Even for Bezos, Fixing Health Care Will Be Hard: QuickTake

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(Bloomberg) -- Every year, health care consumes a larger share of the U.S. economy. Decades of grand efforts to control costs mostly haven’t worked: Health care now accounts for about 18 percent of gross domestic product. Warren Buffett has compared the system to a hungry tapeworm eating away at its corporate and taxpayer hosts. Now he’s trying to do something about it by forming a health-care alliance with Jeff Bezos’s Amazon.com Inc. and Jamie Dimon’s JPMorgan Chase & Co. Can the Buffett-Bezos-Dimon effort succeed where others failed?

1. What will the three-way venture do?

It will initially focus on new technology to simplify health care and reduce costs for the three companies’ 1 million-plus employees. So far, though, it has no name, no definition and no permanent leader. That doesn’t mean it hasn’t scared investors in the health-care industry -- the announcement yo-yo’d the stocks of health insurers and drug plans. But according to Buffett himself, the goals are ambitious. “It would be very easy, I think, to go in and shave off 3 or 4 percent just by negotiating power,” Buffett said in a Feb. 26 interview on CNBC. “We’re looking for something much bigger than that.” The billionaire said the group hoped to hire a chief executive within a year to help flesh out the details.

2. Why wouldn’t it succeed?

The health system has powerful incumbents -- from insurance companies and drug benefit managers to hospitals and doctors -- and every dollar one party saves is a dollar out of somebody else’s pocket. The three companies have little experience in the industry and little in common other than being run by famous billionaires. JPMorgan’s commitment could wane if the project looks like it will damage clients and its bankers begin losing out on future health-care deals. Berkshire Hathaway Inc. is a collection of subsidiaries that run independently, which could make it harder to pool their purchasing power. Amazon’s involvement, however, could be key.

3. Why is Amazon’s role so important?

Amazon has wreaked havoc on everything from books to electronics to household staples and could apply what it’s learned to health care. And Amazon has an obvious interest in getting into the pharmacy market over time, but Bezos has been thinking about the drug business for nearly two decades without landing on a clear strategy. Health care is also fiendishly complex. Markets for services are local, so a contract with doctors and hospitals in Amazon’s Seattle hometown won’t help JPMorgan’s bankers in New York. Really cutting costs could mean saying no to expensive drugs and services -- and risk annoying employees in a tight labor market who have come to expect generous benefits.

4. Why do some see great promise?

In theory, the new venture will have the funding, influence and chutzpah to try new, disruptive approaches, such as bargaining directly with drugmakers or creating an online bidding system to transparently negotiate drug prices, experts said. If the three companies pool all their employees, they’ll have more leverage to negotiate lower rates for doctor visits, hospital stays and other health services. They could use technology to help employees become better shoppers for health services, or cut out many of the industry’s middlemen. And Amazon, Berkshire and JPMorgan have assigned some of their top managers to oversee the alliance.

5. Who will run it?

Todd Combs, an investment officer of Berkshire Hathaway; Marvelle Sullivan Berchtold, a managing director of JPMorgan and former drug executive; and Beth Galetti, a human resources executive at Amazon, will oversee their respective companies’ contributions. The companies are seeking a permanent chief executive officer for the venture and haven’t yet said where it will be based.

6. Who’s tried this before?

One of the biggest recent efforts began two years ago when a consortium of large employers, including International Business Machines Corp. and American Express Co., launched the Health Transformation Alliance. It negotiated drug contracts with UnitedHealth Group Inc.’s OptumRx and CVS Health Corp., two of the largest pharmacy-benefits managers. The alliance, which now counts 46 companies, says it will save 15 percent a year on drug costs, but it hasn’t fundamentally altered the drug-distribution system. Among big companies, Caterpillar Inc. has come the closest to reining in drug middlemen. It’s saved tens of millions a year by creating its own list of covered drugs and negotiating deals with pharmacies on prices.

7. What about other tech giants?

Microsoft Corp. and Alphabet Inc.’s Google had high hopes for new services they offered in 2007 and 2008, respectively, that aimed to allow consumers to record and share health and fitness data digitally. The idea was to create a centralized repository for health data that patients controlled. But getting disparate providers and insurers to share medical data in an easy-to-use format proved difficult. Google’s offering, Google Health, was discontinued in 2011. Microsoft’s version, called HealthVault, is still around, but in January Microsoft discontinued an app that allowed consumers to analyze their data. Tech companies are still trying: Apple Inc. recently announced an initiative to let consumers access their health records on their phones, though it can only link to a limited number of medical records systems now.

8. Wasn’t Obamacare supposed to control costs?

In theory, yes. Obamacare was supposed to help individuals move off of expensive company plans and shop for their own coverage -- at prices they could afford -- on the new health-care exchanges. But that largely hasn’t come to pass. For the most part, companies have continued to offer coverage to their workers and the law has been under constant attack from Republicans who have dismantled key parts of it. Obamacare included a levy on high-cost employer coverage, known as the Cadillac Tax. The tax was designed to push employers to rein in the cost of their health benefits, but it’s been repeatedly delayed by lawmakers.

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