Amazon, JPMorgan & Berkshire Hathaway Partnership

Amazon, JPMorgan Chase and Berkshire Hathaway caused ructions in healthcare insurance markets recently following the announcement of their intention to work together to launch a not-for-profit health insurance company for their U.S. employees. Whilst concrete details of the collaboration have yet to be released, the markets illustrated their concerns at the entry of a new potentially powerful competitor with shares in CVS dropping 4%, United Health dropping 11% and Cigna dropping 7% following the announcement.

According to a press release by Berkshire Hathaway on 30th January 2018, “The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost,” whilst Warren Buffett, Berkshire Hathaway Chairman and CEO, stated the triumvirates intention to “check the rise in health costs while concurrently enhancing patient satisfaction and outcomes”.

Whilst it remains to be seen how the proposed launch of this health insurance company will ultimately impact both health insurance and drug delivery markets, opportunity for disruption looms large. Such non-traditional companies have the capability to approach existing health insurance market issues with non-traditional and innovative solutions. There is a degree of inertia associated with traditional healthcare orientated insurance companies as they have historically been proven to be profitable following their existing practices and frameworks. They therefore struggle to change and tend to face questions from shareholders when trying to innovate service delivery, an issue the newly announced healthcare insurance company is unlikely to face.

This is not to say that traditional health insurance companies have not been trying to innovate themselves. They have been increasingly observed to be attempting to encourage wellbeing in their client base to drive down their demand for costly health care interventions in later life. Discounts on Apple watches monitoring physical activity are now being offered in addition to discounted gym memberships as they seek to engender behavioural change by helping customers improve self-regulation of their prevailing health status.

Paradoxically, it is the proposed new company’s not-for-profit organisational structure that will that will facilitate disruption of the health insurance market, perhaps providing the competitive edge where other new players failed. Shareholders tend to care more about short-term share prices and dividend payments rather than long-term strategic approaches that may not appear immediately beneficial to the bottom line. A non-traditional company like Amazon/JPM/BH with not-for-profit status can adopt strategies that may not be immediately productive but can provide long-term disruptive benefits. For Amazon/JPM/BH specifically, these benefits can be realised downstream through reduced costs of health coverage for their employees in the short-term and improved health outcomes and workforce productivity in the long-term.

This is especially pertinent when one considers that the new health care insurance company will have access to a significant client base that includes the U.S. proportion of the 880,000 employees and their family members. They will have the ability to control the daily environment of their client base in terms of nutrition, working environments and mental health support services. These represent key factors proven to impact considerably on long-term physical wellbeing and therefore demand for costly health care provision. Greater capability in engendering behavioural change in its employees and potential health insurance customers therefore provides a cost saving opportunity. As a not-for-profit organisation, these savings can therefore be passed back to their employees with Amazon, JPMorgan Chase and Berkshire Hathaway individually benefiting from reduced absenteeism and presentism and a more productive and satisfied labour force.

Whilst only time will tell if this is how it all plays out, it is difficult to ignore the potential for non-traditional companies in general to destabilise and disrupt insurance markets. Their prospective ability to exploit their greater access to the client base by vertically integrating health care services into their US employee offering represents a threat to traditional health care insurance companies such as Cigna and UnitedHealth as evidenced by their immediate share price fluctuation. It will be interesting to see how they react as no doubt their shareholders will be demanding.

 

For more information please contact:

Niamh Lennox-Chhugani

Niamh.Lennox-Chhugani@optimityadvisors.com