Amazon, JPM, and Berkshire Hathaway:
Why MoneyBall Medicine can be the reason they will succeed
In late January, the healthcare and tech industries were rocketed by an announcement that Amazon, JP Morgan Chase, and Berkshire Hathaway were joining forces to take on healthcare. Jeff Bezos, Jamie Dimon, and Warren Buffet aren’t the first industry leaders to tackle healthcare’s rising costs, but their combined business acumen and unique market positions make this alliance potentially different. No final plans for what the trio will specifically do have been published, other than a vague description of using technology for “simplified, high-quality and transparent healthcare” for their employees (Humer, 2018). The announcement has set industry pundits guessing as to how the new partnership might disrupt an industry beset by high costs, inefficiencies, and tight regulation, while traditional healthcare companies, such as insurers, drugstores, and pharmacy benefits managers, have been battered in the financial markets as a result. But this alliance has the potential to succeed where others have failed in the past—if they focus on what they (and their companies) know how to do best.
Regulation
One of the biggest barriers in the healthcare industry is the amount of regulation. Pharmaceuticals, medical devices, insurance plans, and some data are all tightly regulated to protect patients. But these myriad regulations can make it difficult for new, non-healthcare specific players to enter the industry and is the cause of substantial frustration. This is where the experiences of JP Morgan Chase will be of considerable value.
Banking is a similarly tightly-regulated industry. Yet, for all the challenges, banks have learned how to navigate the complex rules, even when they differ significantly globally, and we have seen the banking industry transformed by technology and data in the past few decades. Rarely do consumers have to stand in line at a bank to deposit a paycheck, check their balance, or even apply for loans. Online banking and access to accounts through ATMs is nearly ubiquitous and interoperability is essential to perform business. Security is of paramount concern and the banking industry has taken the lead on using blockchain for this purpose.
Understanding how the banking industry navigated regulation while embracing the transformative nature of new technology and data analytics will be an invaluable tool for the new healthcare company. Insurance is another industry that has long lived under strict regulations. Berkshire Hathaway counts several insurance companies as operating subsidiaries. Drawing on the knowledge of executives at companies such as Applied Underwriters, Medical Protective, and National Indemnity Company could give the new healthcare company an advantage as it plans how to navigate regulatory hurdles.
Consumer Experience
A recent survey asked 1,000 Amazon consumers if they were open to the idea of an Amazon entering a variety of markets, from health insurance to banking and lending (Brown, 2018). More than 1/3 of respondents indicated they were open to the idea of an Amazon health insurance plan and more than 40% of Amazon Prime members answered similarly. Should the new healthcare company choose to compete with pharmacies on prescription medications, more than half of the survey respondents affirmed they would trust Amazon in that capacity (Brown, 2018). These results are similar to an Aflac survey of 1,900 adults about the health benefits enrollment process, where half of respondents indicated they would prefer an Amazon-like experience for the task (Sarasohn-Kahn, 2016). For a company that has utterly transformed the way consumers purchase everything from books to clothing to home goods, this trust in the company is indicative of both an overall positive user experience. In fact, when respondents were asked specifically if they trusted Amazon to always have their best interests in mind, more than 80% answered “somewhat” or “yes, very much so” (Brown, 2018). Amazon has successfully developed a method for easy price and feature comparisons, driven prices down for consumers, and created a logistics system that allows for quick, efficient delivery of products. These are essential skills needed to respond to the evolving needs and wants of healthcare consumers, and Amazon’s background developing the optimal consumer experience will undoubtedly be particularly useful for the new venture.
Business acumen
Warren Buffett’s management of Berkshire Hathaway has led the conglomerate to nearly double the growth of the S&P 500 between 1965 and 2017 and an annual compounded rate of 19.1% (Berkshire Hathaway, 2018). Buffett’s business acumen has been well-documented throughout the years as he diversified Berkshire Hathaway from a textiles-oriented business to one with extensive insurance and transportation holdings such as GEICO and acquisitions in the retail and manufacturing sectors, resulting in the formation of the 3rdlargest publicly-held company in the world (Forbes, 2018). This diversity has helped to insulate Berkshire Hathaway somewhat during the 2008 recession and during the tech bubble crash from 2000-2002 (Berkshire Hathaway, 2018). But Buffett has demonstrated that he’s not adverse to technology, with significant financial interests in companies like Apple and IBM, which have also begun to move into the healthcare realm. In sharp contrast to the speed at which Amazon has transformed the book industry (among others), Buffett’s steady, fairly conservative approach to investing and acquiring companies may be particularly valuable for the new company as it seeks to separate the hype from the capabilities in healthcare technology.
Technology
The three companies have seen technology transform their industries over the past several decades. Amazon, in particular, is a leading provider of cloud technology, which encompasses Software as a Service (Saas), Platform as a Service (PaaS), and Infrastructure as a Service (Iaas). As clinical healthcare and research, particularly for genomics, increasingly relies on Big Data and complex data analytics, Amazon’s expertise in cloud computing could come in handy. Amazon also has the tools (and data) to predict what and when consumers will buy products. This isn’t really all that different from what health systems are looking to do for their patient populations: identify patients who will utilize specific resources and determine a more efficient and less costly mechanism for them to do that. While the three have been criticized for jumping into healthcare without any previous experience in the industry(Langreth, 2018, Sanger-Katz, 2018, Wingfield, 2018), their technological prowess could level the playing field.
MoneyBall Medicine
Since the announcement in late January, dozens of articles have been written about the joint venture and its potential impact on the greater healthcare industry. Though the new company will focus its attention on the companies’ 1 million-plus employees, depending on what it does, there could be widespread consequences for the industry at large (Wingfield, 2018). Little has been divulged about how the new company will approach healthcare costs, other than the use of technology or consumer-facing digital health and wellness tools (Eizikowitz, 2018, Satara, 2018). But this is how healthcare is being transformed: MoneyBall Medicine is taking ideas like leveraging data from a variety of sources to glean new insights, using novel technologies like blockchain and artificial intelligence to make health IT systems more secure, patient care more accurate, and health system processes more efficient and streamlined (Glorikian, 2017, Morse, 2018).
Health Insurance Plans
Amazon, JP Morgan Chase, and Berkshire Hathaway are self-insured employers, meaning they utilize health insurers as benefits managers for their employees (Humer, 2018). ‘“So I tell people, JP Morgan Chase already buys a $1.5 billion of medical, and we self-insure,” Dimon said. “Think of this, we’re already the insurance company, we’re already making these decisions, and we simply want do a better job.”’ (Eizikowitz, 2018). Though the announcement sent insurers’ stock prices dropping, few believe that the trio are looking to eliminate health insurers from the equation entirely (Humer, 2018, Kacik, 2018). Despite the threat that the new company could contract directly with hospitals, providers, and drug manufacturers, their combined employee population is a tiny fraction of the overall number of covered lives in the US and payer margins are already small, leaving little room for improvement (Livingston, 2018). Additionally, initial reports confirm the new venture is not looking to replace existing insurers (Wingfield, 2018). Instead, Cigna believes that the new company presents an opportunity for insurers and benefits managers that have prioritized value-based reimbursement schemes (Livingston, 2018, Morse, 2018). Value-based reimbursement goes beyond simply identifying the least expensive device, clinical procedure, or treatment for a patient to identifying (and paying for) the one that yields the best patient outcomes at a reasonable cost (Glorikian, 2017). Companies, like Cigna, that have begun to develop value-based reimbursement programs could find themselves in a position to work with the new company to identify areas where healthcare costs could be reined in.
Prescription Drugs/OTC Delivery
In August, Amazon launched a private-label brand of over-the-counter health and beauty aids (Helfand, 2018). Brick-and-mortar drugstores, such as CVS and Walgreens, have been steadily losing ground to online merchants. Amazon’s entry into the market for these products complements its 2014 deal with Cardinal Health for medical supplies (Johnson, 2017, LaVito, 2018). Some have even posited that Amazon could open drugstores inside its newly-acquired Whole Foods stores (Ramsey, 2017). But a bigger impact might be if the Amazon-JPM-BH company creates its own pharmacy benefits management operation that negotiates directly with drug manufacturers with complete transparency for the 1 million+ employees of the firms to bring down costs based on the value of the drugs—and then offers that service to other self-insured employers (Ramsey, 2018).
For now, the brick-and-mortar stores can offer something that the new company cannot: the convenience of picking up OTC and prescription treatments and walk-in clinics that offer a variety of services such as vaccinations, physicals, and urgent care treatment (Farr, 2018). The new company could take the lead from Apple’s recent announcement that it was building health clinics for its employees (Farr, 2018)and do likewise. But for now, given Amazon’s track record disrupting the publishing industry, it’s not surprising drugstores, pharmacy benefits managers, and drug distributors are concerned the new enterprise will disrupt their industry (Humer, 2018).
Is the Industry Ready for a New Model?
As noted previously, the Amazon-JPM-BH announcement was short on details and met with both optimism and significant skepticism that the trio could produce meaningful change within the industry (Farr, 2018, Langreth, 2018, Morse, 2018, Sanger-Katz, 2018, Thompson, 2018). Other employers, similarly encumbered by employees’ healthcare costs, have sought to cut out the middleman and negotiate directly with doctors and hospitals (Farr, 2018). And self-insured employers have banded together in the past to try to find ways to drive healthcare costs lower, through projects like the Health Transformation Alliance and others (Health Transformation Alliance, 2018, Langreth, 2018). Largely, these endeavors have been only slightly or moderately successful and haven’t driven an industry-wide transformation.
But the pairing of Amazon with JPM and BH may signal a change is on the horizon. The financial and commercial might of the three companies alone are a key difference compared to earlier approaches. So is the timing. Where previous attempts were made to move the needle, the necessary technology was largely in its nascent stages and there was little consumer momentum to sustain the push. Today’s consumers are more technologically savvy than ever, with more than 75% of consumers owning a smartphone today (Pew Research Center, 2018). Health and wellness apps are becoming more popular as consumers look to improve their health, while fitness tracker adoption has similarly increased (Krebs and Duncan, 2015). As the future of healthcare will rely increasingly on digital tools and analytics, there is plenty of room for new ways to do nearly everything in healthcare, from the consumer perspective to the health system perspective (Glorikian, 2017). Consequently, there is substantial interest in seeing how the new company will use technology and data to its advantage in this highly regulated and competitive landscape.
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