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Don’t Read Too Much Into Amazon Getting into Healthcare

Amazon is about to do something about healthcare costs, but that is less exciting than it sounds.

From WSJ:

Amazon, JP Morgan Chase, and Berkshire Hathaway are forming a company to figure out how to reduce health-care costs for their hundreds of thousands of U.S. employees, the three companies said Tuesday.

“The ballooning costs of health care act as a hungry tapeworm on the American economy,” Berkshire Chief Executive Warren Buffett said in prepared remarks. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”

The new company will focus on technological solutions that can provide simplified and transparent health care for the three companies’ U.S. employees at a lower cost.

The three companies together have more than a million employees, though not all of them work in the U.S. The companies didn’t say how much money was earmarked for the initiative or whether it would grow to include other employers.

Amazon has already triggered concerns for the broader health-care industry due to its as-yet unclear ambitions in the space, factoring into CVS Health Corp.’s $69 billion bid last year for insurance giant Aetna Inc. Specifically, Amazon has been eyeing an entry into the pharmacy-services industry and has added health-care supply options to its business-to-business marketplace offering.

Shares of companies across the health-care industry including pharmacy-benefit managers, health-insurance companies and drugmakers dropped sharply in premarket trading Tuesday following the announcement.

I too was excited by this story, but it really isn’t much of a story, alas.

If this grows into a venture that non-employees can sign up for then it is potentially disruptive. But if this really is just for employees then this is less a business venture than a cost-saving measure.

The word of the day is "economies of scale".

The thing about large companies is that once they grow to a certain size, it makes sense to bring certain processes inside the company rather than hire external vendors. B&N, for example, is large enough that it has its own warehouses, Walmart has its own trucking company, and Amazon is building an air cargo division.

These companies are so big that there are sound financial reasons to internalize certain functions so that the companies lower their costs by absorbing the profit margin of their contractors.

This kind of thing is in fact so common in the insurance industry that there is even a term for it: self-insured. Companies with as few as 500 employees have found it worthwhile to carry their own insurance rather than work out a deal with an insurance company.

And that is exactly what Amazon is doing here, only on a much larger scale.

image by teofilo

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Paul January 30, 2018 um 11:05 am

This is why GM, Ford and Chrysler used to have their own healthcare system.

Nate Hoffelder January 30, 2018 um 11:43 am

I didn’t know that fact, but you are correct that it’s the same thing.

BDR January 31, 2018 um 5:38 am

Ultimately, as every OTHER major Western economy has figured out, single-payer is the only viable approach to healthcare insurance.

This is a stop-gap measure for probably only a tiny % of America at its best, a dumbass idea at its worst.

Deacon Rick January 31, 2018 um 10:14 am

Single-payer guarantees delayed service or exclusion to options. See every economy, Western and otherwise, that has tried it.

Disgusting Dude January 31, 2018 um 6:38 am

The JP Morgan Chase CEO said the new company would eventually be open to all comers. That is what caused the big drop in health care stocks.

Nate Hoffelder January 31, 2018 um 6:57 am

Okay, now that changes things. Thanks!

Frank January 31, 2018 um 2:23 pm

The challenge here is massive since much of the "waste" in the health care system is caused by the major health care companies. So other than buying them, like CVS buying Aetna for about $69 billion so it can control pricing better, it is hard to reduce costs outside of that.

Amazon to Compete with UPS and Fedex? Not Exactly | The Digital Reader February 12, 2018 um 12:07 pm

[…] Amazon has a history of developing a service internally and then turning it into a revenue generating business (this is why we have such high hopes about Amazon's foray into healthcare). […]

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