Sun Sentinel Palm Beach Edition
Health care fixes Amazon & Co. should do first
It’s been two months since Amazon, Berkshire Hathaway and JP Morgan Chase announced a triple-threat partnership to improve health care for their collective 1.2 million employees, and ultimately create a better program for all Americans.
So far we have heard nothing from the companies, except a flurry of outside opinions about Prime Health and coughing into Alexa to diagnose the flu. Fortune confides that the real plan is to control and data mine “your individual biology.”
The theory I’ve heard that stands up best is this: They’re coming after the middleman. These extractionary players are chockablock in the health care industry, which Warren Buffett calls the “tapeworm of the U.S. economy.” Insurance companies take 20 cents of every health dollar off the top, but there’s friction in all spending categories. For every dollar spent on drugs, 41 cents gets taken by middlemen, such as the pharmacy or the formulary manager.
Amazon has run over the middleman in any number of categories: books, music, videos, groceries, IT services, lawn furniture. Amazon goes to the lowest price, eliminates multiple retail and wholesale markups and bears a much lower profit margin to take share away from its rivals. Amazon’s frugality and high-tech investments in logistics create what analysts call a flywheel of ever-declining prices and delivery times. Apply the flywheel concept to your fantasy version of the world’s biggest pharmacy, and you get some idea of what it might achieve.
The big insurers and other health care companies will hardly roll over. Instead, they have been getting bigger and more powerful. In 2017 health services companies completed $175 billion worth of mergers, two and a half times that of 2016. That included CVS buying Aetna for $69 billion and UnitedHealth spending $5 billion to buy 300 medical clinics. In January Cigna announced it was purchasing the pharmacy benefits manager Express Scripts for $52 billion.
These deals embrace a different vision of the future. Instead of cheaper and faster, we get a “one-stop shop.” Soon you will get your insurance through Aetna, see a nurse at the CVS MinuteClinic, and get your prescription filled at the nearby pharmacy counter. This sort of system exists in the forms of Kaiser Permanente in California or the U.K.’s National Health System, where insurance and care are under one umbrella.
If these megamergers can squeeze some costs and efficiencies out of the combined firms, that’s great. But I doubt the savings will get passed along to patients and consumers. Besides, health care is already too big, complex and opaque. We don’t need bigger, we need smarter — and we need companies to put consumers first. recent study in JAMA found that about a quarter of the time, what you pay at the pharmacy using your insurance card can cost more in copays than it would with no insurance if you just paid cash. Insurance might force you to pay $25 for a drug that would be $11 if you had no drug benefit. In many cases, the pharmacist is contractually forbidden from telling insured customers the cash price for a drug. This is the one-stopshop that many fear.
The next plausible big bet would be telemedicine. Amazon already streams video into millions of homes and is a world leader in cloud computing. The 1.2 million employees, plus their families, of the Berkshire-Amazon-Chase triad, could be the test customers of Amazon’s cloud computing infrastructure to reach doctors and nurses quickly for advice, outside the boundaries of insurance.
It will be difficult for Amazon & Co. to build this fantasy health world. Many tech titans before have tried and failed. Remember Microsoft HealthVault? Google’s Eric Schmidt told an audience last month that hospitals and doctors’ offices are still in the Stone Age, with their fax machines and pagers. But Google Health is not exactly a roaring consumer success.
At some point, Amazon and its partners will need to contend with the entrenched and now supersized companies that currently direct the flow of so many health dollars. Doing an end-run around big insurers and pharmacies would be nice.
When Jeff Bezos announced these big plans, he said, “We enter into this challenge open-eyed about the degree of difficulty.” Given the way Amazon has already successfully mastered the online sale of almost every kind of product category, has its own Hollywood studio, and a growing grocery business, such humility is likely taken with a grain of salt by the incumbents. What they should be afraid of is Amazon’s famous bias for action.