“It’s no secret Amazon.com Inc.’s Jeff Bezos has been looking to crack healthcare. But no one expected him to pull in Warren Buffett and Jamie Dimon, too.”

“News Tuesday (1/16/18) that Amazon, Buffett’s Berkshire Hathaway Inc. and JPMorgan Chase & Co., led by Dimon, plan to join forces to change how healthcare is provided to their combined 1 million U.S. employees sent shock waves through the healthcare industry.”

“The plan, though in early stages and focused solely on the three giants’ staff for now, seems almost certain to set its sights on disrupting the broader industry. It’s the first big move by Amazon in the sector after months of speculation that the internet behemoth might make an entry. The Amazon-Berkshire-JPMorgan collaboration probably will put pressure on profits for middlemen in the healthcare supply chain.”

“Details were scant in a short joint statement Tuesday. The three companies said they plan to set up a new independent company “that is free from profit-making incentives and constraints.”

Stocks sink

“That was enough to sink healthcare stocks. Express Scripts Holding Co. and CVS Health Corp., which manage pharmacy benefits, slumped 9.7% and 5.7%, respectively. Health insurers such as Cigna Corp. and Anthem Inc. also dropped.”

“The group announced the news in the very early stages because it plans to hire a chief executive and start partnering with other organizations, according to a person familiar with the matter. The effort would be focused internally first, and the companies would bring their data and bargaining power to bear on lowering healthcare costs, the person said. Potential ways to bring down costs include providing more transparency over the prices for doctor visits and lab tests, as well as by enabling direct purchasing of some medical items, the person said.”

“I’m in favor of anything that helps move the markets a bit, incentivizes competition and puts pressure on the big insurance carriers,” said Ashraf Shehata, a partner in KPMG’s healthcare and life sciences advisory practice in the United States. “An employer coalition can do a lot of things. You can encourage reimbursement models and provide incentives for the use of technology.”

“Bezos doesn’t expect the new venture to achieve its goals overnight. “Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort,” he said in the statement. “Success is going to require talented experts, a beginner’s mind, and a long-term orientation.”

“The initial focus of the new company will be on technology solutions that can provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable costs. In the statement, JPMorgan CEO Dimon said the initiative could ultimately expand beyond the three companies.”

“Our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans,” he said.”

High costs

“Any solutions the company devises would find a huge and receptive audience. With about 151 million non-elderly people, employer-sponsored coverage is the largest part of the U.S. health insurance market.”

“Companies get a tax break for offering health benefits to their workers, and many employers also see those benefits as a crucial tool for attracting and keeping workers. But costs are soaring and healthcare consumes a growing chunk of their budgets. Small businesses have been under particular strain.”

“Only 50% of companies with three to 49 employees offered coverage last year, according to the nonprofit Kaiser Family Foundation. That’s down from 66% more than a decade ago. The federal Affordable Care Act requires all companies with 50 or more full-time employees to offer it.”

“Healthcare spending was estimated to account for about 18% of the U.S. economy last year, far more than in other developed nations. Despite efforts to curb costs, studies suggest that U.S. doctors and hospitals continue to provide too much healthcare. In a survey of physicians’ perspectives published last year in the journal PLOS One, the average estimate was that 20% of medical care was unneeded, including about a quarter of tests, a fifth of prescriptions and more than 1 in 10 medical procedures.”

“Amazon, Berkshire and JPMorgan are among the largest private employers in the U.S., with a more than 1 million workers combined. And they’re among the most valuable, with a combined market capitalization of $1.6 trillion, according to data compiled by Bloomberg.”

“This isn’t the first time big companies have teamed up in an effort to tackle healthcare cost. International Business Machines Corp., Berkshire’s BNSF Railway and American Express Co. were among the founding members of the Health Transformation Alliance, which now includes about 40 big companies that want to transform healthcare. The group ultimately partnered with existing industry players including CVS and UnitedHealth Group Inc.’s OptumRx.”

Todd Combs

The latest effort is being spearheaded by Todd Combs, who helps oversee investments at Berkshire; Marvelle Sullivan Berchtold, a managing director of JPMorgan; and Beth Galetti, a senior vice president for human resources at Amazon.

Buffett handpicked Combs in 2010 as one of his two key stockpickers. Combs, 47, has been taking on a larger role at Berkshire in recent years, and Buffett has said that Combs and Ted Weschler, who also helps oversee investments, will eventually manage the company’s whole portfolio. Combs also joined JPMorgan’s board in 2016.

Sullivan Berchtold joined JPMorgan in August after eight years at the Swiss pharmaceutical company Novartis, where she was most recently the global head of mergers and acquisitions, according to her LinkedIn profile.

The management team, location of the headquarters and other operational details will be announced later, the companies said.

Buffett has long bemoaned the cost of U.S. healthcare. Last year he came out in favor of drastic changes in the U.S. health system, telling PBS NewsHour that government-run healthcare is probably the best approach and would bring down costs.

“The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” Buffett said in Tuesday’s statement. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”