Bezos, Buffett and Dimon walk into a bar

That must be how the healthcare story of the week must have started. Amidst the drama about the State of the Union address and the FISA memo release came a tidal wave of coverage about the announcement made by the leaders of Amazon, Berkshire Hathaway and JP Morgan Chase that they will be collaborating on a new healthcare venture seeking to reduce the burden of healthcare costs. The subsequent media coverage was torn between promises of major disruption and foreboding of incontinent failure. What struck the most was not the announcement itself, but the absolute conviction with which these predictions were made despite there being so much unknown. Here’s what I mean.

The first thing that struck me is the simple question “why these guys?” Nobody seems to be asking this, but it’s critically important. It’s especially strange to have a venture between three different partners. Usually it’s a single company entering into the market, such as with Oscar insurance which also promised disruption. Otherwise it’s two firms cooperating, such as Apple’s venture into the data space while partnering with various healthcare provider networks around the country or the CVS/Aetna merger. But three firms getting together? That’s bizarre. Why not four? It would make perfect sense to throw in a pharmaceutical company into the mix. Why not two? It’s not immediately clear what critical skillset JP Morgan is bringing to the mix. Three? When was the last time you heard of a joint venture between three leading partners? It’s so strange that one has to wonder if they came up with the idea while drinking in a bar or playing golf. It’s probably the golf course, Warren Buffett is on record saying that he doesn’t drink.

The bizarre partner mix brings us to the strategy, which also doesn’t make much sense. Despite the deep conviction of the media analysis, the actual announcement didn’t include ANY specifics. The official statement says that the mission was “to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs.” This roughly means nothing, so all we’re left is looking at the core competencies of the companies involved. Much of the subsequent coverage focused on Amazon’s technological innovation and ability to disrupt markets. Is this even true? Does Amazon disrupt? Their Fire OS phones were an abysmal failure, which died off so fast that the media seems to have forgotten they even existed. Similarly their Anime Strike service was shuttered after only a year, while less notorious businesses like Crunchyroll and Funimation are operating just fine. Would people even pay for the Amazon Video service if it was unbundled from Amazon Prime? Amazon acquired Whole Foods but the results so far are mixed. The only business that Amazon ever truly disrupted was the retail market which was done through aggressive supply chain management and competitive pricing. But healthcare isn’t a retail market, it’s a services industry which is an entirely different game (read Baumol’s cost disease). The other business that Amazon has been successful with is Amazon Web Services, which provides an on-demand cloud computing service to individuals and businesses. Amazon could try to leverage this IT expertise, along with their AI projects, to better assess patient data, but this runs into the dual problem of legal restrictions on the usage of patient data and the fact that most patient data is junk (there’s a very good reason why MedPAC is rolling back on MIPS). Amazon also has a relationship with the Express Scripts PBM, but it’s hard to call that a core competence. Berkshire Hathaway is a conglomerate that runs a variety of businesses of which there are too many to describe individually, but my understanding is that they’re also involved with healthcare only tangentially. They don’t run any hospital networks, nor any biotech or pharmaceutical companies. Warren Buffett basically said fairly recently that pharma investment is too difficult to discern and Berkshire Hathaway at the time accordingly only had exposure to positions in vanilla players like Johnson & Johnson and GlaxoSmithKlein. They do provide health re-insurance through the General Re business, but that’s a somewhat different expertise compared to what a health insurer does. Finally we have JP Morgan Chase, which is a bank, they do bank things. Could they be replaced with any other large bank? Probably. So why JP Morgan Chase? Who knows, but I cite my golf course theory. Presumably they’re involved in the project to capitalize this new venture, but the announcement stated that this is going to be a non-profit, which is a hard sell to both shareholders and potential investors.

This brings me to the final thing that I noticed, which was the assumption by the media that this was some benevolent project that seeks to save American healthcare from persistent cost inflation. The joint statement clearly said that the goal was to provide solutions for “their employees”, which indicates that they would start locally before even considering expanding to America as a whole. This isn’t a charitable action, despite calling it a non-profit, but intended to benefit these companies and their shareholders. The question is what that benefit is. The thing that struck me most was the statement of intent to focus on providing “simplified, high-quality and transparent healthcare at a reasonable cost.” That could be a plausible benefit, but is this really something that people at these companies don’t have access to right now and are complaining about? All of these are big brands, one would assume that employees there have access to cadillac plans with low deductibles and broad access. This bares out in the Glassdoor pages, where Amazon’s insurance benefits’ rating of 4.1/5 is supported by comments like “Amazon has the best health insurance benefits I have ever seen.” The same is true for JP Morgan and Berkshire Hathaway. Employees at these companies seem satisfied with their benefits, so something is not right about this announcement. If the employees are not going to benefit, maybe the companies can? It could make sense to establish a non-profit insurer and then transfer the savings that would normally be the insurers markup to the shareholders of the three companies, therefore effectively transferring wealth from the insurer shareholders to parent company shareholders (note, not a charitable action), but this assumes that the new non-profit can operate more efficiently than the existing businesses. Contrary to popular belief insurers aren’t making enormous profits, publicly traded health insurers have a profit margin of only 3% on their revenue. Can Amazon et al negotiate more aggressively with pharmaceuticals and hospitals than their current insurer? It’s doubtful, they don’t have much market power. Although much of the media tried to position the 1 million US employees who work for these companies as a competitive advantage, this isn’t actually a large number. To put things into context the largest US insurer, United, has 70 million subscribers and the 5th largest, Cigna, has 15 million. Amazon+Berkshire+JP Morgan Health just doesn’t bring much weight to the table.

So what’s going on and what’s going to happen? The problem I have with this announcement is the amount that we don’t know and the amount that doesn’t make sense. There’s no company name. There’s no business plan. There’s no competitive advantages. There’s little relevant expertise. The bizarre partner mix makes no sense. All we have is a vague mission statement about improving quality and reducing cost for their employees, but even this doesn’t square out with what employees are saying on Glassdoor. If this announcement was brought in front of a venture capitalist by no-name Jeff, Jim, and John instead of Bezos, Buffett and Dimon they would have been thrown out of the room for wasting people’s time. By their own admission the business is in “early stages” but if you’re just starting out, why even make an an announcement? This is the one question I can’t reasonably answer, why even make an announcement? When nothing makes sense, your assumptions are wrong. This leads me to believe that this isn’t about making a business but all about sending a message. Obviously there’s no proof, just as none of the other theories have proof, but it seems the least incoherent answer. They’re signaling to somebody, most likely insurers but also possibly the government or phama, that this is something they consider to be a problem and are willing to exercise a nuclear option on (ie starting a dubious business) if the rest of the industry doesn’t shape up. It’s about having a strategic bargaining chip on the negotiating table, however credible or real it may (not) be.