Perhaps one of the biggest news story last week was Tuesday’s announcement of a new health care venture between JP Morgan Chase, Berkshire Hathaway, and Amazon. The three fortune 500 companies plan to form, “an independent company that is free from profit-making incentives and constraints.” The announcement was made jointly between Amazon’s Jeff Bezos, Berkshire Hathaway’s Warren Buffett, and JP Morgan Chase’s Jamie Dimon. Markets reacted with a noticeable 6.6% drop from United Health and Express Scripts. CVS dropped 5.5% and Aetna dropped 2.5%. The Vanguard Health Care Index Fund ETF dropped a more conservative 1.81% during trading on Tuesday.
Temporary leadership will be under Todd Combs an investment officer of Berkshire Hathaway, Marvelle Sullivan Berchtold a Managing Director of JPMorgan Chase, and Beth Galetti a Senior Vice President at Amazon. The new company will have 1.1 million ready customers from their combined employees. No headquarters has been selected, and no long term management has been announced. According to the New York Times, the announcement was made at a preliminary stage so a team could be hired. Even in these early days, Jamie Dimon believes the deal could eventually benefit all Americans.
Healthcare costs have been ballooning in recent years. According to research from JP Morgan, Americans spend $714 on healthcare that is not covered by their insurance. That’s up 13.5% from 2013 and 3.6% from last year. The average American spends about $4,000 a year on total healthcare related costs. That number is expected to reach $5,000 by 2023. Between now and 2025 prescription drug spending is projected to grow 6.3% annually. Warren Buffett believes, “the ballooning costs of health care acts as a hungry tapeworm on the American economy.”
Robert S. Huckman from, the Harvard Business Review, identifies likely paths for cost reduction and quality improvement naming streamlining routine transactions, passive data capture, and data analytics as likely routes to take. Though these ideas are speculative, Amazon’s experience in data analytics will probably be one of the ventures biggest assets.
A major point of debate is over the capacity for this venture to make deals on drug prices. Speculators say the coalition may have bargaining power on drug prices. Sam Glick who works for the management consulting firm Oliver Wyman believes, “the idea that they could have any sort of negotiation leverage with unit cost is a pretty far stretch.” Bezos is weary of this risk and others but, “hard as it might be, reducing health care’s burden on the economy while improving outcomes for employees and their families would be worth the effort.”
The healthcare industry makes up 18% of U.S. GDP and could see many changes in the upcoming years. Aetna and CVS’s $69 billion merger deal plans to cut costs and simplify healthcare through vertical integration. A similar deal was formed in 2016 when other large companies, notably Coca Cola, American Express, and IBM, came together to try and tackle the same issues. The Health Transformation Alliance has not had tremendous success, but it’s still in relatively early days.
Over 160 million Americans are given some form of coverage through their job. The collective 1.1 million employees in the new venture are a relative drop in the bucket, but this type of partnership may prove to be a model for other companies trying to curtail the steep price for healthcare.