BAM! Amazon Takes On Healthcare

I received an email the other day reminding me that my regular drug prescription was up for renewal. A few clicks of the mouse later and my next batch was in the process of being dispatched, to arrive at my front door a few days later. Before this online innovation, I would have had to physically go my doctor to renew the prescription, then to the drugstore to collect the product. The price is the same, but the efficiency savings cut costs. However, there is now increasing focus on the price element, leading to interesting developments in healthcare provision.

Berkshire Hathaway, Amazon and J.P Morgan have announced an alliance (let’s call it BAM for now) to overhaul the way it provides healthcare for their employees. The brand new scheme is short on details at this juncture, but the most striking aspect is that the consortium are intent on pursuing a “not-for-profit” model of healthcare provision. The undoubted aim is to reduce healthcare prices. All three companies are concerned about the burgeoning costs of healthcare provision for their employees and so are taking matters into their own hands by combining their expertise in technology, insurance and finance.

The US has the most expensive healthcare system in the world. According to the U.S. Centers for Medicare & Medicaid Services, healthcare spending in 2016 totaled 17.9% of the entire U.S. economy and per-capita spending was around $10,348. Of course, there are huge structural barriers to disrupting the healthcare industry in the U.S, not least the vested interests that lobby the government, but the new BAM consortium will be eagerly watched to see if their model will be spread further.

In fact, more companies are already interested in joining in. According to a USA Today article, Rob Andrews, CEO of The Health Transformation Alliance says, “We are interested in exploring ways we can work together, and I trust that we will.” The Health Transformation Alliance was formed in 2015 by American Express, Macy’s, Verizon and Caterpillar, and has added more participants since.

This is further evidence of technology’s structural downward pressure on consumer prices. If the decades-long uptrend in inflation-adjusted healthcare prices can be broken, it would probably mean that the healthcare sector overall will need to get used to reduced earnings expectations. As the chart below shows, the U.S healthcare sector has steadily outperformed the S&P 500 for (at least) the last 23 years. Since the mid-1990s, the S&P 500 Healthcare index has risen by 1,019%. The only other sector to beat that is Technology, with a return of 1,250%. The other eight sectors of the S&P 500 only managed an average return of 363%.

Clearly, the healthcare industry is viewed as being ripe for disruption by utilizing technology in order to leverage efficiency gains and, consequently, lower prices. As the “Amazonification” of services takes hold, other service providers, such as legal, must be looking on with trepidation.