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What might the Amazon, Berkshire and JP Morgan health care joint venture actually do?

Why did Warren Buffett say the biggest issue facing American businesses as they compete abroad is the cost of healthcare?  

Why did Charlie Munger recently say: “The current US health care system runs out of control on the cost side and leads to behavior that’s not just regrettable, but evil.”

Amazon, Berkshire and JP Morgan (ABJ) recently announced that they are creating of “an independent company free from profit-making incentives and constraints…to address healthcare for their U.S. employees” generated a lot of publicity. ABJ said that the initial focus of the joint venture will be on “technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.” A report on CNBC indicates that JP Morgan would like the effort to reduce the $1.5 billion they spend on employee health care by 20%. What will ABJ actually do and will they be successful?

Before answering the previous question, it is essential to understand both the nature and magnitude of the health care problems that exist today in the United States. Warren Buffett frames the core problem with US health care system succinctly: “In almost every field of American business, it pays to bring down costs. There’s … no incentive to bring down costs.” He is saying that the core of the health care problem in the United States is that the system does things like compensate people who provide products and services for procedures rather than outcomes. In short, since the right incentives do not exist in the US health care system, no one should be surprised about the results we get. Charlie Munger has described many times how perverse incentives can create a horrific result:

“If the incentives are wrong, the behavior will be wrong. I guarantee it. Not by everybody, but by enough of a percentage that you won’t like the system.” “Show me the incentive and I will show you the outcome.” “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”

How big is the problem? Jamie Dimon of JP Morgan points out “We spend 17% of our GDP in healthcare.” Some people say that it is actually now 18%.

How do these health care cost increases cost increases show up in insurance rates? You can find a lot of data in the end notes to this blog post, but in the chart below is one set of numbers from Milliman which is representative of what is at stake for ABJ and similar businesses and their employees:


As another example of the scope and trajectory of the problem a group of more than 40 major corporations called the “Health Transformation Alliance” created this chart to capture the cost problem:


Munger knows health care issues well since he became a Trustee of Los Angeles Good Samaritan Hospital in 1979 and has served as its Chairman since 1987. As an example of Munger’s views, at an event at Stanford Medical School Doctor Robert Pearl heard him tell a story to make his point about problems created by improper incentives. Pearl recounts that story and then adds his own view:

“to demonstrate the perverse economic incentives underpinning American health care, Munger recalled a story about rattlesnakes. In a small Texas town, the local government had an idea to combat the growing snake problem. They offered a bounty for every dead rattler brought into city hall. The next thing they knew, everyone in the town was raising rattlesnakes. This well-intentioned incentive didn’t solve the rattlesnake problem, but it does well to demonstrate the perverse consequences created by health care’s fee-for-service model. As an example, Munger talked about one surgeon who was known for removing normal gallbladders. Having been caught doing what most surgeons would describe as inappropriate surgery, what was his response? The doctor said taking out a normal gallbladder was a reasonable way to “prevent disease.” He said he was helping his patients avoid the dangers of a possible rupture. However, this almost never happens in people with normal gallbladders. Of course, this isn’t the only instance of a doctor abusing the system. In cities like Miami with a surplus of doctors and facilities, we see twice the number of tests, procedures and hospitalizations than in other communities. Whenever a group is paid to do more, not better, the outcome isn’t hard to predict.”

When the ABJ announcement appeared in the press most people assumed it would involve the creation of a non-profit “pharmacy benefit manager” with some similarity to Express Scripts and CVS Health. It could also try to negotiate drug prices directly with pharmaceutical makers as Caterpillar has done. That might be able to reduce health care costs to some degree, but more change would be needed to create the desired result. It should be noted that the pharmacy benefit business is one that Amazon may pursue directly. Amazon is doing this in Japan already:

“Amazon.co.jp also started selling category No. 1 drugs, which require consultation with a pharmacist before purchase, at its website from Monday. Before placing orders, customers need to report their symptoms and medical history via a form on Amazon’s site. Items will only be delivered after approval by a pharmacist.”

Even in the US Amazon already offers over-the-counter medications like Advil and Mucinex  and a line of products from Perrigo’s generic GoodSense brand. A move into prescription drugs seem like a logical next step for Amazon with or without ABJ

A Bloomberg article cited in the end notes has an analysis of the fight between the drug makers, the pharmacy benefit managers and others about costs, prices and profits. There are enough variations in list prices and real prices and rebates in the systems to make your head spin around.  ABJ bringing more transparency to this system and others copying them may therefore act as a disinfectant.  Bloomberg speculates:

“The new [ABJ] joint venture could do something far more drastic if it bargained directly with drugmakers for top-selling medicines or even created an online bidding system for the manufacturers. The trio could partner with RX Savings Solutions, for example, a startup with an app that peers into a patient’s insurance plan to help find lower-cost drugs. Amazon could eventually open its own mail-order pharmacy to compete directly with PBMs. Recent speculation about an Amazon-like market for drugs has rattled investors in PBMs, pharmacies, and drug wholesalers.”

One reason why ABJ is structured as a non-profit may be that there is little profit to be obtained anyway. A Business Insider interview with Dimon has a good explanation:

“The three companies are self-insured employers, which means that when you’re an employee going to a doctor’s appointment, your employer is ultimately footing the bill for the MRI you receive, rather than a health insurer. The insurance companies are there in the middle to handle the logistics of getting the claim from one place to another. “So I tell people, JP Morgan Chase already buys a $1.5 billion of medical, and we self-insure,” Dimon said. “Think of this, we’re already the insurance company, we’re already making these decisions, and we simply want do a better job.”

Since acting as the bargaining agent for employers who self-insure is a business that generates a relatively thin profit margin, little is sacrificed by making the effort a nonprofit.

Given the range of activities that ABJ could do, it seems likely that the joint venture will  create its own version of a type of marketplace called a “narrow network” for participating employees. What is a narrow network?

“They offer their enrollees a small set of ‘in-network’ hospitals to choose from; and if the enrollee decides to go ‘out of network’, s/he will have to pay all or most of the healthcare expenses out of pocket.”

Narrow networks have at their center a core trade off: the employee is no longer able to go to any physician for service under the insurance system, but in return for that limitation, the system is able to obtain medical services at lower cost by putting the work out to bid which creates more affordable premiums. The employee is free to buy service outside the narrow network if they pay the cost (this pay for it yourself alternative is sometimes called “concierge service”). What this bidding process does is help create a market price for medical services. The end result will not be perfect, but it will be better than the non-transparent situation that exists right now. Without that change the patient usually does not even know what the service costs before or even when they consume it. For example, when I visited the emergency room last year for a consultation on a kidney stone, I did not know what the service would cost until I received a bill weeks later.

Business Insider describes the leading examples of a narrow network approach:

“If the whole nation had Kaiser Permanente care, the average quality of the care would go way up and the cost would go way down,” Munger has said. Narrow networks are becoming standard, especially among Medicare Advantage Plans, or private insurance alternatives to Medicare. About 35% of Medicare Advantage members were in narrow network plans, while 22% were in broad-network plans in 2015, according to the Kaiser Family Foundation. They’re also common in the Affordable Care Act Marketplace. But still, the majority of health plans aren’t built around narrow networks, especially employer-funded plans, which proponents of narrow networks say keeps healthcare costs high.”

The most important change is the alteration of incentives for health care providers. At a recent event involving four leading health care organizations in Washington state—Kaiser Permanente, Overlake Medical Center, Seattle Children’s and Virginia Mason, some of the key recommendations for reducing health care costs included

“movement from a fee-for-service model to one based on medical outcomes. There will come a day when physicians are no longer paid for every service they perform, and instead will be compensated for the quality of care provided. In fact, physicians who practice at Kaiser Permanente medical offices are already compensated this way. …Providers and carriers are [also] all working to be more upfront in their pricing, so patients can compare costs before choosing a provider, as well as know how much a service will cost before they get the bill. … Regarding [more transparent] information, Kaiser Permanente members are able to easily access their medical records online, even via their mobile device. Virginia Mason is also developing mobile access. [Health care providers will also increasingly] bring health care to where the patients are. Kaiser Permanente offers CareClinics, walk-in clinics at 10 area Bartell Drugs. Virginia Mason and Seattle Children’s both have wellness centers on site for their employees. Kaiser Permanente, Seattle Children’s, and Virginia Mason all have a number of regional clinics.”

Why don’t all employers move to narrow networks? Perhaps most importantly the competition for employees is fierce in many industries. Employees don’t like to be told that their existing doctor is outside of the narrow network and that can significantly impact recruitment and retention of key employees. Another gating issue for narrow network arises because for certain more complex or rare special medical needs the best treatment can only be obtained at a high-cost provider in a region. These rare or special conditions may need to be excluded from narrow network requirements as a result. For example, how many employees would leave or not join Amazon if they did not allow employees to use the Swedish or University of Washington medical systems?

Rather than require that employees use a narrow network a system of positive incentives to use them seems more practical and likely. These incentives will need to be very significant for behavior to change. What have we learned so far from experiments in some regions of the United States so far?

“Insurers here and across the country have been launching websites and smartphone apps that offer detailed cost information on some medical procedures and services, such as knee replacements, MRIs and colonoscopies. The goal is to lower health care costs by helping people find and compare prices at area hospitals and clinics, which traditionally haven’t advertised what they charge.  Insurers rolled out these cost calculators as more of their customers enrolled in high-deductible health plans that require spending hundreds or thousands of dollars out of pocket each year before insurance kicks in. It’s still to be determined whether price transparency on its own can substantially slow the rise or even lower the costs of health care, and, by extension, insurance premiums.”

Sorting out the relative prices available is not easy since lists of the sticker prices for every procedure and service at a hospital (“charge masters”) are not publicly available. making things even harder is the fact that the charge masters do not reflect the discounts available to each insurer. This means that any legislation requiring that charge masters be made publicly available must require health care providers to include the specific discounts given to each insurer in what they disclose. Without that information on per insurer discounts, the prices needed for patients to shop for services are not sufficient for them to make informed decisions.  There are a range of dashboards and electronic medical records approaches which ABJ could adopt that people are speculating about including one report from The New York Times about what Amazon has already been doing.

Another approach to lowering the cost of health care in the US is “reference pricing,” which is form of defined contribution health benefit in which plan sponsors pay a fixed amount or limit their contributions toward the cost of a specific health care service, and health plan members must pay the difference in price if a more costly health care provider or service. This slide illustrates one approach to reference pricing:

Reference pricing

A medical school professor quoted in the Detroit Free Press has said about the impact of reference pricing usage to date: “More hospitals offered the service at the reference price once the reference price was determined.” But more data and experiments are needed to see if substantial saving can be realized.

What does the data says about the impact of higher deductibles for patients? One analysis concludes:

“We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g., preventive services) and potentially wasteful care (e.g., imaging services).”

JP Morgan’s Jamie Dimon has said on this point: “Going into deductibles was important to get you to shop a little bit but hasn’t really worked really well”

What this seems to suggest is that incentives that look like carrots (reward patients for actively shopping prices for services will work better than incentives that take the form of a stick. The Detroit Free Press gives an example of a carrot-style approach that involved a patient shopping for a colonoscopy:

“Karen Kuiper of Grand Rapids received $100 in the mail from her health insurer, simply for shopping online for good deals. What did she buy? A low-cost colonoscopy. Her insurer covered the entire bill for the roughly $530 procedure, which, thanks to Kuiper’s bargain hunting, could have saved the company $1,000 or more than if she had visited a higher-cost medical provider.”

JP Morgan also uses positive incentives in its existing plans:

“JP Morgan for example has lowered deductibles for employees who make less than $60,000 a year. The deductible can also be tied to lifestyles as well, bringing that deductible even lower. “If you do your wellness stuff now, if you take care of yourself, if you don’t smoke, we give you benefits and the deductible effectively goes to zero,” [Dimon] he said. “So we’ve kind of really made it easier for folks to get proper medical care.”

One of the leading voices on health care issues is Dr. Atul Gawande’s who wrote an influential article in The New Yorker entitled ‘The Cost Conundrum” which about cost variances in health care in McAllen, Texas. Charlie Munger though the article was so important he sent $20,000 to him via The New Yorker even though he had never met him. Part of what Dr. Gawande in that article is as follows:

“This is a disturbing and perhaps surprising diagnosis. Americans like to believe that, with most things, more is better. But research suggests that where medicine is concerned it may actually be worse. For example, Rochester, Minnesota, where the Mayo Clinic dominates the scene, has fantastically high levels of technological capability and quality, but its Medicare spending is in the lowest fifteen per cent of the country—$6,688 per enrollee in 2006, which is eight thousand dollars less than the figure for McAllen. Two economists working at Dartmouth, Katherine Baicker and Amitabh Chandra, found that the more money Medicare spent per person in a given state the lower that state’s quality ranking tended to be. In fact, the four states with the highest levels of spending—Louisiana, Texas, California, and Florida—were near the bottom of the national rankings on the quality of patient care.”

… nothing in medicine is without risks. Complications can arise from hospital stays, medications, procedures, and tests, and when these things are of marginal value the harm can be greater than the benefits. In recent years, we doctors have markedly increased the number of operations we do, for instance. In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens. Are we better off for it? No one knows for sure, but it seems highly unlikely. After all, some hundred thousand people die each year from complications of surgery—far more than die in car crashes.

… McAllen and other cities like it have to be weaned away from their untenably fragmented, quantity-driven systems of health care, step by step. And that will mean rewarding doctors and hospitals if they band together to form Grand Junction-like accountable-care organizations, in which doctors collaborate to increase prevention and the quality of care, while discouraging overtreatment, undertreatment, and sheer profiteering. Under one approach, insurers—whether public or private—would allow clinicians who formed such organizations and met quality goals to keep half the savings they generate. Government could also shift regulatory burdens, and even malpractice liability, from the doctors to the organization. Other, sterner, approaches would penalize those who don’t form these organizations.”

An example of another new approach which changes incentives is what the health care industry is now calling “bundled payments”:

“A bundled payment means that instead of paying the hospital for each component of a procedure, Medicare will pay one bundled payment, which includes all services related to an episode of care and typically includes 90 days of postoperative follow-up and any related complications or readmissions that arise during that period. The price covers all providers involved, including physicians, hospitals, lab work, post-acute providers, etc. In a bundled payment system, the money paid out to the hospital is determined by how effective the procedure was based on a 90-day period after the procedure. Medicare will set a target and if the cost of the procedure goes beyond the target, it will require a refund from the hospital, while those that come in under the target would be able to keep the difference.”

Why are the businesses driving ABJ engaged in this effort together? Getting to critical mass in creating a platform is sometimes called overcoming the “chicken and egg problem.” The nature of this problem can be stated simply: How do you get one side to be interested in a platform until that other side exists, and vice versa. Part of the challenge is to get enough customers on both sides so there is critical mass. ABJ via its employee base has enough purchasing power to justify the creation of the platform and the participating by a critical mass of health care providers.

Amazon has the skills and systems to create a transparent marketplace, Berkshire has insurance expertise and JP Morgan Chase has payments and other expertise. They are also huge purchasers of health care services. The leaders of these businesses want to solve this important and very hard problem. All of that is helpful. But there are no easy answers. Th incentives for people to try to stop and meaningful reform are huge for the reasons noted by Munger here:

“If the government is going to pay A anything he wants for selling services to B, who doesn’t have to pay anything, of course the system is going to create a lot of unnecessary tests, unnecessary costs, unnecessary procedures, unnecessary interventions. Add the fact you’ve got politicians and add the fact you’ve got existing players who are enormously rich and powerful, who lobby you like crazy. Given the level of GDP going to the medical system, imagine what the lobbying is like.”

Some people may say in response to what was said above: “I like my employer provided plan.” Health care providers may also object to the changes saying that they like the financial rewards they get from the existing system. What these people may not realize fully is that another system may be implemented that will be far worse for them than what less drastic changes might produce as an outcome. Putting on their hats as citizens of the US they may also see that the current trajectory of health care costs is not sustainable and it is harming the foundation of the system that supports their quality of life. Something that cannot go on forever, like the trajectory of health care costs, must eventually stop or major important aspects of society may break.

It is easy to be cynical about these issues. Cynics may ask: just three companies in a joint venture are going to solve this massive problem? The key to meaningful change is a positive feedback loop and the way to create a jump start for the phenomenon is for groups like ABJ to act and for others to follow their example. One thing is clear, if incentives do not change, nothing will change.

P.s., Recently Charlie Munger said this about the state of heath care in the United States:

“Healthcare: There’s a lot of crapola that just causes us to run out of money. Other systems like Singapore and Socialist Western Europe use smaller amounts. It is out of control, and incentives are wrong. I don’t know how the deal with Amazon and JPMorgan will work out. That’s a very difficult thing to take on. Atul Gawande at Harvard is best writer in the medical profession and an honorable and clear-thinking man. His parents were both physicians, and he can check all the boxes, so I listen to him. It wouldn’t be hard for a benign despot to do something dramatic. Take macular degeneration. Old people need a shot. I could give that damn shot.  It’s not that hard to shoot a little goop in the eye.  There are two substances for the goop that are both equally effective, and the one that’s pricier is used all over America. Many a man who is dying is like a carcass in West Africa. In comes all the vultures and hyenas and assorted carnivores who come in to feed to bleed money out of old people. It’s not right to bleed so much money out of our dying people. There’s not a hospital that’s not dialysising people to death. It’s deeply immoral, so if someone [like Berkshire, JP Morgan and Amazon’s partnership] wants to assault the asininity of the system, I welcome it. I am all for someone trying to figure it out. I don’t want to do it, because I am too old. If they ask me to serve on such a panel, I’d decline.”


2017 Milliman Medical Index

By Christopher S. Girod, Susan K. Hart, Scott A. Weltz | 16 May 2017

In 2017, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $26,944 (see Figure 1), according to the Milliman Medical Index (MMI).1


1. The MMI’s annual rate of increase is 4.3%. This is the lowest rate since we began tracking the MMI in 2001. Yet the total dollar amount is still bracingly high. Of the $26,944 spent by the MMI’s family of four, $11,685 is paid by the employee, through a combination of $7,151 in payroll deductions for premium, and $4,534 in out-of-pocket costs incurred at time of care.

2. Prescription drug trends are lower, but still high. For the first time since 2013 and 2014, the family of four’s prescription drug trends have decreased in two consecutive years. Still, the 2017 prescription drug cost increase of 8% is more than double the medical increase of 3.6%.2

3. Employees pay a bigger piece of the healthcare cost pie. Through their payroll deductions and through out-of-pocket expenses incurred when care is received, employees now pay for about 43% of expenses and employers pay the other 57%. The difference between these two shares has gradually narrowed since 2001, when employees contributed 39% and employers contributed 61%. High growth in per-employee healthcare expenditures have pushed employers to limit their contribution increases to amounts below the rate of healthcare inflation.

Some stakeholders have held out hope that federal healthcare reform efforts would help control healthcare cost growth. So far, those efforts have had relatively little direct impact on the MMI, because the MMI represents healthcare costs in an employer-sponsored health plan, while the primary focus of healthcare reform has been on the individual insurance marketplace and Medicaid. The employer market tends to be one of the most stable markets for health insurance companies, and one of the most financially important for healthcare providers such as hospitals and physicians. As discussed in a later section of this report, providers receive higher payment for patients in employer-sponsored plans, for the exact same basket of services, than they do for other insured patients. Employers and employees have been subsidizing other markets for many years.”  http://www.milliman.com/insight/Periodicals/mmi/2017-Milliman-Medical-Index/



End Notes:

ABJ Press Release https://www.businesswire.com/news/home/20180130005676/en/Amazon-Berkshire-Hathaway-JPMorgan-Chase-partner-U.S.

Dr. Perl talks about Munger’s remarks at Stanford Medical School: https://www.forbes.com/sites/robertpearl/2015/03/19/atul-gawande-charles-munger/#6bc1fb1a335f

Munger on health care: https://www.forbes.com/sites/phildemuth/2015/04/13/charlie-mungers-2015-daily-journal-annual-meeting-part-2/#791e7f388261

Narrow Networks: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2857305

Business Insider: http://www.businessinsider.com/amazon-berkshire-hathaway-jpmorgan-and-employer-funded-healthcare-2018-1

Tren on multi-sided markets: https://25iq.com/2016/10/22/a-dozen-things-ive-learned-about-multi-sided-markets-platforms/

Bundled Payments: http://carpevitainc.com/the-pros-and-cons-of-bundled-payments/

Trends in Health Care in Washington State: https://wa-business.kaiserpermanente.org/future-healthcare-trends-washington-state/

Dr. Atul Gawande- “The Cost Conundrum”: https://www.newyorker.com/magazine/2009/06/01/the-cost-conundrum an follow up article:  https://www.newyorker.com/news/news-desk/atul-gawande-the-cost-conundrum-redux

People save money and get awards for health care price shopping  https://www.freep.com/story/money/2018/02/14/saving-money-health-care-price-transparency/1078245001/

What does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics  https://academic.oup.com/qje/article/132/3/1261/376942 1

Reference Pricing:  https://bcht.berkeley.edu/sites/default/files/utah_reference_pricing_082916.pdf

Japan Times on Amazon:  https://www.japantimes.co.jp/news/2017/04/19/business/amazon-launches-same-day-delivery-service-for-food-and-medicine/

OTC medications and Amazon: https://www.cnbc.com/2018/02/20/amazon-has-quietly-launched-an-exclusive-line-of-over-the-counter-health-products.html

CNBC Jamie Dimon Interview:  https://www.cnbc.com/2018/01/30/how-jamie-dimon-jeff-bezos-and-warren-buffett-got-together-to-change-american-health-care.html

Business Insider Jamie Dimon Interview:  http://www.businessinsider.com/jamie-dimon-why-jpmorgan-amazon-and-berkshire-hathaway-are-starting-healthcare-venture-2018-2

Bloomberg on Health Benefit Providers:   https://www.bloomberg.com/news/articles/2018-02-14/what-stands-between-bezos-buffett-and-dimon-and-a-health-care-fix

2017 Employer Health Benefits Survey:  https://www.kff.org/health-costs/report/2017-employer-health-benefits-survey/

Health Transformation Alliance:  http://www.htahealth.com/



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