'This initiative seems to have little market clout': Wall Street's confused by the Buffett-Dimon-Bezos healthcare push

  • Amazon, Berkshire Hathaway and JPMorgan are teaming up to form an independent, nonprofit venture that will be focused on healthcare for their US employees.
  • Exactly what this new company looks like remains to be seen.
  • This isn’t the first time large employers have banded together to form healthcare companies that take on the rising cost of healthcare.

Three massive employers are forming a new company to take on the “hungry tapeworm” that is healthcare costs in the US.

On Tuesday, Amazon, Warren Buffett’s Berkshire Hathaway, and JPMorgan said they plan to form the new venture, which will be focused on building technology solutions that will provide “simplified, high-quality and transparent healthcare at a reasonable cost” to US-based employees and their families.

Based on how few details were in the release about what this company looks like, the stock market’s reaction looks quite dramatic. The news sent healthcare stocks plummeting on Tuesday morning, especially health insurers and members of the pharmaceutical supply chain.

Piper Jaffray health services analyst Sarah James wrote that she didn’t expect this new company to have a big impact on healthcare, especially given how past efforts haven’t made many waves. “Many have tried, but few have succeeded,” she said. “We do not expect this JV to be a meaningful disruptor to the industry, despite the stock reaction indicating that it is.”

Barclays analysts said they didn’t view “the consortium approach as the right one when we look at technology disrupting an incumbent sector,” but added that “we are never dismissive of anything disruptive that Amazon is involved in.”

And RBC Capital Markets analyst George Hill said in a note: “At first glance this initiative seems to have little market clout with respect to impacting healthcare costs and would not seem to have the capability to displace established players.”

For one, this isn’t the first time employers have banded together in the name of lowering healthcare costs.

For example, 20 companies that cover about 4 million people formed the Health Transformation Alliance in 2016. The group has since swelled to more than 40 companies, covering 6 million lives, including Coca-Cola, American Express, and Macy’s.

The intent behind forming the alliance was similar to Amazon/Berkshire Hathaway/JPMorgan’s: “To improve the way corporations provide health care benefits in an effort to create better health care outcomes for their employees.”

So far, that’s meant a few key projects for the alliance. In March 2017, HTA announced that it was setting up a new partnership around prescription drug benefits, working with pharmacy benefit managers (companies that help negotiate lower prices for prescription drugs) to help come up with a plan that suited the alliance members.The HTA also said it’d be working to build new medical networks and using data – in partnership with IBM Watson Health – that would ideally help lower costs and improve outcomes.

Redrawing the lines of healthcare

The boundaries of the healthcare business have been changing. Instead of growing by acquiring other companies in the same business, companies have started to move into new lines of business, with no two combinations looking exactly the same.

CVS’s acquisition of Aetna, for example, sent a big shockwave through the healthcare industry. The move combined the largest pharmacy in the US with the third-largest insurer in what was the biggest deal of 2017.

Aetna CEO Mark Bertolini took the new venture created by JPMorgan, Amazon, and Berkshire Hathaway as a step in a similar direction.

“There is an unmet consumer need in health care. Individuals and families want a simple, affordable and high-quality experience that helps them stay well,” Bertolini said in a statement on Tuesday. “Our combination with CVS Health will help address those needs at the local level, and I am encouraged to see other companies working toward the same goal.”

And in January, a group of hospitals, including Salt Lake City-based Intermountain Healthcare, Ascension, SSM Health, and Trinity Health, along with the Department of Veterans Affairs health administration (a group that in total represents 450 hospitals) announced their plans to create a nonprofit generic drug company.

Their rationale? For years, health systems have been on the hook for skyrocketing drug prices for injections or drugs delivered through IV solutions, medications that have also been at the heart of drug shortages. The two challenges have made it harder to treat patients the way doctors want.

It’s possible that the new company created by JPMorgan, Amazon, and Berkshire Hathaway will similarly redefine the way we think about healthcare, though it will likely take a few more details to entirely figure it out. Analysts on Tuesday met the news with scepticism.

“While we find the combination of these companies as intriguing, we do not see how the companies disrupt the healthcare status quo immediately,” RBC’s Hill said. “We believe that the power to drive change at a rapid pace resides only in Washington, where we see little chance of regulatory directed change emerging in the near term.”

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