Amazon has chosen its initial partners for its foray into healthcare—Berkshire Hathaway, the third largest public company in the world, and JPMorgan Chase, one of the largest banks in the world. Their mission is ambitious: to check the rise in health costs while concurrently enhancing patient satisfaction and outcomes. Can these three companies, none of which have expertise in healthcare, truly make a dent in healthcare costs? I would argue yes.
Here are three reasons why this partnership is fertile ground to realign innovation efforts with affordability and a long-term focus on health:
Self-insured employers play by different rules
The partnership’s first priority, as JPMorgan Chairman and CEO Jamie Dimon has stated, is to “create solutions that benefit our U.S. employees, their families, and potentially, all Americans.” Many have speculated this equates to covering their employees in a self-insured manner first. If this happens to be the case, the partnership will be constructing its model within a market that is conducive to minimizing costs.
In the private insurance market, private insurance companies are disincentivized to encourage innovation that lowers care costs, in part due to the Medical Loss Ratio. The Medical Loss Ratio is the ratio of expenditures in medical claims paid by an insurer for care of their beneficiaries to premium revenue. Private insurance companies are required to keep their MLR above 80% in the small group market and 85% in the large group market. Though the Medical Loss Ratio intends to ensure care is not withheld from beneficiaries, it also changes the profit maximization strategy for private insurers.
Instead of improving their bottom line with preventive care and finding ways to lower care costs, these private insurers profit when the 15 to 20% of premium revenues not seen as “medical loss” (such as overhead, administrative costs, and profit) is as large as possible. In order to maximize profit, the total revenue collected in premiums must also be as large as possible—pushing insurers to not only cover as many lives as possible, but raise premiums. Such a market discourages innovation meant to control care costs, as any successful initiatives would only end up diminishing the potential for profit.
Self-insured employers, however, get to play by different rules. Because they’re not bound by Medical Loss Ratio standards, they have a significant impetus to minimize cost, relative to the private insurance environment. If the new partnership truly prioritizes the goal of lowering care costs, positioning itself in the self-insured ecosystem will be ideal as it develops its payment and delivery model.
Integration of new resources and capabilities
Each partner brings with it an abundance of resources and capabilities that when combined, hold potential to create a unique model for purchasing and delivering patient care.
Amazon has taken some initial steps into pharmacy, and it brings to the table its vast experience in creating digital platforms that cater to consumer preferences and facilitate buyer and seller engagement in a market. Amazon has also brought in expertise on cutting edge healthcare delivery models that focus on determinants of health beyond the medical realm via its new hire, Martin Levine, formerly of Iora Health. How these capabilities and resources will be put together is yet a mystery. But it seems Amazon is not just seeking to implement digital tools into traditional care delivery models, but rather building a new and innovative model for purchasing and delivering care altogether.
As a banking powerhouse in the U.S., JPMorgan brings capabilities in providing financial services to individuals and commercial entities. JPMorgan may see opportunity in finding new ways to help individuals come up with long-term solutions to finance the purchase healthcare coverage.
Currently, across the U.S., private health insurance beneficiaries switch health plans often, and this trend leads to a diminished financial ability for healthcare payers and providers to seize accountability for long-term patient health. For example, it takes about a decade for insurers to recoup their investment in early diabetes treatment, during which time their enrollees have likely moved on to another health plan, leaving a competitor or Medicare/Medicaid to benefit from the initial investment. JPMorgan may be able to integrate health insurance with long-term financial services such as student loans or mortgages, expanding the time horizon of care to longer than we see now with typical insurers.
It’s unclear what relevant capabilities Berkshire Hathaway brings to the table, but its holdings (including the likes of Apple, the Kraft Heinz Company, American Express, The Coca-Cola Company, and Wells Fargo) are likely to be the next sites to scale any successful models that emerge from the partnership. More on that in a bit.
Ability to scale quickly
Once a sustainable model emerges from the partnership’s self-insured employer ecosystem, don’t expect it remain within the confines of the partnership for long. The partnership has clearly stated it seeks to control costs and improve healthcare on a national level, referring to the “the ballooning costs of healthcare” as a “hungry tapeworm on the American economy.” As Amazon (potentially) works with JPMorgan in creating payment plans to reach individuals and employers, look for Berkshire Hathaway to expand the employer model to many of its holdings across the nation.
We don’t know the answer for how this partnership will ultimately play out, and it’s unlikely that the three partners have all of the answers either. From the start though, it seems they are positioning themselves in the right ecosystem to align their innovation efforts with lowering costs. Combine that with the tools the partnership possesses in personal finance, and it seems the partnership may be set to seize true accountability for long-term patient health.
Ryan Marling is a research associate at the Clayton Christensen Institute for Disruptive Innovation.