Sunday, April 8, 2018

Amazon & Health Care: As at April 2018


“The cost of healthcare is a tapeworm on the American economy” - Warren Buffet

On Tuesday January 30, 2018 Amazon, Berkshire Hathaway, and JPMorgan Chase announced a partnership to cut health-care costs and improve service for their employees. Jointly these company employ 1.1 million people (LaVito, 2018). Their access to the frightening amount of capital sent health-care middle man stocks tumbling even though no actions had been announced. This venture is not a new initiative as there have been several ventures seeking to reduce costs. Most notably the Healthcare Transformation Alliance initiative, which is a group of 46 companies that banded together to lower health care costs (Wingfield, 2018). However, Amazon’s blunt pursuance of technological innovation to transform industries could effectively reduce costs for consumers.

Given Berkshire Hathaway and JPMorgan specializes in capital acquisition and investment, it is my assumption Amazon is the initiator of this venture. As effectively a logistics firm, Amazon would not see much growth without additional ventures. As shown in Chart 1, Amazon’s profits were relatively low until the introduction of it’s web-computing service. The Amazon Web Service (AWS) is used by companies such as Netflix and Spotify. Since the lunch of AWS, Amazon has enjoyed significant rise in corporate profits. However, with growing competition from the likes of Microsoft, Google, and IBM the space is becoming saturated. To continue growth, Amazon has been diversifying into additional industries such produces and now health-care. Thus, the market rightfully fears that the initiative will seek to disrupt the current healthcare market, even though the announcement was for 1.1 million people out of the 160 million that currently have employer-based care (Humer, 2018).


Chart 1: Amazon’s profit/loss graph from q1 2013 to q1 2017. Amazon, once a big spender, is now a profit machine.  Graph from https://www.theverge.com/2016/7/28/12313526/amazon-q2-2016-earnings-report-aws-cloud-profit
Amazon has already sold over-the-counter medicines on its website and unknown to most Amazon has partners with Dublin-based medicine manufacturer Perrigo (Luhby, 2018). Amazon has priced these medicines cheaper than its brick and mortar competitors. Thus, Amazon has positioned to build on it’s core competencies as the middle man, using savings from brick and mortar saving to attract clients. As part of this venture, Amazon is gaining access to employee data from its venture partners allowing it to study the money spent on waste, administration, fraud and misuse of specialty medicines/pharmaceuticals (Humer, 2018). With the data, the venture hopes to use better technology, customer engagement and consumer choice to address the current healthcare issues. One technological solution proposed is a telemedicine kiosk like the one in west palm beach which allows for an offsite doctor to see and treat patients (Bomey, 2018). Jamie Dimon, CEO of JPMorgan, also sees automation of health care tests, lab work and food preparations as possible outcome of this venture. Amazon by itself would take years to accomplish such initiative, however, with Berkshire Hathaway’s track record as an multinational conglomerate, meaningful accusations are highly likely.

The sheer amount of capital gives this venture market power. However, success of the venture and consequently the success of Amazon’s diversification attempt is still uncertain at best. A venture in pharmaceutical is capital intensive because of the scientific method involved in development. Any innovation in pharmaceutical is subject to years of rigorous testing; thus, Amazon cannot obtain a high level of leverage with pharmaceutical producers who need to recover years of expenses. Supplier loyalty should be an area of significant concern as doctors and hospitals build relationship with suppliers and don’t change suppliers frequently if the service has been well (Luhby, 2018). Prescription medication selling is subject to bureaucracy as the selling of prescription medication require licencing and control. Amazon has not suggested any method of insuring control and have clarified the current applications at state level are not more prescription drugs. So far, the announcement has resulted in Amazon as an alternative for over-the-counter drugs at a cost of additional attention from policy makers. Pharmaceutical companies are known to have seasoned lobbyists and lawyers who undoubtedly have influenced the president’s recent obsession over Amazon. This attention can decrease profit and potentially threaten the venture partnership. All considered, cost to reward suggests a failed diversification to this point, though it is possible the result of employee finding can lead to significant gains. This means the true outcome of this venture is several years out at best.

Bomey, N. (2018, Feb 25). How Amazon, JPMorgan, Berkshire could transform American health care. Retrieved April 07, 2018, from: https://www.usatoday.com/story/money/2018/02/25/amazon-jpmorgan-berkshire-health-care/350625002/
Humer, C., & Henry, D., (2018, April 5). JPM, Amazon, Berkshire will use data to improve healthcare. Retrieved April 07, 2018, from: https://www.reuters.com/article/us-jpmorgan-dimon-letter-healthcare/jpm-amazon-berkshire-will-use-data-to-improve-healthcare-idUSKCN1HC2C7
LaVito, A., & Cox, J. (2018, January 30). Amazon, Berkshire and JPMorgan Chase to team in landmark new health care company. Retrieved April 07, 2018, from https://www.cnbc.com/2018/01/30/amazon-berkshire-hathaway-and-jpmorgan-chase-to-partner-on-us-employee-health-care.html
Luhby, T. (2018, March 2). Amazon is already trying to disrupt health care. Retrieved April 07, 2018, from http://money.cnn.com/2018/02/27/news/companies/amazon-health-care/index.html
Statt, N. (2016, Jul 28). Amazon, once a big spender, is now a profit machine. Retrieved July 28, 2016 from https://www.theverge.com/2016/7/28/12313526/amazon-q2-2016-earnings-report-aws-cloud-profit
Wingfield, N., Thomas, K., & Abelson, R. (2018, January 30). Amazon, Berkshire Hathaway and JPMorgan Team Up to Try to Disrupt Health Care. Retrieved April 07, 2018, from https://www.nytimes.com/2018/01/30/technology/amazon-berkshire-hathaway-jpmorgan-health-care.html

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