When on January 31, Jeff Bezos, majority owner and CEO of America’s biggest online retailer Amazon, announced the foundation of a new, not-for-profit, healthcare company, the market value of insurance companies, hospital service providers, drug makers, drug stores and ‘pharmacy benefit providers’ (I will explain that shortly) nosedived. Within a few days the shares of pharmacy retailer Walgreens Boots Alliance lost tens of billions of dollars.
This reflects in part Amazon’s fame as a disrupter of cosy business as usual: had it announced it was getting into the apple business, fruit growers would have tumbled too.
Leaving aside any analysis of allegedly rational investor behaviour, the markets had also reacted to something which deeply resonated with all Americans suffering from the ills of healthcare: to be sick in the US means putting up with mediocre treatment, diminishing life expectancy and ballooning costs. More than $10,000 are spent every year on any single person, totalling $3.2 trillion, or 18 per cent of GDP.
To put this in context, our government, anything but a scrooge usually, is spending the equivalent of approximately $1.200 per person per year. And we live happily ever after – nearly 10 years longer, and healthier, than the average US citizen.
US healthcare costs are ballooning far in excess of inflation or economic growth, to the tune of six per cent per annum, even when this has slowed somewhat recently. The reasons for this malaise are manifold. And those who carry the cost – patients, employees (25 per cent) and employers (75 per cent) who pay health insurance to the tune of $19,000 per year and household, are kept in the dark about the actual costs of drugs and treatment, which are agreed between pharmacies, hospitals and insurance companies.
As middlemen act large, private companies – the Pharmacy Benefit Managers – are reimbursed by pharmacies (!) and insurers (this is a bit like your trusted insurance broker of old who earned a commission from the insurance company for selling you overpriced policies you might not even need). PBMs claim to strike a bargain for patients, allegedly reducing drug costs for millions of Americans, while drug prices shoot through the roof.
Strangely, many of those PBMs, whose main task would be to do the paperwork for prescription drugs, run a side business marketing branded drugs, or own pharmacy chains. The discounts and rebates PBMs agree with drug producers and pharmacies usually end in the pockets of the PBMs, who book hundreds of billions (!) in revenue.
Mr Bezos, in his crusade against the “hungry tapeworm”, has teamed up with America’s largest bank, J.P. Morgan Chase, and Warren Buffett’s insurance company and investment vehicle Berkshire Hathaway. Their aim is not to displace other businesses, at least not in the beginning. They do not wish to build hospitals, hire nurses, or take over the drug trade. Amazon had tried this before when it bought the online retailer drugstore.com in 1999 and failed. Mr Bezos had to sell it on to Walgreens which closed it down. Amazon wants to ease the plight of its own employees and to reduce its own cost burden. So do J.P. Morgan and Berkshire. Together these companies employ nearly one million people. Talk is about apps for patients, about cost efficiencies, about personal data analysis.
Their role model might well be Zhan Jifu, a Chinese bureaucrat in the city government of Sanming, an impoverished industrial town of 2.5 million inhabitants which risked drowning under a deluge of ever growing medical costs. Mr Zhan had enough of pharma kickbacks to doctors, hospital mark-ups on drugs, shady middlemen and all the resulting budget deficits. He combined hospital management, drug procurement and health insurance into a single agency and linked hospital management salaries with cost cuts.
When he started to demand rebates and steep price reductions from big pharma, he widely overstepped his remit... only the provincial government would have been entitled to regulate drug prices. Yet it worked. Prices for medicine dropped to 80 per cent in a few years, Mr Zhan was commended by the World Bank and his hands-on approach is now rolled out nationwide.
The hope of many Americans is that the three knights of industry will prevail in a similar fashion. Analysing the situation, most investors understand that their enterprise will only succeed if others sign up to it too. One million employees may sound a lot, but it does not compare favourably to 266 million clients firmly in the hands of PBMs. Powerful interests will attempt to resist.
To get hospital costs down, these exclusively private, profit-orientated businesses should be rewarded for results rather than effort, for cost effectiveness rather than costly and often unnecessary routine, stretched treatment, excessive medication, or superfluous surgery.
Insurance costs should be lowered through competition by taking health insurance and treatment in-house for instance and by giving patients control over treatment costs through obligatory policy rebates. Malpractice claims, a sizable share of insurance costs, should be capped or discouraged. Generic drugs should be the norm, with branded drugs carrying extra costs for patients.
So many ideas, yet most of them are prone to being systematically strangled by special interests. It is almost certain that insurance companies, hospitals, pharma businesses and pharmacies and the PBMs will prevail one way or the other. After all, they collaborate in a system equally profitable for all of them. Their fall from investor grace, if for a short moment, was certainly premature.
As so often, the markets have reacted rashly. It remains to be seen if Amazon will succeed where so many have failed before. This is a retailer, after all, not the US Congress.
Yet, in all the hype and euphoria the best bit of news was lost entirely. While Mr Bezos walks into battle for non-profit salvation of all Americans, voices calling for a break-up of Amazon, the most successful retail operation in the history of capitalism, will subside. Anti-monopoly Cassandras will turn mute. And Amazon will gain another lease of life, going from strength to strength. A good time to look at its share price again.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
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