Moonshot to fix U.S. healthcare
Amazon, Berkshire Hathaway, and JP Morgan are forming a healthcare mega-company
Axios: Amazon, Berkshire Hathaway, JPMorgan form health care mega-company
What do you think of the “healthcare mega-company” that Amazon, Berkshire Hathaway, and JP Morgan are forming?
One of my favorite quotes from Amazon CEO Jeff Bezos is “Your margin is my opportunity”. There is no greater margin opportunity today than our massively inefficient healthcare industry.
The scale of inefficiency in our healthcare industry is truly staggering. Indeed, I believe it is the single-most pressing American economic issue that needs to be addressed:
We spend 17% of our GDP on healthcare compared to 10–12% for other wealthy countries like Germany and Japan.
In our $19 trillion economy, this is equivalent to $1.0 to 1.3 trillion in output that could be allocated to more productive purposes.
I might be able to understand if we were healthier and living longer than our peers. But the opposite is true; despite our massive spending, our health outcomes are significantly lower e.g. average life expectancy 2-5 years lower than other wealthy countries.
The industry is plagued by rent-seeking behavior that prioritizes maintaining an inefficient status quo vs. innovation.
It puts American companies at a disadvantage competing in global markets.
It likely contributes meaningfully to wealth and income inequality in the country.
It is such a large and complex issue that even a fully Democrat-controlled government introducing the most sweeping healthcare reform in modern history could not solve many of its fundamental issues. Moreover, it has been politicized in an increasingly divisive political environment, which makes it even harder (nigh impossible) to solve. With the current Republican-controlled government trying to undo key elements of Obamacare, it feels like we have wasted the last two decades and accomplished nothing here.
So the private sector must be involved in changing this industry alongside regulators. Unfortunately, in the past we may have been too optimistic that leaning on existing players in the healthcare industry would yield real change — as many of them are heavily incentivized to maintain that inefficient status quo. Dragging your feet until the current administration is voted out of power has proven to be a very effective business strategy.
We need to look to true outsiders to have a fighting chance.
Enter Berkshire Hathaway, Amazon and JP Morgan — three large and widely admired companies from outside the healthcare industry that have enough heft to hopefully shake things up and make a real impact.
They represent a healthy cross-section of the American economy from technology, retail and banking to industrial and services businesses from the Heartland in the Berkshire Hathaway portfolio.
The three have a combined employee base of 950,000 of which I estimate 750,000 are based in the United States [1]. At approximately $10,000 per employee [2], this works out to $7.5 billion per year in combined healthcare spend.
This is significant but not enough on its own to make a dent the conventional way (by pooling spending power). There have been other efforts in the past to try to pool healthcare spending to extract price concessions from the industry. They have largely failed.
They need to do more — and this is where looking at the specific core competencies of each is relevant:
Amazon will bring its technology expertise and intense focus on customer experience.
Berkshire Hathaway will bring its insurance expertise and capital.
JP Morgan can leverage its banking relationships with the largest healthcare companies (as well as regulators) and possibly its payments/fintech expertise.
We can sort of figure this out by looking at the biographies of the senior executives tasked to represent each firm:
Beth Galetti — Senior Vice President, Human Resources; direct knowledge administering healthcare and benefits for Amazon’s 340,000 plus global employees.
Todd Combs — One of two portfolio managers working under Warren Buffett; formerly worked in the insurance industry (Progressive).
Marvelle Sullivan Berchtold — Consumer healthcare M&A banker; formerly head of corporate development at Novartis; lawyer.
Given how early things are, one can only speculate on the specific go-to-market strategy for the consortium but I imagine it will include some of the following elements:
The first customers will be employees at each of the consortium members. This scope will be expanded over time.
Technology-centric approach to reduce administrative costs and supply chain inefficiency — e.g. re-designing the drug supply chain; innovation in the use and sharing of health information.
Simplification of the healthcare offering from a customer perspective.
Bringing greater price transparency to the markets.
Rallying other industry leaders to join the consortium.
The “free from profit-making incentives and constraints” [3] aspect of the consortium is also very important here.
$7.5 billion is a mere drop in the bucket of healthcare spend. These three companies will need to rally other industry leaders to join the consortium and increase this spending pool. Explicitly removing the profit-making incentive will make it much easier to rally others to join.
It will also make it easier to influence regulators at the state and national level and gain bi-partisan political support. For this to be successful, the three companies (and future consortium members) will need to work in close coordination with regulators and lawmakers.
But wait, if the consortium is not looking to explicitly make profit, why are these three uber-capitalists spending any time on this? It is really important to understand this — capitalism is not altruistic and one should always be suspicious of capitalists masquerading as altruists.
Not surprisingly and thankfully [4], it is actually still about profit … just indirectly. While the consortium itself is not focused on profit, the individual consortium members are clearly looking to save on operating expenses. There is a lot of margin to go after here.
They are looking to reduce that collective $7.5 billion a year in medical costs — a figure that continues to grow rapidly. If you can shave off one-third of those costs [5], this amounts to $2.5 billion in annual savings. Capitalize this figure at 20x and we are talking about $50 billion in collective market value — plenty of capitalism to go around for even these three mega caps!
And perhaps in the process it will spur true innovation in the healthcare industry — the type of innovation or industry or value chain re-design which moves our economy and society forward instead of merely transferring wealth from one pocket to another. As Jeff Bezos is quoted as saying in the press release, tackling this industry will require, among other things, “a beginner’s mind and a long-term orientation.”
Now I have no way of knowing at this point whether this consortium will ultimately be successful — it is still so early and the journey is inevitably going to be long and arduous. History is littered with the corpses of failed efforts. But if the nation is going to solve this issue, we need to start somewhere. And after multiple failures and false starts over the years, this is about as encouraged as I have felt in a long time.
Notes
[1] I assume 60% of Amazon’s workers are in the U.S., 95% of Berkshire Hathaway’s and 80% of J.P. Morgan’s.
[2] CNBC: Employers to spend about $10,000 on healthcare for each worker
[3] Source: Amazon, Berkshire Hathaway and JPMorgan Chase & Co. to partner on U.S. employee healthcare (official press release)
[4] I am happy that there is profit motivation here. I’d be a lot more skeptical if they came out and said that the consortium was driven by altriusm. But all three — Jamie Dimon, Warren Buffett and Jeff Bezos — were very clear that the key goal is reducing long-term healthcare expenditures at their respective organizations.
[5] Reducing costs by one-third would bring us in line with other developed countries.
This was originally published on Quora in January 2018.