Janus Henderson: Amazon takes on healthcare
News that Amazon.com, Berkshire Hathaway, and JPMorgan Chase are forming an independent healthcare company to lower costs for their employees sent shares of managed care providers, pharmacy benefit managers, and other healthcare companies falling. So far, details of the project are limited: in a press release announcing the partnership, Jeff Bezos, Warren Buffett, and Jamie Dimon, the companies’ respective chief executive officers, acknowledged that the initiative was in the early planning stages and would not be without its challenges.
We agree with this assessment and therefore believe the initial stock sell-off could be short-lived. For one, Amazon, Berkshire Hathaway, and JPMorgan employ 1.1 million people combined. By comparison, a major insurer, such as Aetna, provides coverage to tens of millions of people. Pharmacy benefit managers, which administer prescription drug programmes for health plans, also have significant scale that will be hard to match. Meanwhile, the healthcare system is highly regulated and localised, built on a complex web of relationships with entrenched players. In other words, these industries are unlikely to be toppled overnight.
Using technology to lower costs
Long term, however, the partnership could help accelerate change that is already budding within the sector. As stated in the release, the new company will focus first on leveraging technology to provide “simplified, high-quality and transparent healthcare at a reasonable cost.” No doubt, healthcare is primed for cost rationalisation, especially now that more consumers are bearing a higher portion of expenses through high-deductible plans. Until recently, investors assumed Amazon might target retail pharmacy, where the company could provide convenience (taking advantage of its distribution network) and price transparency. Now that Amazon’s sights are set on the broader industry, cost efficiency is likely to become even more important in the sector as a whole.
Finding efficiencies now
We have long appreciated companies that improve patient lives, make the healthcare system more cost efficient and achieve better outcomes. Firms providing high-cost, high-margin services carry greater risk, in our opinion: examples may include retail pharmacies at risk of the ‘Amazon effect’ and areas of the services industry that face reimbursement pressures.
Already, many businesses are delivering innovative therapies to patients with high, unmet medical needs or developing the types of technologies that Amazon and its partners might support, such as telemedicine (whereby a practitioner provides care remotely, such as via video). At the same time, some insurance companies are achieving organic growth by focusing on markets with secular tailwinds, such as Medicare Advantage, which benefits from an ageing population.
Long term, Amazon, Berkshire Hathaway and JPMorgan may be able to create a blueprint for using technology to cut waste and achieve better outcomes. It is a project that will take time, but one that could have a positive impact on ever-rising healthcare costs. The US healthcare system is complex, but it is foolish to underestimate the change that can be wrought by technology and consumer behaviour. We will be watching.
Rich Carney, Healthcare Services Analyst with the US-based Janus Henderson Healthcare Sector Team