Can Amazon, JPMorgan Chase and Berkshire Hathaway’s new venture really disrupt the US healthcare industry?
If any Jeff, Warren or Jamie announced they were launching a new start-up to disrupt the US healthcare system most investors – Warren Buffett included – would most likely yawn and say “we’ve heard that before”.
However, the fact that in this case the Jeff, Warren and Jamie happen to be Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffett and JPMorgan Chase’s Jamie Dimon has made investors – and many American healthcare users for that matter – sit up and take notice.
The three business giants say they are setting up a new company aimed at cutting the cost of healthcare for their employees. The new venture will focus on technology solutions to provide the companies’ combined one million staff and their families with “high-quality and transparent healthcare at a reasonable cost”.
In a joint statement, Bezos, Buffett and Dimon describe tackling the “enormous challenges” of US healthcare as “among the great issues facing society today”, while Berkshire Hathaway chairman and CEO Warren Buffett colourfully dubs the ballooning cost of healthcare “a hungry tapeworm on the American economy”.
The venture with no name and no strategy
The new firm, which will be “free from profit-making constraints” will “check the rise in health costs while concurrently enhancing patient satisfaction and outcomes”, says Buffett, but it’s currently unclear exactly how it will achieve this. Bezos, Dimon and the Sage of Omaha, as Buffett is nicknamed, freely admit the company is in its infancy.
In fact, the not-even start-up – currently in its “early planning stages” and still being formed, according to the release, has no CEO, no headquarters and, as yet, not even a name. These will, they say, be “communicated in due course”.
The three billionaires also admit that, as yet, they don’t necessarily have a strategy either. “Our group does not come to this problem with answers,” Buffett acknowledges.
Bezos adds: “The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty.”
But they hope that by combining “talented experts, a beginner’s mind, and a long-term orientation” – and, admittedly, as Dimon points out, their “extraordinary resources”, they will come up with a solution.
The growing cost of US healthcare
At face value, this doesn’t sound terribly promising. However, what has investors – and Americans – excited is what JPMorgan Chase CEO Jamie Dimon had to say: “Our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans,” he said.
This explains why US healthcare stocks slumped following the announcement, with shares in US pharmacy-benefit manager Express Scripts Holdings falling 11% and health insurer Anthem Inc dipping 6.5%.
US healthcare costs are growing rapidly, hitting $3.2 trillion in 2015 – 17.8% of US Gross Domestic Product. Back in 1960, at $27.2bn, healthcare accounted for just 5% of US GDP.
Many industry watchers have been expecting the likes of Amazon to enter the marketplace and harness its technology to disrupt it but doing so is a tall order.
Trump’s attempts to dismantle Obamacare
Under the Affordable Care Act, known as ‘Obamacare’, all US citizens are required to have health insurance. Supporters of the legislation say that the reforms have meant 21m more Americans now have access to affordable healthcare.
Critics argue that premiums have become too expensive for middle income consumers and that many Americans are forced to pay for comprehensive benefits they don’t need, such as those in their 50s and 60s paying for maternity cover.
Average family premiums for workers increased to $18,764 in 2017, according to the Kaiser Family Foundation – a 19% increase since 2012. What’s more, employees are paying a larger share of the costs – now covering 30% of the premium themselves.
While vowing to dismantle Obamacare, which it claims has led to double digit insurance premium increases in 31 states, President Trump’s administration has so far largely failed to pass new legislation – the American Healthcare Act – to form a new healthcare system, with the bill stalling in the Senate.
Buffett, meanwhile, has previously voiced his support for a single insurer solution.
Spiralling drug costs
Meanwhile, the rising price of lifesaving drugs can put many of them out of reach for poorer US citizens, with diabetes patients, for example, becoming ill and even dying because they can’t afford insulin, which tripled in cost between 2002 and 2013.
“The high cost of pharmaceuticals is another factor driving up costs,” says Dr Linda Girgis, MD, FAAFP, a family physician based in New Jersey. “Pharmaceutical companies determine these costs. Something needs to be done to rein in these prices and perhaps large corporations such as these have more negotiating power.”
“Many factors drive prices up,” writes US endocrinologist David M. Tridgell in the Washington Post. “Half a dozen companies may be involved with a drug before it reaches the patient, and each may mark up the cost.
“Unlike in many countries, there are no government-set limits on what companies can charge. These include manufacturers, wholesalers, pharmacies and pharmacy benefit managers (PBMs), which serve as the middlemen between insurers and drug-makers.
“PBMs negotiate which drugs are on an insurance company’s formulary; they can receive a “rebate” from pharmaceutical companies when drugs make it to formularies. These “rebates” result in inflated list prices that the insurer never pays.”
What could Amazon bring to the table?
Although the retailer has given little hint as to the direction the new venture will go in, healthcare watchers have been speculating as to how Amazon’s technology could disrupt the marketplace.
Solutions suggested by those in the industry include everything from health-related mobile apps to the companies using their combined muscle to secure discounts for medical tests.
Erik Gordon, professor at the University of Michigan’s Ross School of Business, thinks the new venture could see the creation of a mobile app that makes the hassle of booking doctors’ appointments as easy as reserving a restaurant table using your phone.
“I think they will bring the customer-facing, patient-facing thing into your smartphone,” he told the New York Times.
Cutting back on waste
Meanwhile, Dr Linda Girgis believes Amazon’s expertise in cost control could help reduce wastage in the industry.
“In order to cut costs, this company needs to first see where waste is being paid out and eliminate it,” she says.
“For example, I recently came across a poll that it costs more to deny necessary medical tests than to actually do them. If we eliminate much of this prior authorization obstacle, I believe cost would come down and the burden of treating patients [could be] eased.
“Doctors truly want to only do things in the best interest of our patients and not run helter-skelter ordering random tests.
“Companies such as Amazon are experienced in cost control, something that is lacking among our current insurance companies who are more concerned with maximizing profits.
“Such a company should be able to offer their services to a much higher volume of patients thereby allowing the reduction in premium prices and more money available to cover needed services.”
‘Sabre-rattling’ at a multi-trillion industry
However, some experts are sceptical that the new venture will successful shake-up what is a multi-trillion dollar industry full of vested interests. The likes of Walmart and Caterpillar have tried and become frustrated.
“[Big companies] have all got problems with their healthcare insurance schemes,” says Hedley Rees, managing consultant at Pharmaflow and author of Find it, File it, Flog it.
“In January, Intermountain Healthcare said they would make their own generics. That was the first sign that people are trying to fight back, but it’s all still sabre rattling.
“But if you look at the top 10 pharma companies, they have a combined market capitalisation of $1.8trn. Johnson & Johnson is top at just under $400bn.
“Amazon’s market cap is $673bn but they’re a retailer. They’ve got no understanding of the regulatory implications [of healthcare], so the most they can do to disrupt is to get into the distribution of pharmaceuticals.
“Again, 90% of distribution of pharmaceuticals in the US is controlled by three companies; Cardinal Health, AmerisourceBergen and McKesson, and they’re also horizontally and vertically integrated. So I see [Amazon, JPMorgan and Berkshire Hathaway’s position] as a negotiating stance only.”
Bezo, Dimon and Buffett face an uphill struggle, says Rees
Rees believes the fact information about the new venture is vague is telling. “The details are sketchy because they don’t know how to go about it,” he says. “At the bottom of it all are US patent laws [which make it difficult to reduce the cost of prescription drugs].”
He cites the example of Novartis’ new cancer- treating gene therapy drug Kymriah which has been criticised because it costs $475,000 a treatment. “They didn’t even create any IP – the University of Pennsylvania did all the research,” he says.
“All that sort of advanced therapy work big pharma are starting to buy their way into, but they’re only [approved for use in] very rare cancers so they have to charge these high prices. People say the blockbuster drug days have gone but pharma companies are still chasing the blockbusters.
“Unless we change patent laws so companies have to provide more evidence that a drug works before getting a patent [nothing will change]. FDA [US Food and Drug Administration] has been pushing for this for years [but getting nowhere].”
And big pharma are not the only players who have a vested interest in maintaining the status quo, says Rees.
“And, pharmacy benefit managers, equally, they’re creaming off profits being intermediaries between the pharma companies and insurance companies, so there’s inertia against change that is huge,” he says.
“To say Amazon etc. are going to get inside it [is nonsense].”
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