The healthcare industry in the United States could experience a complete overhaul in the next few decades.
It is already experiencing early signs of major shifts like employers exercising pricing power to cut costs; the use of technology (like drones and databases to predict, diagnose and treat illnesses); and the consequent decline of bargaining power of healthcare providers like hospitals and pharmaceutical companies.
All those effects and more are, in part, a result of a healthcare alliance that was announced in January of this year by three corporate giants – Amazon, Berkshire Hathaway and JPMorgan Chase.
What they essentially plan to do is act as customers of healthcare on behalf of their employees.
Whether or not they develop something scalable that can be applied to other companies and the rest of the industry is unclear at this point. However, the fact remains that they will accomplish amazing things for their employees regardless.
Let’s take a look at the purpose of the iconic alliance and explore the potential disruptions to the healthcare industry, specifically in the United States.
Image credit: The New York Times
Warren Buffett (Berkshire Hathaway), Jeff Bezos (Amazon) and Jamie Dimon (JPMorgan Chase) made an announcement in late January that sent shockwaves through the healthcare industry.
They announced that they are coming together to create a company that will cut healthcare costs and improve services for their U.S. employees.
The announcement destabilized the shares of several companies in the healthcare industry. ExpressScripts and Aetna’s stocks dropped 3 percent while CVS and UnitedHealth stocks dropped 4 percent.
Image credit: The New York Times
Shares of Amazon went up after the announcement while Berkshire and J.P. Morgan’s dropped slightly.
The three companies, combined, employ more than 1.1 million people. But the initiative is to be free of profit making incentives.
Their first goal is to look into technology solutions to simplify the system. Although the plans are not laid out in detail yet, or at least available to the public yet, the CEOs are hoping that the size of the project will help bring the required scale and resources to tackle the issue.
How healthcare premiums work
Healthcare premiums are split between employees and employers and they’ve been growing at a much faster rate than wages are. Between 2012 and 2017, employee earnings went up by 12 percent while premiums went up by 19 percent; and between 2007 and 2012, premiums increased two times faster than employee earnings.
“The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” Warren Buffett said in a statement.
“Our group does not come to this problem with answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes.”
J.P. Morgan currently uses Cigna and UnitedHealth Group as health insurance for their employees; and Amazon uses nonprofit Premera Blue Cross and ExpressScripts (as its pharmacy manager).
JP Morgan spent $1.25 billion last year on medical benefits for 300,000 US employees and their families.
Buffett goes on, “medical costs — which are borne to a great extent by business — have gone from 5 percent to 17 percent of the economy since 1960…Our health costs have gone up incredibly and will go up a lot more.”
“Our nation’s healthcare costs are essentially twice as much per person vs. most other developed nations,” Dimon said.
“Our people want transparency, knowledge and control when it comes to managing their healthcare.
The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans.”
Indeed, the U.S. healthcare system is unsustainable in regards to its costs, which has spurred plenty of political debates.
Democrats and Republicans have been more split by healthcare policy than anything else (arguably) in the past decade. Indeed, the Republicans are quite focused on repairing and replacing Obamacare.
The announcement also clears up Amazon’s moves in healthcare over the past year. It wants to disintegrate the traditional healthcare system and experts expect to see a lot of deals and vertical integrations being made in the wake of the announcement.
“Today’s announcement by Amazon, J.P. Morgan & Chase company, and Berkshire Hathaway is clear recognition that the healthcare system needs to continue to create and deliver meaningful value to payors and patients,” Express Scripts said in a statement.
“…We look forward to hearing more about this new initiative and how we can work together to improve health care for everyone.”
The alliance was born out of a need to lower healthcare costs in the U.S. and also as a response to the large trend of consolidation in the industry. So, would the new company the trio plans to set up lower healthcare costs? No one is sure.
Although the trio haven’t spoken on details of the partnership, they said it would be a “long-term effort” and that the independent company would be “free from profit-making incentives and constraints.”
They also said that the initial focus would be on “technology solutions that will provide simplified, high-quality and transparent health care at a reasonable cost.”
The main aim of the partnership also seems to be about lowering the growth rate in healthcare spending; and although the deal may not lower costs, it might just meet its aim to lower the rate of growth in spending.
Perhaps someone in the new company will come up with an innovative idea to make healthcare more cost-effective.
The big test for the trio would be to create a cost-effective model that can be replicated across the entire industry. In doing so, they will likely restructure the healthcare delivery system to make it more efficient.
They will also likely challenge the pricing power of all healthcare key players (hospitals, physicians and pharmaceutical companies).
However, cutting costs in healthcare has a few repercussions.
The healthcare industry employs a lot of people, so reducing excessive healthcare spending could hurt jobs. That may be the reason why it has been so difficult for the system to reform itself.
Perhaps an outside disruptive force like the one the trio is setting up is needed to push the reform sooner rather than later.
However, cutting costs in healthcare may not necessarily lead to rising unemployment.
The U.S. has arguably been using healthcare as a jobs program. Indeed, the healthcare sector has been immune to the recent recessions, including the one of 2008. So if the space is disrupted, a lot of jobs could be lost.
But those jobs could move to the tech industry. So instead of people working at hospitals, they’d be working at Amazon, doing programming or customer care.
Yes, every disruption is painful. However, with healthcare taking up 18 percent of U.S. GDP, disruption is inevitable.
The announcement wouldn’t be turning heads and raising alarms in the healthcare sector were it not for Amazon’s presence in the alliance (they are likely the driving force behind the alliance). Amazon has a strong and healthy history of disrupting markets.
They actually make a living out of it.
So it is expected that they will disrupt the healthcare industry. How? Perhaps with technology.
It could bring in AI and big data to the alliance.
Healthcare will be more technologically focused in the next decade, particularly as a result of the new alliance.
Perhaps drones will deliver prescriptions or AI algorithms will identify disease trends and big databases to help diagnose and treat patients.
Perhaps they (the trio) will augment the technology initiatives which promote information sharing between hospitals and which have greatly reduced healthcare expenditure.
The implications of technology in healthcare are numerous, particularly regarding personal connections in healthcare.
The personal touch in healthcare could fade just like bookstores have faded since the rise of Kindle. Some experts say that healthcare is inevitably headed in that direction.
The healthcare market is also very much focused on providers. The trio may be able to change that. Amazon is very consumer-centric and is slick with supply-chains, so there is the potential of creating a consumer-centric model of healthcare.
It is still unclear what the scope of their partnership will be but if the goal, as they said, is to greatly improve healthcare delivery, then the effort needs to include more than just the employees at those companies.
However, their announcement has already created a few disruptions.
A lot of recent alliances have been formed. CVS, the pharmacy retail chain, is buying insurer Aetna. That merger could be a response to the threat of the trio’s entry into the healthcare industry.
It is, in part, a defensive measure based on the fear that Amazon may enter the pharmacy and the pharmacy management spaces.
Amazon, alone, has so far caused a few disruptions.
In May 2017, CNBC announced that Amazon was looking to enter the pharmacy market. UnitedHealth subsequently bought two primary and urgent care services: DaVita Inc. and Surgical Care Affiliates.
As mentioned earlier, it is it difficult to measure the implications of the partnership on the healthcare industry without a clear idea of what the main objective and scope of the project will be.
In theory, it could lower costs and improve access for their combined 1.1 million employees, but it is not as clear in practice.
It could impact the healthcare industry in several ways. The first impact is that whatever model or arrangement the trio comes up with will spread to the larger market. The second impact is the second-order effects the trio may have on the industry as a whole.
What we do know is the challenges they will likely face on their journey.
The trio will find it challenging to develop an alternative healthcare model for both their employees and the larger market.
Coming up with a model to serve their employees will be a challenge in itself and the success of it will largely depend on how they will cope with the fact that much of healthcare is local; and that they have to be translocal in order to survive.
For example, the Kaiser Health Plan, which was originally a healthcare plan for Kaiser employees was later extended to consumers in California. And that it where it stayed.
It has never been able to go beyond that home base.
Tackling the larger healthcare market will be more of a challenge. They need to figure out how much of the healthcare landscape they want to disrupt and which side to focus on (supplier side or provider side).
They also need to figure out how they will position themselves on each side; and perhaps identify possibilities for systematic integration as well.
A possibility could be for them to disrupt the existing delivery system and bring in primary care clinics, physician groups and hospitals. Pricing power would bend the cost curve, but do the trio have enough power to do that?
The real opportunity could lie in rebuilding the entire system instead of disrupting it
Why? Because a few companies have already tried and failed to “fix” the entire system.
Two years ago, 20 big companies, including American Express, IBM, Verizon and Shell Oil, came together to form a Health Transformation Alliance to improve the way companies purchase healthcare for their employees. And they were not quite successful.
Mercer has several collectives of employers that come together to buy prescription drugs, increasing their purchasing power by coming together as a group.
Those partnerships and collectives have yet to disrupt the healthcare industry.
And even though Amazon will use technology to carry out its mission, it may not be able to make any major gains. Technology alone may not be sufficient to bring about positive changes.
Technology has been tried in the healthcare industry (think electronic medical records) but has not lowered spending growth, even though it has improved quality. So there may not be major gains in delivering drugs to patients better, but there might be gains in improving loyalty to high-value drugs.
The guess is that the trio probably won’t deliver on all the expectations that industry watchers have. They are not taking on the initiative based on evidence (since it has never been done before), but on faith.
And that is what businesses do all the time and some of them succeed at it.
“The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty,” said Amazon CEO Jeff Bezos. “Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort.”
If it turns out that a low cost provider makes insurance more affordable for employers, then the alliance would be quite a disruptive competitor in an industry that hasn’t seen any new players in decades.
The current healthcare system is outdated and is ready to be disrupted. However, it could take some time.
The joint venture doesn’t seem like it will be a new health insurance company or pharmaceutical company or hospital – it seems to be more of a company that will use technology to make healthcare more transparent and affordable. So perhaps it will do just that.
All three companies know how to make profits. Their expertise lies in generating profits in their core operations. If they do lower healthcare costs for employees, that goes towards their bottom line. (Low healthcare costs for employees means lower cost of employment.)
The fact that three of the most iconic CEOs in the world today have come together to focus on real issues that are affecting all Americans, is a very positive thing.
They want to leave a legacy behind as well as spotting a business opportunity. Perhaps that’s all we need to think about for now.