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John Engle
John Engle
Articles (469) 

Warren Buffett Teams Up With Dimon and Bezos: What to Make of Their Health Care Plans

This 'dream team' could transform the health care landscape forever

If we were tasked with putting together a true dream team of business leaders, we would probably start with Warren Buffett (Trades, Portfolio), Jeff Bezos and Jamie Dimon. They each bring phenomenal (and diverse) skills and experience:

  • Buffett has bought and operated countless valuable businesses through Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
  • Bezos has built Amazon (NASDAQ:AMZN), an e-commerce behemoth that has recently taken the plunge into a range of other business pursuits.
  • Dimon has spent years at the helm of JPMorgan Chase & Co. (NYSE:JPM), the largest bank in the United States, leading it through the financial crisis into a post-recession era of impressive growth.

Together, they have all the skills one could possibly desire to tackle virtually any business venture. And, while it might once have seemed fanciful, that dream team is now becoming a reality.

JPMorgan and Berkshire are joining in Amazon’s effort to revolutionize their employees’ health care experience. Together, they aim to transform the way their employees – and perhaps eventually all working Americans – manage their health care.

Let’s take a look at what we know so far.

Amazon leads disruption

Of the three, Amazon has undoubtedly made the most aggressive play in health care. We recounted one of the major strategic moves the company has taken in a research note already, but it bears a brief recapitulation. Specifically, Amazon is expanding into the pharmacy sector.

This summer, it announced the acquisition of PillPack, an online pharmacy, for nearly $1 billion. While still miniscule compared to the dominant pharmacy giants such as Rite Aid (NYSE:RAD), Walgreens (NASDAQ:WBA) and CVS Health (NYSE:CVS), Amazon is looking to become more than just a niche player. It failed to penetrate the online pharmacy sector once before, nearly two decades ago, but this time the company is more mature, much bigger and armed with far greater resources.

This time, Amazon could pose a real threat to the big pharmacy chains over the long run.

Berkshire fights the economic tapeworm

Berkshire is also making moves in health care, albeit through investment rather than operational acquisition. Most notably, the conglomerate has built a sizeable stake in Teva Pharmaceuticals (NYSE:TEVA), a generic drugmaker. As political outrage among American citizens continues to grow toward mounting drug costs, such generic makers are well poised to thrive. While hardly as deep an operational play as Amazon’s, Berkshire is clearly getting more into the disruptive side of health care.

But Berkshire’s direct health care moves, and its partnership with Amazon and JPMorgan, is motivated by more than traditional value investing insights. Buffett himself is personally invested in changing the way health care works in America. He has described the rising costs of health care as a “hungry tapeworm on the American economy.”

JPMorgan commits to its employees

As a financial institution, JPMorgan has not done much in the way when it comes to health care. But CEO Dimon has demonstrated a deep personal commitment to changing health care and making it more affordable for Americans. Like Buffett, he sees the cost of health care as a huge problem in the United States:

Look, America has an issue, OK? We spend 17% of our GDP in healthcare. You know we have the best of all worlds — some of the best healthcare in the world. And the worst of all worlds. We don't do very good preventive medicine. It cost too much.”

Dimon has led an internal effort at JPMorgan to make employee healthcare more affordable. The company already works as its employees’ insurer, and it has endeavored to curb costs:

“JP Morgan Chase already buys a billion and a half dollars of medical, and we're self-insured. Think of this: We're already the insurance company, we're already making these decisions, and we simply wanna do a better job.”

The company has already been putting its money where its mouth is, using the recent windfall from tax reform not only to raise salaries, but also to cut deductibles for lower level employees. So given the narrow confines of its current collaboration with Amazon and Berkshire, JPMorgan makes perfect sense as a partner.

Combining forces

As a recent CB Insights report points out, the three-way collaboration offers some great advantages:

"By teaming up with JPMorgan and Berkshire Hathaway, Amazon now has an additional pool of more than 1.2M employees — diverse in socioeconomic status, geography, and age, among other factors — to test its products on before releasing them to the public.

“This could be helpful when searching for solutions that work for both specific use cases (e.g. chronic disease management) and population demands (e.g. pharmaceutical delivery).”

There are also clear parallels between the ways the companies handle health care. Like JPMorgan, Berkshire and Amazon are self-insured employers, meaning they essentially are their employees’ insurance companies, ultimately footing the bill for medical expenses.

Amazon, Berkshire and JPMorgan each have formidable market power and have been able to leverage scale and influence to the benefit of their employees. But they can accomplish far greater things by combining forces, as Dimon explains:

“In conversation with Warren...and Jeff Bezos, we said we know we can do more. We know we can do more just thinking through every single part of it. Both the customer-facing part so you might be able to get look at more data on your phone and stuff like that, getting you do wellness.”

With more than 1.2 million lives ultimately in their care, the three business magnates have both economic and ethical reasons to work together to improve outcomes and reduce costs.

Choosing a leader

In June, it was announced that Dr. Atul Gawande, a renowned surgeon and Harvard professor, would be taking the helm of the company. He officially started work in July.

Gawande comes from the world of medical practitioners and academia; his influential speaking and writing have made him a major thought leader in health and medicine. But he has little in the way of a business track record. That said, he has experience building health organizations from the ground up, including ones that required collaboration from multiple institutions. In 2012, he founded Ariadne Labs, a partnership between Harvard and Brigham and Women’s hospital. While he proved a successful leader there, Gawande is facing a much larger challenge ahead.

The choice of Gawande is an interesting one. It signals that Buffett, Bezos and Dimon want real medical talent at the highest level of the new venture, and that they appear more focused on leaders who can build a grand strategy first and foremost, with nitty-gritty business execution coming second - at least for now.

A chance for transformation

From the outset, it was claimed that the new company would be “free from profit-making incentives and constraints.” Unsurprisingly, skeptics have questioned whether the grandiose vision could be achieved, with some suggesting the whole enterprise may ultimately prove to be little more than an effort to push insurance costs down for the three companies.

But recent moves, especially concerning leadership, suggest the trio are serious about enacting real change. Certainly they can use their combined power to get better prices. But they may also be able to apply pressure to an industry rife with inefficiencies. Middlemen abound in the health care sector, raising costs for everyone without contributing to an efficient health care market. If the new venture can succeed in curtailing the value extraction alone, it could mean a 15-20% reduction in health care costs. That would be huge for employees.

The real question is whether any success of the three companies in reducing structural costs of health care could, given their combined footprint and influence, radiate outward to the rest of the market. They have a grand ambition and it may prove a serious challenge even for the likes of them. But it is rarely a good idea to bet against Buffett, Bezos or Dimon. Even less so to bet against all three at once.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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