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Is This the Beginning of the End of Healthcare as We Know It?

By Danny Vena - Jan 31, 2018 at 9:36AM

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After months of speculation, we now know why Amazon has been increasingly interested in the healthcare space. A reckoning is coming, and the incumbents are shaking in their boots.

The U.S. pays more on healthcare costs than any other developed nation -- 17.9% of our gross domestic product in 2016, according to a recently released report by the Centers for Medicare and Medicaid Services, the U.S. government agency charged with tracking those costs. This amounts to $3.3 trillion, or an astounding $10,348 for every man, woman, and child in the country.

Three of the biggest companies in the U.S. have decided to do something about it., Inc. (AMZN 2.89%), Berkshire Hathaway Inc. (BRK.B 1.61%) (BRK.A 1.58%), and JPMorgan Chase & Co. (JPM 1.73%) have banded together to form an independent company to address the healthcare issue. This enterprise will be "free from profit-making incentives and constraints" and seeks to provide U.S. employees of the three companies with less expensive healthcare options. 

A medical doctor using a stethoscope to touch medical icons on a virtual screen.

Can this partnership disrupt the healthcare industry? Image source: Getty Images.

Large potential impact, minimal details

While the ambitions of the group are vast, details regarding how they hope to achieve these goals are sparse. In a press release, the partners said that the newly formed venture has an "aim of improving employee satisfaction and reducing costs," and will be initially focused on "technology solutions."

The three companies have an estimated 1.1 million employees globally, though it is not known how many of those are located in the U.S.  While the initial focus will be on lowering costs for the workers of the three companies, it isn't inconceivable -- particularly given Amazon's history of disruption -- that success in the endeavor might lead it to participation by other companies, an outcome alluded to by Jamie Dimon, chairman and CEO of JPMorgan Chase.

He said (emphasis mine), "The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans."

Legendary investor and Berkshire CEO Warren Buffet stated "The ballooning costs of healthcare act as a hungry tapeworm on the American economy."

Amazon CEO Jeff Bezos chimed in saying "Success is going to require talented experts, a beginner's mind, and a long-term orientation."

The business triumvirate made it clear that the effort was in early stages and the group admitted to not yet having answers. It also stated that the undertaking would be a "long-term effort."

Been on the drawing board for months

The plans for this partnership have likely been ongoing for some time, with details emerging as early as May.

Warren Buffett said at the company's annual shareholder meeting in May that "healthcare [once] was 5% of GDP, and now it's about 17% of GDP." He also said that the country was getting "more and more out of whack with the rest of the world" regarding the healthcare system. 

Berkshire's vice chairman and Buffet's top lieutenant Charlie Munger had his own choice words on the subject:

The whole system is cockamamie. It's almost ridiculous in its complexity, and it's steadily increasing cost, and Warren is absolutely right. It gives our companies a big disadvantage in competing with other manufacturers. They've got single-payer medicine and we're paying it out of the company. 

Companies in the healthcare industry have been watching Amazon closely for months. Reports emerged in May that the company was hiring a new general manager tasked with developing a strategy and finding a path into the highly regulated and complex healthcare industry. In October 2017 it was revealed that Amazon had received approval to be granted wholesale pharmacy licenses in 12 states, with applications pending in others. 

Not happening overnight

There is room for improvement in a system some believe is ripe for change. Clinical waste, administrative complexity, excessive prices, and fraud and abuse caused an estimated $1 trillion in wasteful spending in the U.S. healthcare system, according to an article in the Harvard Business Review.

Investors had a visceral reaction to news of the collaboration, bidding down shares of insurers and pharmacy benefit managers alike. It is important to remember, however, that the healthcare industry is notoriously complicated and heavily regulated, and changes will not occur overnight. Still, with three of the country's most preeminent businessmen lending their support to the effort, those in the healthcare sector should take heed.

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Stocks Mentioned, Inc. Stock Quote, Inc.
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