Will the Berkshire healthcare business struggle from the beginning? Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shocked the market this morning when it announced that the company had teamed up with Amazon.com, Inc. (NASDAQ:AMZN) and JPMorgan Chase & Co. (NYSE:JPM) to tackle rising healthcare costs in the United States.
At this point, details on the deal are limited but what we do know is that three of the largest companies in the US are now working together to try and disrupt what has historically been a highly profitable sector. The collaboration should also help these businesses drive down their costs over the long-term and improve employee satisfaction.
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JP Morgan, Amazon, and Berkshire all bring something different to this deal. Berkshire brings its insurance experience. Amazon brings technology and JP Morgan can help tackle payment issues as one of the world's largest banks.
Berkshire Healthcare Unit: Cost saving
The cost savings from this initiative could be substantial. As analysts at Barclays point out, Berkshire Hathaway had around 367, 000 employees at the end of 2016, almost all of which are based in the US. As a result, “we anticipate this effort could ultimately mean important expense savings for the company.” Meanwhile, JP Morgan has over 225,000 employees, making it the second largest US-based bank employer. Amazon has around 500,000 US employees. In total, according to analysis from Credit Suisse, there are around 1 million employees that could benefit from this initiative.
As noted above, each company is likely to bring something different to the deal. Barclays’ analysts note that Amazon “arguably has the best technical abilities of any company we cover” and while disruption has generally been the result of one well-placed company, not a collaboration between others, the fact that Amazon is the best in the space increases the likelihood that the new entity will succeed.
Indeed, as well as its tech experience Amazon will have the backing of JP Morgan, which will be able to leverage “its technology in the space, as the healthcare customer payment experience continues to evolve.” This includes, according to the team at Barclays, “helping providers offer consumers access to financial information like cost and price transparency; real-time out-of-pocket balances and plan data; and a wide range of payment options, such as payment plans, online or mobile payments, and prequalifying assistance for Medicaid.”
However, while all the building blocks are there, this consortium still has some way to go before a fully functioning healthcare disruptor is a reality. As Bank of America’s healthcare research analysts point out, the new entity's “ management team is still being formed, there is no actual HQ, and the companies admit that they do not have solutions built to reduce costs.”
“The companies state that this entity is in the early planning stages and acknowledge that the lack of healthcare expertise is part advantage and part disadvantage. In fact, the press release noted that the companies do not have a clear answer how to lower costs, somewhat mitigating our fear of any near-term impact.”
Despite the buzz around the initial announcement, the team at BoA appears skeptical that this new endeavor will be victorious over the long-term. Specifically, the report from the healthcare team notes “healthcare is not in any of these companies’ DNA, leading us to believe that this will take at least several years to play out and there is a strong possibility that it never reaches its potential.”
Also, the report goes on to say any concerns about the impact Amazon will have on pricing within the healthcare industry are unwarranted because “80% of hospitals are non-profit and half of managed care is, so the for-profit players are used to competing against companies who price below costs from time to time.”
Analysts at Raymond James hold a similar view. They believe the fact that these three industry giants have been forced team up shows how difficult it is to disrupt the existing healthcare infrastructure:
"In our opinion, the announcement also shows the challenge of penetrating the fragmented healthcare industry. Amazon for now is not going alone in pursuit of achieving cost efficiencies in the healthcare arena, but is teaming up with Berkshire Hathaway and JPMorgan Chase. Buying consortiums like the Health Transformation Alliance (HTA) illustrate the challenges of aligning member interests to achieve a common objective. The impact that they have on the healthcare system tends to occur over time in modest increments rather than in a quick, dramatic fashion."