Can Amazon and Friends Handle Health Care? There’s Reason for Doubt
Posted January 30, 2018 8:06 p.m. EST
The announcement Tuesday that Amazon, JPMorgan Chase and Berkshire Hathaway would be joining forces to create a health care company moved stock markets and prompted optimistic predictions of major reform in a notoriously complex industry.
But while the three companies bring successful management, technological expertise and substantial capital to the venture, many health industry experts expressed doubts about whether their results would match their ambition.
Here are a few reasons that experts suggest we temper expectations.
It has been tried before
Over the years, faced with rising costs, employers have banded together to try novel approaches to health insurance benefits. Some have pioneered strategies like working directly with health systems or have achieved significant savings compared with competitors. But none have made a major dent in overall health care spending.
“They contribute in the small wins,” said Jonathan Kolstad, an associate professor of business at the University of California, Berkeley. “But those tend to be swamped by growth in health care, which is so high. They’re not silver bullets.” Health care is very local, and companies have traditionally had a hard time preventing hospitals and doctors from raising prices or delivering mediocre care, because they don’t have enough leverage to force health care providers to do things differently.
“The part that is the most difficult is trying to influence the underlying system,” said Michael Thompson, the chief executive of the National Alliance of Healthcare Purchaser Coalitions, which represents employer groups. “Any single company, even broad coalitions, have a hard time.”
Technology giants have attempted health care innovation before. Google and Microsoft started health ventures in recent years to a lot of fanfare, with little success.
None of these players have expertise in health care
The three companies don’t have much direct experience in providing health insurance or services. Chase has invested in the industry, and Berkshire Hathaway has owned insurance companies, but none have worked extensively in health benefits or in managing doctors, hospitals or pharmaceutical companies.
“Just because you know an industry is underperforming and you have a lot of money doesn’t mean you have a successful strategy,” said Leemore Dafny, a professor at Harvard Business School, in an email. Dafny said she was excited to see such serious players take on this problem but noted there were numerous examples of outsiders trying, and failing, to succeed in the health care system.
Health care is a business that requires a lot of regulatory compliance and negotiation with established players. A new entrant could bring innovative approaches to old problems, but it may also become stymied by the industry’s complexity. The entrepreneurs who launched Oscar Health, one of the insurance startups to sell policies under the Affordable Care Act, wanted to create something radically different from the competition. But it has had a difficult time living up its initial hopes and has lost substantial sums in what has proved to be a very challenging business.
Classic disruption rarely applies in health care
Most disruptive companies enter a market with a product that is lower in value than that of market incumbents but much lower in cost. That’s the model for classic disrupters, like Southwest Airlines or Japanese carmakers. Health care tends to be different, because consumers don’t usually want to settle for a lower-quality product, even if it is substantially cheaper.
Amitabh Chandra, a health economist at Harvard, said that perhaps the easiest way to squeeze a lot of dollars out of the health care system would be to reduce what he called “low-value services” — health care treatments that are expensive but only slightly more effective than cheaper options.
But reducing their use is hard because many people still want the better therapy, even if it’s not a particularly good value. Highly compensated employees, like those at Chase or at Amazon headquarters, may be particularly attracted to cutting-edge cancer treatments or the latest prescription drugs, he noted. A health plan that cut out such services might hurt the ability to recruit and retain workers needed to succeed in other parts of the business. “If there was pure inefficiency, I think it would be a lot easier to make progress,” he said. “The problem is that all of this stuff has some small benefit.”
There are some ways that a smart company might seek to wring real inefficiencies out of health care. It could, say, lower the prices paid to monopoly hospitals, eliminate services that have no value or tighten the supply chain for drugs. Optimists about the venture say, if the company succeeds, it will most likely do so by finding strategies that improve care and reduce cost.
These are really different companies, with different priorities
The three companies are each large but also very different, and they may have different priorities about how to structure their health benefits.
JPMorgan Chase is a financial services company, based in New York, with highly compensated employees. Berkshire Hathaway is a consortium of companies, spread throughout the country, in a variety of industries. And Amazon is a technology company with a hub of highly paid workers in Seattle, and with lower-wage workers spread in warehouses around the country. Will they all want or need the same sort of health plan?
In general, companies with a lot of highly paid workers tend to offer generous benefits. Health insurance is not taxed in the same way as other forms of compensation, so an investment banker may prefer a health plan that covers everything instead of one with a big deductible that she has to pay out of her post-tax salary. A lower-wage worker in an Amazon warehouse, by contrast, may want a skimpier health plan and more wages.
There is not a clear strategic incentive to sell whatever they learn
Big stock market moves after the announcement suggest that investors think that whatever the companies develop could become broadly adopted, undermining the business of existing health care players, and transforming health insurance across the country. This is consistent with some of Amazon’s previous strategies, like expansion of its web services business, which was begun as an internal product and has become dominant in the industry.
But savings on health care would accrue directly to the companies’ bottom lines, allowing them to hire more workers or increase their profits relative to their competitors. That means selling such services to their competitors would need to be profitable enough to make up for giving competitors that business edge.
“It’s not going to transform the economy unless they then share all of those ideas and best practices with their competitors,” said Craig Garthwaite, a health economist who teaches corporate strategy at the Kellogg School at Northwestern. “That would not be good for long-term shareholder value for their firms.”