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Unpacking the Amazon, Berkshire and JPMorgan Announcement about their Healthcare Initiative

January 30, 2018

Amazon, Berkshire Hathaway and JPMorgan Chase today announced a partnership to launch an independent healthcare company (“NewCo”) for the benefit of their U.S. employees. Amazon’s entry into healthcare was eagerly awaited because we are desperate for a radical transformation of our healthcare industry, and Amazon has a successful track record in leveraging its core competencies to launch user-friendly and efficient services in adjacent markets

 

NewCo has the potential to be the transformative move in the U.S. healthcare industry, country’s largest. The outlined goal of NewCo is to tackle two biggest problems of the $3.4 trillion industry: attain better patient outcomes and arrest industry’s spiraling size.

 

The announcement provided scant details about NewCo and how it aims to solve the industry’s long-desired but yet elusive above two goals. Except for its stated “initial focus” on “technology solutions that will provide U.S. employees (of the three companies) and their families with simplified, high-quality and transparent healthcare at a reasonable cost.”

 

Below is my attempt to unpack today’s announcement and make some observations:

 

  • America’s uniqueness in the industrialized world for most of its workers receiving their health insurance from their employers is well documented. So is the fact that historically, employers have not taken an active role in leveraging their position with the healthcare industry to either reduce healthcare premiums employers pay or improve the quality of care their employees receive. Apart from the Health Transformation Alliance initiative, that was launched around two years ago and currently has over forty major corporations as its members, today’s announcement is arguably the most important muscle-flexing move by America’s corporations to take matters in their own hands.

  • None of the three founders of NewCo has background in healthcare, which is a complex, five-headed beast that operates under a highly regulated environment. The prospect of new competition from an entity with zero experience in a highly complex and regulated industry should typically not threaten large entrenched industry incumbents. Still, the news rattledstocks of major U.S. healthcare firms. Part of this may be the usual “Amazon effect” — company’s previous announcements to enter new industries has been greeted by selloffs in those industry incumbents’ stocks. But I believe that part of today’s selloff in healthcare stocks is an open acknowledgement that a) there is unnecessary “fat” in the industry (read “incumbents’ profits”), b) that “fat” is under threat, and c) the days of industry’s bloated cost structure may be numbered.

  • I believe the lack of healthcare background for NewCo founders will be an asset for NewCo, instead of being a liability. We need to create a different healthcare system in America, not simply a better one. Having a “beginner’s mind,” as recognized in the release, will be a strength for NewCo.

  • The fact that NewCo will be “free from profit-making incentives and constraints” is very important. This mindset will allow NewCo to put patient’s interest at its core, thus aligning NewCo’s mission with its and industry’s goal of improving patient outcomes.

  • Having said that, the NewCo is expected to add a profit margin when it expands to offer its service beyond founding partners’ employee base to “potentially, all Americans.” Having designed and operationalized the most efficient health system for itself, NewCo’s offering, added with a reasonable profit margin, for outsiders may still result in tremendous overall savings compared to our current situation. Amazon has a track record of successfully running this playbook (e.g., AWS).

  • “Transparency, knowledge and control” in managing our healthcare has thus far proved to be an elusive goal for Americans. NewCo founders employ over 500,000 employees in the U.S. This is a large enough customer base for them to effectively bargain with industry players they will have to partner with (health systems, pharma, and physicians) and perfect an efficient healthcare system that can later on be offered to “potentially, all Americans.”

  • One of the major goals of the healthcare reforms of 2009/2010 was to pave the way for technology to solve industry’s above two big problems. But despite a record venture investment of over $25 billion in the U.S. healthcare sector since 2010, we have not yet seen any defining unicorns emerge to solve these problems. In fact, during this period, the industry size has grown by 30% and the gap in the quality of care in the U.S. compared to other wealthy OECD countries has widened. By focusing on “technology solutions” at the heart of their effort to transform healthcare, the three partners today reinforced that technology will be central to achieving industry’s goals, despite dismal returns from venture investment in the industry since 2010 (more on that later).

 

While several previous attempts have been made to transform healthcare in America, without any success thus far, I am optimistic about NewCo for the following reasons:

 

  • It is being launched by three of the most successful companies in the world, which bring complementary strengths to the table (technology, finance/payment systems and insurance).

  • Amazon’s track record in using technology to create highly efficient and user-friendly services in new industries.

  • The timing may be right. Digital technology — big data & analytics, AI, mobile, IoT, cloud computing, social media — is becoming mainstream. The opportunity to apply the playbook of “digital technology disrupting our media & entertainment over the last two decades” to radically transform healthcare is here.

  • It will learn from many lessons learned from our previous failed attempts.

 

I, and many Americans, will be eagerly waiting to learn more about NewCo’s plans, and, more importantly, witness its execution.

 

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