with Cigna and Aetna to offer health plans to 30,000 JP Morgan workers in the test markets of Arizona and Ohio. As you can imagine, all of the carriers have been watching this threat evolve and are eagerly trying to involve themselves and/or partner with Haven.

Right now, Cigna and Aetna may feel lucky with this new deal, but it's a good bet that they are being set up and will get burned, like so many before who have entered into "partnerships" with an Amazon venture. Before they dive in too deep, Cigna, Aetna and others in the health care space would be well-served to look at what happened to Toys "R" Us or Borders not so long ago.

Where the traps are set

So far, Amazon has been the most vocal partner of the joint venture when it comes to seeking a slice of the $3.5 trillion health care/health insurance market. Since this is its first foray into health care and the company is notoriously secretive about its plans, we need to look at other business segments for clues about the ways in which Amazon enters a new market that they have identified as profitable. While toys and books may seem like a stretch to extrapolate how they will enter health care, these examples illustrate a pattern that could easily be repeated with Cigna, Aetna or elsewhere in the health care space.

The fall of Toys "R" Us and Borders

In 2000, the early years of the internet and online commerce, Amazon and Toys "R" Us struck a record 10-year deal that gave the toy retailer exclusive rights to sell toys, games and baby products on Amazon's website. Toys "R" Us agreed to pay $50 million per year for 10 years for the exclusivity rights, with a few exceptions.

At the time, it was considered a significant victory for Toys "R" Us; however, just four years after striking that deal, Amazon broke the exclusivity portion of the deal and began to allow other retailers to sell toys and baby products on the platform. In 2004, Toys "R" Us sued Amazon and "won" the right to sever the agreement and create its own e-commerce website.

Unfortunately, what Toys "R" Us then realized it had lost too much ground in the fast-moving e-commerce realm, and it was too late to ever really make up the lost time it had given up to Amazon. Amazon, for its own benefit, had used the well-known name of Toys "R" Us to establish itself in the segment that they identified as a target industry. Once the company felt it had established itself, it no longer needed the Toys "R" Us name and moved against them. After years of well-documented financial struggles, Toys "R" Us never really recovered and filed for bankruptcy in 2017, closing all of its brick-and-mortar stores in 2018.

A similar fate befell Borders bookstores. Amazon struck a deal with Borders in 2001, which gave Amazon control of Borders' online book sales. In 2008, Borders abruptly ended the deal with Amazon when it realized that they had relinquished an important part of their online presence with their loyal customers. The bookseller rushed to establish its own e-commerce website after the partnership ended, but again, it was too late. In 2011, Borders filed for bankruptcy and closed all of its bookstores.

These are just two of the countless examples of this type of strategy being deployed by Amazon when they enter a new target market.

Direct-contracting will play a big role

Industry insiders aren't the only ones who believe Haven's long-term strategy is to build and create their own health insurance product and compete with the current set of health insurance carriers. Newsweek, Forster and other credible financial analysts have made similar predictions.

The consensus seems to be that the new strategy being developed by Haven will be based on direct contracts with providers (i.e., hospitals, physician groups, lab networks, etc.) and will leverage the online administrative support that Amazon is developing. It's realistic to think that by combining the Amazon-owned brick and mortar assets (such as Whole Foods Markets), Amazon technology that is already in our households (think Alexa), servers already owned for processing claims (Amazon Web Services), existing supply chain solutions (PillPack, which Amazon purchased in 2018 for almost $1 billion), and other assets that are very far down the development pipeline, this direct-contract approach can and will exclude the need for any health insurer/carrier involvement.

Haven believes the programs it is developing will eliminate what it considers the unnecessary cost and administrative burden of the existing insurance carriers. Thus, providers will be able to run their facilities and business more efficiently, and at a lower cost, and provide better outcomes and experience for patients.

Ultimately, Haven can leverage its partners' independent strengths and has advantages to entice and negotiate directly with providers in ways insurers can't. These advantages range from Amazon Prime memberships for deeper discounts, enhanced cloud services specifically developed for providers, other technologies to make claims administration more streamlined, easier and cheaper, or even lowering the cost of medical malpractice insurance for providers by tapping the Berkshire Hathaway relationship. All of these "extra" perks will help providers lower the cost of doing business and increase providers' profitability.

Haven can then ask providers to offer lower reimbursement rates than the major carriers get. It provides a realistic alternative when you think about the pressures that exist today for providers to lower their costs, coupled with the natural discord that already exists between insurance carrier negotiations of reimbursement rates and the hospital/physicians always believing they need and deserve more.

Largest employers are already doing it themselves

Direct-contracting with providers is not a new concept. It's actually a proven and effective way to lower the cost of health care and insurance for employers. For years, Fortune 100 companies have used their employee group size as clout to negotiate lower reimbursement rates to specific hospitals in exchange for the promise to bring their volume of care to those specific hospitals via plan design and limited or tiered networks.

The more volume, the more favorable the plan designs. And the tighter or more limited the networks, the lower the reimbursements can be. These larger companies are typically in the self-funded environment, governed by ERISA, allowing even more flexibility, and either administer their health care programs themselves or hire an independent third-party administrator to handle it.

It is more difficult to recreate that situation with smaller employers, but Haven has all the pieces needed for small and mid-sized companies to be pulled together in large pools for greater volume-build with large pools.

A faster path to direct contracts with providers

Before the November partnership announcement with Cigna and Aetna, the only thing missing in this storyline was Haven's ability to get it started. Prior to that announcement, we were looking at their path to implement with no employees on their platforms, meaning no proven volume to offer as clout with providers for the direct contracting discussions. Starting there, Haven would have been forced to pay higher reimbursements than the insurance carriers do, putting it in the difficult position of needing to prove they could deliver the volume of customers to the hospitals and other providers without the critical lower reimbursements. It's a big, time- consuming and task with not much hope for success, and could have required five or six years and a lot of capital to gain any traction.

But Haven has now circumvented that slower process by partnering with the viable and known commercial networks of Cigna and Aetna. It's again using the same leverage principles Amazon employed with Toys "R" Us, partnering with a known name to establish a footprint in a market in which they have none, even if it ends up being a temporary arrangement. The move will allow the venture to build volume, measure it quickly and start negotiating directly with the best-quality, lowest-cost providers almost immediately. It will cut years out of the development process.

With this move, it won't take long for Haven to establish independent, direct contracts nationwide with a bunch of different health care providers, at which point it won't need the insurers to be involved at all. It can then cut loose Cigna and Aetna and compete directly against them in an environment in which they now control all the variables.

It's another setup; a trap strategy in a new market. It sounds familiar because it's happened before. Eventually, Haven will offer its health plans to independent employers across the country, and nothing is stopping the local hospitals and big medical centers from signing independent contracts with Haven.

Amazon already does an amazingly good job evaluating data from its billions of transactions and can show Haven the way. Together, they can target those hospital systems that are naturally high-quality and low- cost and partner with them, alleviating the hospitals' financial challenges by, for example, providing a 10 percent or 20 percent discount on products like syringes, bedding and paper goods.

It's also no secret that Amazon (and Haven by proxy) likes to cut out the middleman. All of the functions that an insurance company takes on, which add cost with no extra value, Amazon/Haven can cut out and provide directly. That's where Haven can learn from what Amazon has repeatedly done in other industries. Amazon comes into a new market, finds the value extractors and eliminates them.

So, who's at risk when Amazon comes in?

•  Middlemen that are value extractors and have large profit margins
• Companies that focus on formatting or coordinating information
• Areas where customer service has been an afterthought
• Companies that have relied on opaque pricing as a business model

The majority of this list perfect describes the health insurance carriers' market. Make no mistake, Haven is aiming to take out health insurers, not brokers. But brokers could be collateral damage anyway. If Haven goes to market without brokers, as many believe they will, and is able to have even moderate success or prove that brokers/advisors are not necessary, how long do you think it will be until the carriers, in an effort to compete with Haven, make similar moves to eliminate broker compensation?

Take action

This is all happening faster than we ever guessed. Don't put your head in the sand. Don't ignore this threat. Cigna and Aetna should heed the warning, so history is not repeated in yet another marketplace. But most of all, advisors and brokers should start planning for the new world now. What should benefit advisors do about all this?

Migrate your firm to a fee-for-service model, if you haven't already done so. The traditional producer model is dying, if not already dead. It's better if you diversify your income stream, rather than concentrating your revenue in just three or four carrier commission sources.

Here are the questions you should be asking as a business:

• What is your client acquisition cost?
• What's your minimum rate to take on a client?·
• What percentage of your income stream comes from insurance carriers?

Find ways to truly add value. We may not always be able to outline exactly what that means, but we can certainly outline what it is NOT. It doesn't mean simply bringing spreadsheets to clients or simply running carrier "auctions" every year any longer. You must be able to add value, because you will be competing against technology companies that know how to do it and have proven track records of doing so.

Fully implement cost controls. Don't just talk about them. Build pools with your clients that include modular pieces where you can control all the process and pieces. Scale the best technology cost controls available. Know your numbers. Align with service providers that can help with repeatable workflows and processes for scale. Know your numbers.

Think and act like a technology company because that's who you will soon be competing against. Other advisors won't be your only competition anymore. Learn from the experience of other businesses, but don't become a pirate or a parrot. The important thing is to fully understand and communicate the value that you add for your employer clients. If you do that well in your meetings with clients, then you'll stand a much better chance of surviving the disruptions that Haven and other tech ventures will bring to the marketplace.

Mick Rodgers is the founder of Axial Benefits Group in Boston, focusing on health care.

Read more: 

• Fear, relevance and the future of brokers
• Do you have the skills necessary to survive as a benefits professional?
• 9 companies leading health care disruption in 2019