When it comes to sky-high healthcare costs, Amazon.com (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), and JPMorgan Chase (NYSE:JPM) have had enough. The three companies are creating a new nonprofit company with a singular aim: to improve quality and lower costs. Can this project usher in a healthcare revolution?
In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and contributor Todd Campbell explain what we know so far about this effort and the impact it may have on healthcare industries.
A full transcript follows the video.
This video was recorded on Jan. 31, 2018.
Kristine Harjes: Todd, as you mentioned, the announcement from Amazon, Berkshire Hathaway and JPMorgan on Tuesday sent ripples throughout the stock market. Within the first two hours of the announcement, the market value of 10 large health insurance and pharmacy stocks dropped by a combined $30 billion.
Todd Campbell: $30 billion, wow!
Harjes: And on one hand, Amazon coming for you as a business or an investor in a business, that shouldn't really be that surprising. But, there are valid concerns for a handful of different categories of companies.
Campbell: I think so. You and I did a show previously talking about how Amazon was rumored to be kicking the tires on either creating its own pharmacy benefit manager or somehow getting involved in drug distribution, so it probably isn't a surprise to see that, when the news broke on these companies teaming up to work together, a lot of the market cap that was lost this past week came at the expense of companies like McKesson and AmerisourceBergen and Cardinal Health, who are big drug distributors. The pharmacies took it on the chin. Walgreens, CVS (NYSE:CVS), and Rite Aid all traded down on the news. The pharmacy benefit managers, Express Scripts, etc., traded down on the news. I suppose those are the kind of companies that are most obvious potentially at risk for disruption. It makes sense. The more hands, Kristine, that touch a good, the more profit margin that needs to be built in to reward each one of those hands. So, you could argue that all these intermediaries and these middle men are increasing costs. But the savings that may be associated with disrupting that -- and again, we don't know what this trifecta of companies has planned -- may not be as large as some people think. These are already huge companies that are deeply embedded. They have significant pricing power and negotiating power with drugmakers. And, as we said earlier in the show, drugs only represent about 10% of total healthcare spending in the U.S. anyway. So, I almost wonder whether or not that will even be the primary focus of this new entity.
Harjes: I want to add on a couple of things to that. First of all, I don't see any sort of change in any of these companies' negotiating power. As you already mentioned, they're big, but they're not huge. They're nothing compared to, say, the number of people that UnitedHealthcare covers. And I really don't think that these guys are ready to play hardball. Can you imagine if Amazon is going to negotiate even harder now, and they're going to squeeze drugmakers and not offer services that are deemed too expensive? I just don't see that going over well with their employees. And meanwhile, the other thing that I want to make sure we mention is, employer coalitions on healthcare already exist. In fact, Amazon and JPMorgan are part of the National Business Group on Health. And also, a Warren Buffett company called BNSF Railway is part of the Health Transformation Alliance, which has over 40 companies, and their whole idea is to advocate for transparency in drug pricing. But they really haven't transformed much in their existence. So, to me, I see this market reaction as a bit of an overreaction, at least initially, although I do think it's something to watch out for. I also don't see how you could lose so much in market cap at the drop of a hat based on a somewhat vague PR announcement.
Campbell: [laughs] Yeah. The devil will be in the details on this. I think, we look at this and hear the word "Amazon" and we immediately think, this company is going to disrupt this market substantially. And hey, it might. We don't know. There's obviously no company that's better at supply chain management than Amazon. Theoretically, if they can figure out a way to get a product from a drugmaker to a patient quicker, faster, more conveniently, with less friction costs, yes, there will be savings there.
To your point, though, yeah, UnitedHealthcare already has tens of millions of members that they're negotiating for. McKesson is massive, AmerisourceBergen is massive, Walgreens is massive. These companies already have significant negotiating power. So I wonder just how much of a savings they're going to get. And like you said, you're not going to be able to really successfully play hardball with the maker of a life-saving medication, and that's because patents protect these drugs and give them a de facto monopoly. They're not competing if they have a small-molecule drug that's going to solve a problem for a patient. They don't have competition until those patents expire. So, they have, I guess you would say, the pricing power necessary to play hardball with the insurer, in this case, this new entity. I think, what you may end up seeing is these three companies looking at drugs and saying, "We can save some money there, but where we're really going to have to try to innovate is using technology to improve the access to care, to drive down those hospital and physician services charges."
Harjes: I also want to make sure we talk about potential winners here. When you talk about avoiding hospital charges, I immediately start thinking about the walk-in clinics. CVS' stock lost, I believe it was around 4% yesterday in its market cap. I actually think they could be a winner here if this coalition drives their employees to seek out lower-cost care, such as that you would find in a walk-in clinic, rather than seeking out emergency room care. Other than that, Todd, do you see potential beneficiaries in the market?
Campbell: I absolutely do. There are three areas in particular that I think could be on the table as an early on focus from these three companies. One kind of touches on what you were just talking about with the Minute Clinics and the in-store clinics, but it takes it one step further, and that's telehealth. I think telehealth really is going to be the big way that we can disrupt how much people have to pay for healthcare services like primary care visits, specialist visits, and second opinions. And if I'm right, then these three companies could look toward a telehealth provider -- for example, Teladoc (NYSE:TDOC), which we talked about on the show a few weeks back -- and try to partner up with them to roll out telehealth more widely and make it the default choice among consumers. So, your first choice isn't to go to your primary-care physician, your first choice is to dial them up on speed dial and say, "I think I have the flu, can I get a prescription airdropped via a drone at my front door?"
Harjes: I think that you're right that the telehealth sector will definitely benefit from this. But when you're thinking about specific companies, I kind of think you could go either way. For Teladoc, for example, they could certainly wind up partnering with this gigantic three-company conglomerate, or maybe they would even be bought out by them. But you could also find the opposite, where Amazon and JPMorgan and Berkshire create their own version and it blows up and knocks Teladoc out of the market.
Campbell: I'm skeptical of that, Kristine, only because you're talking about hundreds of thousands of providers, and Teladoc already has those relationships in place. It already has the system in place to be turnkey and start delivering real results relatively quickly. Yes, theoretically, you might be able to build up, from scratch, a system like this. But it would just seem to make much more sense to use Teladoc, especially since Teladoc is already working with 300 of the Fortune 1,000 companies out there. It's even working with CVS. So, rather than CVS competing against it, CVS actually has a relationship with them. So I agree with you that there's a risk there to that, but it would seem to me, at this point, anyway, that the savvier, quicker-to-marker solution would be to embrace a player like Teladoc.
Harjes: Yeah, but if anybody is going to build it from scratch, it's going to be Amazon. But we won't dwell on that. That's speculation. You mentioned that you have two more areas that you think might be ripe for disruption and actually benefit from this.
Campbell: Yeah. Electronic records, Kristine, would be a second one. Data, data, data, it's all about data. If you can leverage information and create predictive algorithms that can be used to treat patients before they get sick, to prevent hospitalizations, to prevent illness, to prevent chronic disease, wow, the potential savings there could be massive. Now, we've talked in the past on the show about how a lot of these legacy electronic records systems are siloed systems that don't play nicely with one another. There have been some pretty big barriers to entry as a result toward the concept of unifying, centralizing all that information in one place that can be analyzed. I don't know what the final solution will look like, but I imagine they're looking at it and trying to figure out, can we use something like blockchain to completely disrupt the health records market, so everything is in one centralized and verified and approved location? The potential there could be significant.
Harjes: Absolutely. OK, what's the last one, No. 3?
Campbell: The last one would be wearables. Using technology to provide real-time healthcare data that can then be analyzed to track patient health, and intervention by doctors where necessary. We're already starting to see evidence of this. We talked about in the past, Apple (NASDAQ:AAPL), and some of the things Apple is doing with its Watch and with its Healthcare app. CEO Tim Cook said he was tracking his diet's impact on his blood sugar levels. Theoretically, if you can build in a blood glucose monitor into a watch, that would be great if you could team that up with an insulin pump or something like that. Then, in December, Apple came out with a heart study where they're going to use technology to be able to evaluate for abnormal rhythms in your heartbeat, and possibly be able to determine if you're at risk of a heart attack or a stroke. These kinds of things are potentially massively disruptive, because, as you can bet, chronic disease is gobbling up a significant amount of that healthcare spending that we talked about at the start of the show, and emergency treatment for heart disease, such as a heart attack or stroke, can cost up to $1 billion a day, according to the Centers for Disease Control.
Harjes: Yes. This seems like the continuation of a trend. For, example, when you look at Fitbit, one of their biggest areas for growth is potentially partnering with more and more insurance companies and large employers, particularly those that are self-insured, to provide the devices for their employees at a discounted rate or free because of the opportunity that they have to then lower healthcare costs by better chronic disease management and catching, say, anomalies in your heartbeat early. So, a lot of opportunity there for wearables, I completely agree.
Campbell: And I don't think that just because Amazon is involved that there isn't room there for Apple to also be involved. You could argue, why would I be asking Siri about my health if I have Alexa? But I think there will be enough interoperability to support all of these companies. And when it comes to wearables right now, I think Apple and some of these others, Fitbit, etc., they're the ones that could really start to move the needle more quickly than others. I don't know if you saw this news this past week, but Apple actually announced in its Healthcare app that you're going to be able to now store your patient healthcare data in it, and it's inked deals with athenahealth and Cerner, some of the largest providers of these record systems to hospitals and providers, to integrate their data onto your app. That's where this market needs to go.
Harjes: Yeah, that's huge. The integration between the tech sector and the healthcare sector, we're already seeing it in spades, and it's clearly only going to advance from here.
Campbell: And I think that, from an investment standpoint, trying to figure out how this all shakes out, just think about transparency, initiatives that would increase transparency throughout the healthcare system, improve access, allow people to shop for products. Access and cost and transparency, those are probably the three things that you want to be focusing on.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Kristine Harjes owns shares of Apple. Todd Campbell owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Fitbit. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Athenahealth, Cerner, CVS Health, McKesson, Teladoc, and UnitedHealth Group. The Motley Fool has a disclosure policy.