River Runs Through It

The Amazon Health-Care Threat Has Arrived

If the Berkshire/JPMorgan venture is as ambitious as it seems, incumbents are in trouble.
Photographer: Alex Wong
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The great and oft-heralded Amazon.com Inc. foray into health care is here, and it's not what we expected.

The company isn't diving headlong into drug distribution or becoming a pharmacy benefit manager (PBM). Along with JPMorgan Chase & Co. and Berkshire Hathaway Inc., it announced a more interesting idea Tuesday -- a new company aimed at lowering the cost of employee health coverage.

Though no one sector will face the full wrath of Bezos, this joint venture is a potential competitive threat to all of health care's many middlemen. 

Bad News, Guys

The vague but potentially dreadful news of an Amazon/Berkshire Hathaway/JPMorgan health care venture sank managed care and PBM stocks on Tuesday

Source: Bloomberg

This isn't Corporate America's first stab at controlling ballooning health-care costs. Caterpillar Inc. runs its own PBM for employees. Forty plus U.S. companies are part of the Health Transformation Alliance, founded in 2016 to "fix our broken health care system" by pooling data and uniting to wrest better terms from PBMs, among other things. 

But Amazon, Berkshire and JPMorgan seem to have bigger ambitions than just negotiating prices with service providers. You don't need to create a whole new company or devote significant resources to do that. 

A key line in the detail-light release announcing the new company is that it will be "free from profit-making incentives." That looks like a shot at PBMs and health insurers, who try to lower costs but also maximize profit for stakeholders, resulting in a perverse and very expensive system. But it could also be aimed at health-care providers, given their Byzantine pricing and the outsize share of costs they represent. 

The release said the new company's "initial focus" will be on using technology to provide simpler, cheaper, and more transparent health care for employees of the three founding firms. Whatever that means, it seems likely the ultimate aim may be to independently design and run employee health coverage.

With nearly 1.2 million employees and hundreds of billions in combined revenue -- along with the combined expertise of three of the most successful companies in history --  Amazon, Berkshire and JPMorgan have the requisite firepower to do this.

A Bit of Muscle

Amazon, Berkshire, and JPMorgan have scale and financial firepower to put behind their new health-care venture

Source: Bloomberg/fililngs

Amazon employee count as of 9/30/17, Berkshire as of 12/31/16, JPM as of 12/31/17

Insurers and PBMs now must worry about other companies following this blueprint. Even scarier for them is the idea that the Amazon/Berkshire/JPMorgan company will eventually recruit other employers to join it. That's a real possibility, given the venture's ambition and the fact that it's creating a new company rather than a less-formal alliance. In the release, JPMorgan CEO Jamie Dimon teased the idea of potentially helping "all Americans." 

Incumbents aren't necessarily doomed just yet. This venture is in its infancy, and health care is complicated. The U.S. system is opaque, fragmented, and heavily regulated. Technology is often proclaimed as a health-care cost panacea, and rarely delivers. 

The most effective way to reduce health-care costs is to restrict choice. People hate when they are denied their preferred care or medicine by an insurer or PBM. Imagine the reaction (and broader brand consequences) if Amazon is doing the denying. 

There's also the question of negotiating power. The triumvirate may have 1.2 million employees, but UnitedHealth Group Inc. -- to take one example -- provides or manages employee health insurance for nearly 30 million people.

But because the new company isn't initially trying to make a profit and will likely aim to avoid paying high fees to middlemen, it may not have to push provider or drug prices quite as low to get a good result. Think the difference between active and passive management, but for health care.

The pedigree of the companies involved and the current lack of detail may have me reading too much into this effort. But if it's as ambitious as it sounds, then health-care incumbents are in trouble. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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