Originally published in Becker’s Hospital Review
By Tony Colarossi
As the American healthcare industry wonders how Amazon, Berkshire Hathaway Inc. and JPMorgan Chase & Co. might reinvent U.S. healthcare, the mission statement of Amazon’s Jeff Bezos should strike fear in its heart — “Your margin is my opportunity.”
Bezos, Berkshire’s Warren Buffett and JPMorgan’s Jamie Dimon say their not-for-profit healthcare entity will use technology to deliver “simplified, high-quality and transparent healthcare” for their more than 500,000 U.S. employees.
If they succeed, however, their venture could utterly disrupt everything from hospitals to pharmacies for all Americans.
The three companies are a potent combination. Amazon has unrivaled distribution and data and is known for its incredible customer service. Its technology has reinvented everything from retailing to logistics and cloud-based web services. JPMorgan is also customer-friendly and expert at using data to improve products. It also brings knowledge of financing and structuring health savings accounts associated with high-deductible health plans. Berkshire, another great communicator and marketer — everyone adores the GEICO Gecko — knows insurance and re-insurance. It could help structure health insurance plans and figure ways to deal with cost outliers. Together, they’ll seek to re-educate American consumers to think about healthcare differently — assessing costs against outcomes, like comparison shopping on Amazon.
Cutting healthcare costs will be their No. 1 priority. Americans spent more than $3.2 trillion in 2015 on healthcare — 17.8 percent of the entire U.S. economy. That spending does not make Americans the healthiest people in the world, however.
While insurance companies have incentives to keep prices high, Bezos once said: “There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.” If Bezos and his new partners can cut costs for their own employees, it’s easy to imagine them offering the same services nationwide, and even globally.
The first big action of the new company might be offering its own high-deductible health plan. Such plans can reduce health costs by involving consumers more in their health decisions, taking costs into account as they make their care decisions. As a greater number of Americans receive their healthcare through their employers, the amount they pay of their healthcare costs has fallen over the past 50 years from about 50% of total costs to roughly 15%. That growing disconnect between the patient and the cost of care mirrors the rising cost of healthcare.
Using the type of data-driven approach to products used by both Amazon and JPMorgan, the new company could push health providers to cut administrative spending, and consolidate locations where specialist services are offered to patients to drive costs lower.
Their overarching goals will be trying to push the cost of commercial healthcare closer to Medicare reimbursement rates. Today, commercial insurance pays about 150% what Medicare reimburses, and the numbers are even more extreme when it comes to hospital stays. A Congressional Budget Office study found that in 2013, the average commercial payment rate for a hospital admission was $21,400, compared to $11,400 for Medicare patients — an 89% difference.
Amazon will try to push commercial prices down to close that gap, perhaps encouraging consumers to use telemedicine solutions and less-expensive healthcare venues, whether that’s ambulatory surgery centers instead of hospitals or urgent care centers instead of emergency rooms.
They will also seek to find ways to cut administrative expenses in the United States — the highest among eight countries in a study published in Health Affairs.
Beyond health insurance, the market for pharmaceuticals appears vulnerable to Amazon’s unmatched direct-to-consumer model. Backed by Amazon’s logistics and distribution, the new company could try to squeeze out pharmaceutical distributors, AmerisourceBergen Corporation, Cardinal Health and McKesson Corporation, as well as brick-and-mortar neighborhood pharmacies. The three big wholesalers have more than $400 million in annual drug distribution revenues, controlling 90% of the market. In perhaps a sign of what’s ahead, Amazon had already received wholesale pharmacy licenses in at least 12 states.
Beyond developing new health insurance products and delivering medicines directly to homes, they can leverage their collective employee base size to squeeze concessions from the whole healthcare value chain. Reducing costs in healthcare can only be done in five ways — paying healthcare providers less for their services, changing use patterns (for example, convincing the population not to take a certain test based on new clinical findings,) eliminating waste and fraud, changing the venue where care is received (such as performing minor surgeries as outpatients,) and encouraging people to live healthier lives.
We can expect the new company to work on all five of those fronts to push prices lower.
Anyone who has followed Buffett — aka the Oracle of Omaha — knows that he would love to cap his storied career as America’s most successful investor by helping lower healthcare costs. At last year’s Berkshire Hathaway annual meeting, he said, “Medical costs are the tapeworm of American economic competitiveness.”
That tapeworm may soon get treated, because unlike other newcomers that have tried to compete in a crowded healthcare field, Amazon, JP Morgan and Berkshire Hathaway have one significant advantage — they already command the trust and respect of the American consumer.
Tony Colarossi leads Plante Moran’s acute healthcare consulting services.