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Books, Diapers … and Health Care

U.S. health care stocks got a jolt last week when Amazon, Berkshire Hathaway (BH) and JP Morgan Chase (JPMC) announced their entry into the health care business to improve cost and health outcomes for their employees. While there had been rumors about Amazon getting into health care, many were surprised by BH and JPMC joining forces with Amazon.

This is not the first time an employer has made an effort to be more directly engaged in reducing the cost of benefits for its employees. The cost of health care in the U.S. has skyrocketed over the past decade, with high single-digit annual inflation rates, which puts a great strain on employers’ cost structure.

In 2016, the U.S. spent $10,348 per-capita on health care, compared with just $146 in 1960. The $3.3 trillion the U.S. spent in 2016 represents almost 18 percent of our GDP, which is 1.5 times more than the next highest on the list: the Netherlands.

In the U.S., almost all the large and medium-size employers self-fund the cost of health care for their employees and their families, so a material portion of this cost comes out of their earnings. While this is more prevalent in the U.S., we do see other large employers around the world bear this cost, such as our joint venture partner, Saudi Aramco.

People often mention the high cost of employees’ health care benefits as one of the key reasons for the fall of General Motors in the early 2000s. Along with pension costs, its fixed benefit costs were about $2,000 per car.

Several years ago, my job at Cigna’s corporate development department brought me to a small town called Peoria in Illinois. While the timing of the trip was not ideal (February in the middle of a blizzard), I was fortunate to learn how Caterpillar—the largest employer in that region—had employed an innovative model to manage costs.

Caterpillar had bypassed the insurance companies and had contracted directly with a local hospital system to provide health care for its employees and their families. In an early form of a “narrow network,” Caterpillar negotiated a low-cost structure by channeling all of its employees and their families to a single health system, removed the intermediary and established a way to contribute toward innovative practices at the health system.

Caterpillar’s strategy unfortunately did not set a trend. Caterpillar had the advantage of having most of its employees in a single location and being the largest employer in the region, which provided leverage. Most other employers do not enjoy these advantages.

Positioned for Success
When the three organizations led by Amazon announced they are joining forces to reduce health care costs for their employees, I couldn’t help but think about the areas where they are positioned to succeed—and where they may struggle and need external help.

Amazon has come a long way to dominate retail industries that offer tangible products. Its brand power—and expertise in logistics—positions it very well to make an impact in the prescription drugs market.

While Amazon represents only 10 percent of total health care expenditures, this market has seen astronomical cost increases in recent years due to the introduction of expensive drugs to treat hepatitis C, various forms of cancer, spinal muscular atrophy, etc. Annual drug cost trends in high single digits to low teens have far outpaced cost inflation in other aspects of health care. When Amazon joins forces with its new partners, there is a great opportunity to use the extra leverage of having a larger group to yield better prices for prescription drugs.

While every industry talks about the value of Big Data, this new partnership could spur its use in health care—an industry ripe for such a concept. Health care companies have invested billions of dollars to build technology tools that can analyze use patterns, risk factors, medication compliance, as well as quality of care to improve both cost and health outcomes. However, health care in the U.S. is very fragmented, and there aren’t many organizations that can both gather holistic data and influence outcomes.

Perhaps this new partnership can help change that. Amazon and JP Morgan Chase are renowned technology innovators, and I believe having access to all relevant data for employees and their families provides them with the incentive to build the right technology platform for population health management, home health, etc.

Health care is complex. Health insurers and hospitals have archaic processes to schedule appointments, provide clinical care and process claims. Even folks who have deep experience in health care struggle to understand what benefits are covered, how to set up appointments and what their financial exposure is.

A week after our daughter was born, my wife and I started to receive invoices from pediatricians, the OB/GYN physician, the hospital and an Explanation of Benefits (EOB) from our insurance company. The invoices did not specify what the charges were for and what we owed, and the EOB also failed to explain the benefits. My wife and I had to make several calls to our insurers, the hospital and the physicians’ offices asking that they talk to one another and identify what our co-insurance amount was.

Amazon is known for its ability to streamline shopping, and it could simplify these kinds of hurdles for its employees—in partnership with JP Morgan Chase (as a banker and financier) and Berkshire Hathaway (insurance expertise).

Cautionary Concerns
While there are clear benefits for these organizations to pursue this initiative, there are areas where I believe they would need assistance from an existing health care player.

Health care is local. Unlike Amazon or Wal-Mart, there aren’t nation-level synergies to be gained because many health care facilities are community owned and operate independently. Therefore, Amazon and its partners may not have enough scale in all of their locations to procure health care services at a cheaper rate than an insurance company or third-party administrator. Although they will be able to leverage scale in key geographies such as Seattle and New York, they will still have to rely on a leased network to provide care for employees in other geographies.

Administering benefits and claims can be an operational hassle and a regulatory nightmare. These organizations are better off using a third-party administrator rather than venturing into it themselves. I hope they don’t distract themselves from their key strategy of becoming a health care company themselves. As GE is learning, you can’t be everything for everyone.

This is not a revolutionary move from these companies to transform health care. Instead, it’s an honest effort from three large employers that are facing the burden of ever-increasing health care costs. While it may mean taking one step at a time over a period of two to three years, I hope they succeed in improving health and cost outcomes in the industry.

Late last week, Disney announced it has directly contracted with local Florida hospitals to provide health care to employees and their families, so we will hear other employers taking similar efforts in the future.

As they navigate these new waters, they might want to dial Peoria for help!


Dinesh Ganesan

Vice President and Chief Financial Officer Dinesh Ganesan is a vice president and the chief financial officer for Johns Hopkins Medicine International. He provides leadership in financial planning, budgets and projections; management of assets and operating cash flows; and the financial operations of new and existing affiliates, projects and business development opportunities. Click here to learn more about Dinesh.

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