Innovation and Disruption

Should Hospitals Fear the Amazon-Berkshire-JP Morgan Entity?

March 1, 2018 9:02 am

Hospitals can respond to the potential disruption by implementing several commonsense steps, advisers say.

Feb. 28—Although little is yet clear about the high-profile collaboration between three innovative companies, hospitals could see a range of impacts, industry watchers say.

Berkshire Hathaway, Amazon, and JP Morgan announced Jan. 30 the formation of a partnership to address health care for their U.S. employees, “with the aim of improving employee satisfaction and reducing costs,” according to a release.

The announcement, which included few additional details, was widely viewed as having the potential to shake up a massive and growing sector that has seen scant large-scale innovation. The announcement alone was credited with driving a $30 billion one-day stock loss among the five largest insurers and three largest pharmacy benefit managers (PBMs).

But a month later, the healthcare industry remains uncertain about the direction of the initiative.

“There’s no impact now; from what I can tell, they made the announcement without having a plan,” said Thomas Scully, general partner at Welsh, Carson, Anderson & Stowe and administrator of the Centers for Medicare & Medicaid Services (CMS) under President George W. Bush.

But healthcare watchers have started looking at ways that the new entity could impact the sector.

One scenario in which the impact could be small is if any initiatives are limited to the employees of the three companies. Only 750,000 of their employees are based in the United States, according to some estimates, and spending about $10,000 per year on each would total only $7.5 billion annually—a tiny share of the $3.5 trillion in U.S. healthcare spending.

“That is insignificant in every market in America,” Scully said. “If that’s their attitude—‘We’re going to drive change’—they’re not going to drive change; they’re too small.”

Potential Directions

Among the near-term possibilities is that the new entity could disrupt healthcare benefits “middlemen,” such as PBMs, brokers, and consultants.

Geoffrey Manne, executive director of the International Center for Law & Economics, noted that Amazon already has put competitive pressure on pharmacies and PBMs by seeking pharmacy licenses in a number of states.

Leslie Norwalk, strategic counsel with Epstein Becker & Green, and acting administrator of CMS under Bush, said the partnership could expand direct-to-employer contracting by providers.

The new company could still pay claims, like a traditional insurer, but change the way health care is provided or paid for.

“Employers might bring that change if they have, for example, HR departments that are perhaps more creative than we have seen at traditional insurance companies,” Norwalk said.

Scully said the new entity could drive the most change in the healthcare sector by buying an insurance company and PBM in a few mid-sized or larger markets, like Austin, Dallas, or Seattle.

They could “shake up the world by being transparent and show the world what they are doing and disclosing all of these prices,” Scully said. “That would drive some changes.”

That form of price transparency likely would drive similar approaches among other insurers.

“Insurers all follow each other,” Scully said. “They’re all trying to make their margins and they are trying to survive competitively. If Amazon came in and shook up the world, they would all react.”

The potential appeal of an insurance product from the new entity was reinforced by a new poll that found 35.8 percent of consumers would be open to using a health insurance plan created by Amazon. However, 32.9 percent were not sure and 31.3 percent would not seek such a plan.

Increasing consumer demand for transparency, cost effectiveness, network quality, and improved patient experiences could fuel the appeal of such a product, industry watchers say. In addition, superior navigational tools could drive provider selection by consumers based on transparent quality and cost parameters.

Chapin White, senior policy researcher at the RAND Corporation, said the new entity is most likely to impact hospitals because about $1 trillion of all healthcare spending goes through them.

“And there’s just hundreds of billions of dollars in revenues to hospitals from aggressive pricing,” White said. “If I were hospitals, I would be very worried.”

The partnership’s effort to bypass hospital systems may start with lab tests and then move on to using artificial intelligence to reduce the use of physicians and “do a complete end-run around physicians and the hospitals who run the system currently,” White said.

Threats to Hospitals

Given the capabilities of the new partnership, hospitals could be vulnerable in several areas, including patient volume, analysts say. For instance, if the new entity drives more effective steerage, it could accelerate the shift of profitable inpatient volume to the outpatient setting or move volume into lower-cost retail settings.

Others warn that vastly greater transparency could enable meaningful consumer shopping and real price pressure. And sharply increased consumer expectations around cost and experience could fuel a perpetuating cycle of shopping behavior.

Regardless of the initiatives that the new partnership pursues, hospitals can bolster their position by taking a range of steps, industry advisers say. For instance, they can aggressively build their brand with key target segments, reposition their outpatient portfolio to be more competitive, and close performance gaps on services that are easily shifted out of the hospital market.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare


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