Can Amazon and Its Partners Solve Healthcare’s ‘Tapeworm’ Effect?
News that Amazon, Berkshire Hathaway, and JPMorgan Chase are forming a nonprofit company to cut healthcare costs and improve quality sent shivers through the sector. Details were sketchy, but if you are already taking strategic steps to improve value, you may be rewarded.
By now, you’ve heard that Amazon’s entry into the healthcare space, long-anticipated, will involve the creation of a new nonprofit company with banking giant JPMorgan Chase and the companies that make up Warren Buffet’s Berkshire Hathaway.
Though details are sketchy, a top executive from each partner will initially lead the effort, which is intended to use technology solutions to simplify the healthcare system and, more broadly, increase transparency and ultimately, cut costs. With nearly 1.1 million employees among them, no one should doubt their resolve, or their heft.
Given the scant details of the effort so far, gauging whether this is a transformative event or something that will nibble at margins is unclear. Amazon’s involvement, thanks to its huge success disrupting retail, is no small matter.
These companies certainly have market-moving power, at least in some geographic areas. But they may yet underestimate the magnitude of the challenge they face. Here’s one sobering statistic for them: Federal, state, and local government spending accounts for 45.2% of national health expenditures, while private business accounts for only 19.9%, according to the Centers for Medicare and Medicaid Services.
Many others have tried this kind of thing. The Pacific Business Group on Health and The Leapfrog Group each started with the same goal and include a wide swath of the largest corporations in America as members.
Other companies have successfully developed centers of excellence programs that reward organizations for transparency and provide bundled payments for episodes of care. Those ideas are meant to help healthcare move away from the fee-for-service payment system, from which many of its ills ultimately stem. We’ve covered these efforts for years here—the story on centers of excellence above cites value as its driving force and it dates to 2013!
The work of many of these groups and individual health systems has brought notable successes, but broadly, reducing the rate of healthcare inflation to at least the rate of general inflation has not been one of them.
Healthcare now represents, depending on your source, between 18% and 20% of GDP, a much larger share of the economy than almost any other developed nation. The inflation rate rises and falls, but over the past 20 years, the headline consumer price index has risen at an average annual rate of 2.2%, versus the price of medical care, which has risen 70% faster, at an average annual rate of 3.6%.
In words that are sure to become famous or infamous, depending on your point of view, Warren Buffett explicitly said in the press release announcing the effort that the “ballooning costs of healthcare act as a hungry tapeworm on the American economy.”
How does that feel, healthcare leadership? It’s crude, but it’s hard to argue with the aptness of the analogy.