As a young person who has a general understanding of where tech is today, I’m oftentimes amazed by how behind the times my healthcare provider seems to be. And here’s the thing. Not only do I live in Northern California – the technology hub of the world – but my healthcare provider is Kaiser Permanente, a company considered a leader in health IT and one that even has its own venture capital arm.
That’s why I was beyond excited to hear that Amazon, Berkshire Hathaway and JP Morgan Chase announced, in a joint press release, that “they are partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.”
A Limited Understanding:
Before we get into it, I want to emphasize that I don’t consider myself anywhere close to an expert on healthcare, let alone the American healthcare system (before and especially after writing this post). Unfortunately, I feel like this is the case with most people my age and likely even many older people too. I know that it’s incredibly regulated, politically polarized, and made up of complicated policy (which helps make our tax code extra confusing and probably partly explains the bipartisanship). Instead of getting caught up in the details of today’s healthcare situation however, I decided to focus on healthcare’s history in America which is key in understanding today’s model.
The History of Employer Sponsored Healthcare:
If you’ve already begun to skim, just know that American healthcare is a system formed by two major policy decisions. Up until the second half of twentieth century, most people didn’t even have healthcare. This all changed following WWII.
Due to the shortage of labor during the war, wages kept rising higher and higher. Realizing the danger of inflation, President Franklin Roosevelt signed an executive order that froze wages. Businesses then started using healthcare as a way to attract workers now that they were no longer able to raise wages.
The second major event that helped institutionalize healthcare was when the IRS made all employer-based health insurance tax exempt in 1943. In other words, health care through your job became the least expensive option.
Together, these two events established the employer-based model, thus creating the foundation of which the whole healthcare industry is built on. An important characteristic of the post WWII economy was that it was a traditional economy with limited supply and almost always enough demand. Since then, the American economy has begun to shift to a demand facing economy (that where there’s almost always enough supply and instead limited demand) especially in fields where technology has helped us make significant progress. Despite this shift, the healthcare industry has remained behind for a variety of reasons ranging from the employer-based model to the regulation that has restricted information technology integration in healthcare. The question has thus become whether this lovechild company of Amazon, Berkshire Hathaway and JP Morgan can help improve and possibly even overthrow this model’s inefficiencies.
Google and Microsoft thought they could.
Back in the simpler time that was 2007, Google tried creating a centralized health information system for their employees. Yet, this project ran aground by 2012. Meanwhile, in 2008, Microsoft created a web based health record system for businesses and consumers. This product still exists today but has yet to bring a digital revolution to the American healthcare system.
The Road Ahead:
While neither Amazon, Berkshire Hathaway and JP Morgan Chase has yet to say what they are actually planning to do to “provide U.S. employees and their families with simplified, high quality, and transparent healthcare at a reasonable cost,” I like what my favorite tech writer Ben Thompson has hypothesized.
In short, Thompson speculates that Amazon will be the controlling force behind this new company. This new company, he calls Amazon Health, begins by building out a platform that its employees (along with Birkshires and JP Morgans) can interact with its healthcare suppliers on. This platform will eventually be converted into a marketplace where pharmacy benefit managers, insurance administrators, distributors, and pharmacies compete for Amazon’s employees. This marketplace will then be contracted out to other employers and once a certain scale has been reached, Amazon will open it to general public and begin to replace some (if not all) of healthcare’s middle men.
Amazon Health needs Berkshire Hathaway and JP Morgan to support it along the way. Regardless of how big Amazon Health becomes, they will still need insurance. This would logically come from a Berkshire subsidiary company called Re Gen, which is a reinsurance business or a company that insures insurers (try saying that three times fast). Meanwhile, JP Morgan would support Amazon through financing and capital markets.
Although this healthcare utopia is great to dream about, healthcare’s current state suggests that we have a long way to go. I personally think of our family friend, Udi Manbar’s Ted Talk when I think of some of these challenges. Whether it be policy, security, or cost based, there seems to always be another road block in accessing and aggregating the data that could potentially relieve Americans of healthcare’s economic burden and bring medicine into the future.
Although they will definitely face more than their fair share of challenges along the way, I believe that if anyone could make this healthcare dream come true, it will be this joint venture.
The reason: patience.
Along with being one of America’s most influential and oldest companies, JP Morgan is one of America’s largest bank with nearly two trillion in assets under management (Bank of America comes in second with around one trillion). The stability that comes from JP Morgan’s size and reputation gives Amazon a reliable partner in the long run. Then there’s the Sage of Omaha. As the first to really show how patience could prove (extremely) profitable in value investing, Buffet is clearly the right partner in a long-term operation. Finally, Amazon: the company that only plays the long game. Outside of Buffet and maybe Musk, I don’t there is anyone who’s more famous for thinking long term than Bezos. While Facebook and Google were stealing the show five or so years ago, Bezos knew the infrastructure he was building then would eventually shoot Amazon right past them. This kind of thinking is necessary when approaching something like healthcare, an industry that moves much slower due to the regulation and that which follows from it.
The only thing that I don’t believe from the press statement is the idea that this company “will be free from profit making incentives and restraints.” Part of the reason for my disbelief comes from the parties involved. Outside of being well balanced, long term thinking companies, these businesses all have one thing in common. They’re all very good at making money. As a result, I have difficulty seeing how these three companies will form an industry altering entity that’s also purely non-profit. The second reason is that Amazon drives value through convenience. Since making the healthcare process more convenient for all parties is essential to creating a new system that others will adopt, there will ultimately be a profit that can be derived through this newfound convenience.
The only other explanation is that “free from profit making incentives and restraints” means superseding the profit driven competition through vertical integration. Not only would this support Thompson’s hypothesis about this mystery company’s goals, but it would establish a new precedent for the American economy. Healthcare is no longer a place of profit.