Amazon makes its move in healthcare

When Amazon bought a big stake in drugstore.com in 1999, Jeff Bezos thought he could do for pharmaceuticals what he had done for books, stealing market share from bricks-and-mortar pharmacies and bringing down prices for consumers.

It did not work out that way. The chief problems that the website faced are still cited today as the reasons that US healthcare has proven “too big to disrupt”: a handful of large, entrenched incumbents control large swaths of the market, while a thicket of expensive regulations prevent smaller players from mounting a credible challenge.

Amazon finally sold drugstore.com in 2011 to Walgreens, the epitome of the type of company it had wanted to disrupt, which closed it down in 2016.

But now Mr Bezos is back - with reinforcements - and the news wiped tens of billions of dollars of combined stock market value from Walgreens Boots Alliance and its peers.

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Amazon has formed a not-for-profit healthcare company with JPMorgan Chase and Berkshire Hathaway, which will be charged with lowering costs for the trio's almost one million employees and "potentially all Americans".

Months of speculation that Amazon will turn its disruptive instincts to healthcare has weighed on the share prices of companies in every part of the industry, from drugmakers and drugstores to insurers and pharmacy benefits managers (PBMs).

And although Tuesday’s press release was light on details, it was a clear statement of intent: the online retail behemoth said it was teaming up with the largest US bank by assets and Warren Buffett’s sprawling conglomerate so the trio could lend their “scale and complementary expertise” to a long-term effort to lower healthcare bills.

At first, the new company would focus on “technology solutions” to lower costs, they said.

One person briefed on the discussions gave the example of an app that might help employees cut their drug bills: when the patient goes to the pharmacy to fill a prescription for an expensive branded medication, the app would send an alert informing them of a cheaper generic alternative.

The companies also intend to explore whether they can benefit more from their status as “self-insured” employers, whereby they keep income from employee premiums and set aside a pool of their own capital for potential losses.

Although self-insured companies have more of a say when designing health plans, they still outsource much of the decision making to private insurers and pharmacy benefit managers. JPMorgan contracts with Cigna and UnitedHealth, for instance, while Amazon uses Premera Blue Cross, a non-profit insurance company, and Express Scripts as its PBM, according to analysts.

"Amazon, JPMorgan and Berkshire are clearly frustrated by the general inability of employers to do something about healthcare costs," says Paul Fronstin of the Employee Benefit Research Institution, an independent research organisation focused on healthcare and other benefits.

“They’ve had enough, they’re saying ‘we need to do something’, and they clearly think they can do something,” adds Mr Fronstin.

Messrs Bezos and Buffett and Jamie Dimon, JPMorgan's chief executive, hope other companies will join them in time. Mr Buffett's graphic description of ballooning healthcare costs as a "hungry tapeworm" is indicative of a growing exasperation in America's boardrooms over soaring healthcare costs.

The annual premium for a family health plan sponsored by an employer hit $18,764 last year, with workers typically paying $5,714 towards the cost of coverage and companies picking up the rest, according to a report from the Kaiser Family Foundation. Back in 1999, the annual premium for a family plan was just $5,791, with workers covering $2,196 of that.

Despite spending more per capita on healthcare than any other developed country, the US still ranks 12th out of the 12 wealthiest industrialised countries when it comes to life expectancy, according to the Organisation for Economic Co-operation and Development.

Health insurers, hospitals, pharmacy benefits managers and drugstores have compounded their reputation for high prices with poor customer service, regularly earning them a place in the ranks of America’s most hated companies.

While US healthcare appears ripe for disruption, large employers - which pay a big chunk of the total bill - have struggled to effect change in the face of consolidation among insurers and PBMs.

A running joke among executives in charge of employee benefits is they have no choice but to deal with "Cuba" - Cigna, UnitedHealth, Blue Cross, Anthem or Aetna - the inference being that the large insurers have vested interests on a par with the Caribbean dictatorship.

Analysts pointed to several reasons why Amazon's partnership with JPMorgan and Berkshire could change the status quo. Barclays described the move as a "long-term opportunity to drive down the rate of increase in healthcare costs and improve bottom lines".

The online retail giant has an enviable data analytics operation that could identify waste and inefficiencies, while JPMorgan’s experience in payment systems might also allow the company to perform some of the claims processing that is currently outsourced to insurers.

And Mr Buffett brings his crusading instincts alongside the largest number of employees, with 368,000 people working across a diverse range of industries.

But what the venture has in expertise, it lacks in scale.

Although 950,000 employees might sound like a lot, it is a fraction compared to the number of “lives” that are managed by the large PBMs, which assemble big groups of clients and use their clout to extract discounts from drugmakers.

The three largest PBMs - CVS's Caremark, Express Scripts and UnitedHealth's Optum - together manage roughly 250m lives, according to Credit Suisse.

The Amazon initiative is also smaller than the Health Transformation Alliance, a consortium of US employers - including IBM, Verizon and American Express - that clubbed together in 2016 to try to lower healthcare bills.

That group, which has a membership of more than 40 companies with almost seven million employees, hopes to cut costs by stopping patients from taking pointless medicines while using hospitals that have a reputation for low prices and high quality care. It is still unclear whether its efforts will bear fruit.

“If Amazon and co are going to have an impact, they can’t just have a few employers on board - everyone has to be in on it” says Mr Fronstin. “Walmart has a million employees, and they still haven’t solved it.”

– Copyright The Financial Times Limited 2018