The Bezos-Buffet-Dimon trio are targeting healthcare’s giants to eliminate waste, reduce costs and improve quality.
Amazon’s announced intention to form a healthcare alliance together with investment wizard Warren Buffett and JP Morgan head, Jamie Dimon, has roiled healthcare stocks and shaken industry incumbents. This article explains how an Amazon entry could reduce costs, improve quality, and eliminate wasteful spending for patients, providers, and payers. Meanwhile, it could also mean new entrants, new services, new business models and new investment opportunities.
Healthcare spending is a tapeworm on the economic system – Warren Buffett
On January 30, 2018, Amazon, Berkshire Hathaway, and JPMorgan Chase & Co. announced an alliance “to address healthcare for their US employees, with the aim of improving employee satisfaction and reducing costs.”1 The Amazon Healthcare Cooperative (or AHC, as we term it) will pursue these goals through an independent company with a focus on technology solutions that will provide “high-quality and transparent healthcare at a reasonable cost.”2 At 18% of GDP, US healthcare costs increases are already unsustainable (see insert Uncontrolled Growth).3 Health insurance premiums for individuals and families paid by corporate-employers have outpaced inflation every year since 1999 and continue to rise.
The AHC is excitingly unique in that it is composed of outsiders daring to take on a monolithic industry. Bezos, undaunted but realistic, noted, “success is going to require talented experts, a beginner's mind, and a long-term orientation." While the members of the AHC trio are second to none in the world of business and investments, they are inexperienced newcomers in healthcare. Gawande fills this gap bringing an insider’s knowledge and a skeptic’s keen eye towards a complex and convoluted healthcare ecosystem.
The biggest complaint people have about healthcare is that no one ever takes responsibility for the total experience of care, for the costs, and for the results. – Dr. Atul Gawande
Gawande is a sharp critic of medicine’s own chronic health issues including over-diagnosis, lack of transparency, perverse incentives for incumbents and un-coordinated care. He is also clearly focused on the total patient (read customer”) experience—a concept with striking parallels to consumer goods giant, Amazon. Moreover, his joint venture’s focus shows he understands that data, technology, scalability, and streamlining operations will be key in any attempt to transformation healthcare. These are all areas where Amazon (as well as cooperative co-members) possess “warehouses” of experience and where they continue to explore and invest. Recent revelations indicate that Amazon has established a stealth lab, called “1492”, focusing on healthcare technology.4 Not much is known about the products or services being created, however, speculations include data-mining tools for electronic health records, telemedicine technologies and health apps. The company has also received pharmacy licenses in more than a dozen states; and with its acquisition of Whole Foods, has a large footprint in not only retail but also the healthy nutrition market where baby boomers and millennials converge.
Even before strategy announcements and business plans, the mere creation of the “AHC” has created shockwaves in markets and sent many healthcare stocks lower. More activity and market drama will surely follow (See Figure 1).
Healthcare delivery differs significantly from other industries, like finance and retail, in ways that have limited the speed and scale of technology deployments. Still, these differences don’t justify the lack of innovation and adaption in the sector. Uptake of new technologies and applications is notoriously slow even in areas where there is clear benefit. A close look at payment/profit structures and entrenched interests of incumbents reveals there is little incentive to reduce costs. A disruptive new entrant with the power and means of the AHC could tear down existing structures, uproot entrenched relationships, and eliminate system excess.
A disruptive new entrant with the power and means of the AHC could tear down existing structures, uproot entrenched relationships, and eliminate system excess.
Amazon, Berkshire, and JPMorgan each bring unique qualifications and experiences that could allow them to improve the health care industry in disruptive ways. Amazon’s e-commerce capabilities include personalized content, price transparency, product quality reviews, supply chain & logistics management, technological innovation, and stellar customer satisfaction.6
For its part, Berkshire has a long and successful history in the insurance industry and brings risk assessment, claims processing, product marketing, and direct consumer contact through its holding companies—Berkshire Hathaway Reinsurance, General Re, and GEICO.7 JPMorgan provides expertise in credit and financing solutions which can be extended to the AHC, its partners, and its customers. In addition, it is a leader in managing payments and transactions of all shapes and sizes (from the local barber shop to large global enterprises) with volumes exceeding a trillion annually. With this know-how, JP Morgan could re-shape health industry payment structures.8
Armed with these complementary skill sets, the AHC can press for industry changes in health insurance, pharmacy benefits, distribution agreements, pricing transparency, and quality ratings for specific treatments and providers. We envision a database or e-commerce platform for a range of health products and services, similar to Amazon’s current service offering.
We envision a database or e-commerce platform for a range of health products and services…like TripAdvisor, the AHC could become the standard in healthcare advice…a one-stop shop
Like travel website, TripAdvisor, the AHC could become the standard in healthcare advice, a one-stop shop on where to go, what to do, who to see, who to avoid, and what it costs across all aspects of care. Does your anti-anxiety medication have severe side-effects? AHC platform reviewers found physical exercise to be a more effective solution. Did the hospital recommend a knee replacement? Doctors in one region have found better and cheaper results with physical therapy. In short, an AHC platform will keep patients (and payors) better informed and more in control of their healthcare costs.
In the digital age, this is precisely the type of service consumers have come to expect: low-cost, convenient, user-friendly, and fast— sometimes even at the expense of quality and privacy (see section entitled, Don’t discount data privacy).9
The high-calorie, sugar-coated, fat-laden dietary habits of many Americans are leading millions into premature illness and death while also eating through billions of healthcare dollars per year. Chronic diseases, such as hypertension (high blood pressure), heart disease, cancer, and diabetes are responsible for 7 of every 10 deaths in the US each year and account for 75% of the nation’s health spending.10
Studies prove, healthy living (e.g. eating right, exercising regularly, minimizing alcohol, and abstaining from tobacco) is our best defense against both the onslaught of chronic disease and escalating healthcare costs. The AHC could use data and in-house synergies (like its Whole Foods unit) to propose specific meals, exercise options and/or over-the-counter or homeopathic medications that could help patients prevent future health issues as well as more-effectively manage current ones. The AHC would also have the power to make healthy lifestyle options easier to adopt through consumer-friendly systems and technologies. A further step would be algorithms that could identify and assess purchase patterns and health information to prevent sicknesses and help patients get and stay well.
Preventing illness is just one part of the solution. Real and enduring benefits will begin when health plan premiums fall which will require a total system overhaul. As part of a healthcare overhaul strategy, the AHC will need to tackle the issue of extreme outlier cases where long-term and expensive therapeutic care are required. This is important because of the dramatic growth in aging populations and chronic disease. It seems that Bezos understands this, if Amazon’s recent purchase of PillPack is any indication (See insert PillPack).
The AHC would also have the power to make healthy lifestyle options easier to adopt through consumer-friendly systems and technologies.Over the long term, the company could reduce consumption of expensive drugs, devices, procedures, and unnecessary hospital stays. This doesn’t make much business sense if you are in the business of building hospitals, selling supplies or developing pharmaceuticals. But if you are also a new type of insurance company that wants to take market share from incumbents by reducing unnecessary utilization, lowering expenditures, reducing insurance premiums, and improving care quality and coordination, it should be at the core of your plan.
B2B to B2C to B2P—a complex mix of relations to master
Healthcare is a complex web of interconnected yet fragmented segments. A look across the supply chain reveals that individual sub-segments cannot be disrupted in isolation. Any sort of broad-scale transformation will need the cooperation of both ends of the B2B environment—that is the demand side (i.e. the hospitals, clinics, ambulatory care facilities) and the suppliers (i.e. medical devices, diagnostic equipment, pharmaceuticals). But as long as healthcare remains a fee-for-service business, the accompanying incentive structures make it difficult for current system players to overcome existing relationships and change the status quo.
Given its outsider status which shields it from profit-protecting motives and its highly successful formula of direct B2B contracting with end manufacturers, we strongly believe the AHC has the potential to streamline the current healthcare supply chain. What’s more, favorable forces spanning politics, technologies, and consumers trends are providing tailwinds that are increasing the momentum and lowering barriers for outsiders to inject value for customers (employers and private payers) and patients (see insert Favorable Tailwinds).
The AHC has the ability to master B2B and B2C relationships but in order to create and expand a new healthcare order focused on large patient pools and scaled platforms, it will need to master the B2P (business to populations) value chain. Providing healthcare is more complex than selling toothpaste. A single patient will have multiple touchpoints and require intense interaction across multiple players in the system. A seamless and satisfactory customer experience will require the AHC to collaborate with other healthcare players.
Success is going to require talented experts, a beginner's mind, and a long-term orientation – Jeff Bezos
Moreover, the AHC should not abandon the existing infrastructure but rather find ways to steer patients into the right place (clinic), at the right time (for regular check-ups or acute care episodes), and for the right reason (appropriate treatment). Addressing these three elements alone could drastically erase the 20-30% ($ US 500-800 billion) of waste estimated in US healthcare annually.11,12 That’s a lot of revenue up for grabs to the players who can create the right formula.
Despite tech-heavy visions of low-cost, high quality, and convenient healthcare with a swipe of the finger, obstacles and uncertainties are still very real. One contentious issue looming in Europe and the US are concerns over data privacy. Ink was still fresh on the pages when experts raised questions over the how the newly announced AHC coalition would handle data privacy.13 “What happens when a company that has access to our weekly shopping lists, eating habits and in-home Alexa-based assistant also becomes involved in our medical care?”14
What happens when a company that has access to our weekly shopping lists, eating habits and in-home Alexa-based assistant also becomes involved in our medical care?
Will AHC employees and later broad swaths of the US insured population blindly accept access to their health records and data? This obstacle is too easily dismissed by advocates who think rapid technological deployment is the cure for all that ails healthcare. But, as recent events surrounding Facebook and its data usage policies prove, it’s a major enterprise risk.
Ultimately, we believe that the benefits that the AHC will bring to consumers will outweigh data privacy concerns. Younger generations have grown up with tech’s intrusive dominance and so appear to be comfortable giving away their private data in exchanged for valued services. Furthermore, gone are the days of low premiums and overly generous care. Higher deductibles, co-payments and out-of-pocket expenses seem to be an inevitable part of any future health plan. Cost-conscious younger generations may be more willing to surrender data in return for more control over healthcare-related expenses, more transparency, more options and better outcomes. Who wouldn’t jump at the opportunity to use a platform whose profit model is built around improving their health, well-being and personal finances?
We believe the benefits that the AHC will bring to consumers will outweigh the data privacy concerns.
The healthcare sector continues to grow and produce profits but at the cost of the wider economy and even patient health. Unfortunately, the current path to profits is increasingly recognized, by insiders and outsiders alike, as unsustainable. The giants of healthcare are aware of current and distant threats to their business and are taking measures to increase their value proposition to patients and payors. Incumbents are beginning to show a willingness to collaborate, innovate, integrate, diversify and invest in new technologies that open up new possibilities for large-scale care. But change has been slow.
Meanwhile the giants of technology, financing and consumer goods are using their collective muscles to push things faster and further than ever before with the potential to break the powerful links of the healthcare supply chain. In addition, demographic trends at both ends of the consumer spectrum (from aging populations managing chronic diseases to tech-savvy millennials managing out-of-pocket expenses) should favor the increased control, transparency, convenience, coordination and affordability offered by Amazon-style health platform exchanges. The clash and ensuing fall-out promises to reward investors with opportunities particularly in the areas of healthy living and preventative care as well as integrated service platforms and technology solutions.
3 World Bank Health Expenditure Data, 2014, Total % of GDP http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS
4 Huron Consulting Group (2018). How Amazon Could Revolutionize Healthcare. Retrieved from: https://www.huronconsultinggroup.com/resources/healthcare/amazon-revolutionize-healthcare
8 Company website as of Dec 2016, https://www.jpmorgan.com/country/CH/en/detail/1320554577735, https://media.chase.com/content/pr/jpmc-retains-lead-as-number-one-in-merchant-processing-volume
9 Cognizant (2017) Rethinking Health Plan Business Models for the Emerging On-Demand Digital Economy.
11 How the US can reduce waste in healthcare spending,Harvard Business Review, October 2015
12 A Prescription to reduce waste in healthcare spending, Health Inc., NPR, December 2017
16 McKinsey Healthcare Report, Why the evolving healthcare services and technology market matters, May 2018
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