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.
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