Has it been surprising how much we’ve all talked about, and wanted to talk more about, the partnership between Amazon, Berkshire Hathaway and JPMorganChase (ABJ for short) on healthcare?
In a way, yes. Such wonkishness usually doesn’t capture the public interest with such staying power. Yet, when you have two guys who’ve been Richest Person in the World at one point telling us that this is a topic worth doing something about, a large cross-section of people who might otherwise go about their business instead stop and take notice.
But also, no. Healthcare reform is the issue of our time. We are nearly 10 years on from when the Affordable Care Act was first introduced and debated, which was nearly two decades removed from when rising costs in healthcare became a hotly contested issue on Capitol Hill and on Main Street, which in turn was two decades removed from when the current employer-based system started showing signs of cost and quality tension, and so on, and so on. The healthcare sector is now the largest private-sector employer in the U.S. It’s literally a life-and-death subject. Of course we all want to talk about it.
Thankfully, Warren Buffett did just that on Monday, revealing more details about the Press Release Heard ‘Round the World.
“Well, the goal is to deliver better care in reality and also in terms of how the people feel about the care that they’re receiving ’cause that’s important too,” Buffett said in an interview on CNBC. And, to find ways to take cost out of the system, while not impairing the quality of what people receive. And that’s enormously complicated. There’re so many intersecting companies and people — it’s not gonna be easy.”
There are several key words and phrases in that statement that reveal much about not only the motivations of the three companies and their leaders but also about the road that lies ahead for them and for us.
Let’s take a look at that road — and what it means for all employers and employees — through the lens of four ever-present factors for the uniquely American employer-based healthcare system: Consumerism, Cost, Competition, Complexity.
We start with the consumer because that is famously where Amazon starts. The first of their Leadership Principles is “Customer Obsession:”
Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
Though it is Buffett who was interviewed and not Amazon CEO Jeff Bezos, you see Bezos’ influence in Buffett’s statement that they want to address not just care but how people feel about that care.
Such a concern is not misguided. Patient satisfaction surveys regularly reveal that there is much room for improvement in healthcare delivery. A 2015 survey of 3,500 U.S. hospitalsrevealed that just 7 percent got a perfect 5-star patient satisfaction rating while nearly 20 percent had 1- or 2-star ratings. Likewise, health insurance carriers have notoriously low Net Promoter Scores (NPS) — industry averages are about 50 points lower than Amazon (although, full-disclosure, Berkshire Hathaway and JPMC have NPS in the same range as most health insurance companies).
Amazon is well-positioned to address service aspects of the healthcare ecosystem. Not a day goes by that we don’t receive an email from an Amazon supplier asking us about our satisfaction with whatever important or inconsequential product we bought last. Such seamless feedback loops have been built up over years as a result of data-driven transparency practices and a mastery of supply chains and communication mechanisms borrowed from traditional retailers, especially Walmart, and applied to ecommerce.
The gravely disjointed healthcare ecosystem would likely benefit by adopting a more streamlined supply chain. In fact, one of the more consistent NPS performers among health insurance/provider networks is the Kaiser Permanente system in California, one of the oldest and most successful “managed care” organizations in the country, where insurance and provider are largely still one and the same. They’re not a perfect organization but they tend to be an outlier in perceived service in the same way that Southwest is an outlier among low-fare airlines.
So, yes, starting with the customer works — and it’s sorely needed in healthcare. If the new ABJ venture can’t capture the supply chain themselves, then hopefully they can at least shock health carriers and providers into upping their game on the service side.
The root of the problem with the U.S. system has almost always been cost. Quality of care ebbs and flows, access rises and recedes, but costs continue to rise unabated. Since the 1960’s, health insurance costs have gone up at a rate greater than inflation or cost-of-living every single year — an increase of a whopping 818 percent (!) up to 2010 (see chart below).
Buffet noted in his comments that in 1960 we were spending about $160 per person, and now we’re spending more than $10,000 per person for employer coverage. That second number, as shown below, may be an underestimation.
More recently, the primary drivers of costs in healthcare have been in three areas: provider services, rising prescription drug costs, and administration. A November 2017 study by the Journal of the American Medical Association (JAMA) showed that 50 percent of the rise in healthcare costs as a percent of GDP from 1996 to 2015 was from “service price and intensity” alone. In other words, we’re getting more stuff done and getting charged more for that stuff.
This phenomenon is the “tapeworm” of costs that Bezos noted in his original comments on the partnership. The good news is that, like some common high-cost health conditions, it’s a disease that’s treatable. Buffett notes correctly that “it would be very easy I think to go in and shave off 3 percent or 4 percent just by [leveraging] negotiating power.”
That approach is the premise for much of what a new movement of brokers and consultants are offering their employer clients — a data-driven attempt to find the inefficiencies in employer-based programs (frequently administration and pharma costs) and flush them out. But it’s not just a business-to-business case anymore. Optum ran commercials, along with their parent company United Health Care, throughout the Winter Olympics on Comcast-NBC stations touting their ability to root out inefficiencies in healthcare.
Everyone appears to be on the same page. The only enemies for making major improvements may be the two factors that arguably got us there in the first place — which we’ll discuss next.
In much of Buffett’s remarks, as well as the original statements on the partnership, explicit mentions of competition as a motivation have been limited. But that part of the picture is never far out of frame.
Over the past five years, unemployment rates have been at or below 6 percent, which drives employers into competition for workers, as shown in this graph from the Bureau of Labor Statistics.
Such a tight labor market drives benefits strategies to a simple, age-old set of actions:
- When the labor market is tight, companies must compete head-to-head for talent;
- Two essential factors in attracting and retaining top talent are salary and benefits;
- The cornerstone of benefits — and the most expensive component of benefits programs by far — is health insurance and related healthcare services;
- Therefore, to attract and retain talent, companies must invest in healthcare benefits and services.
A recent survey by the National Business Group on Health of large employers put 2018 healthcare costs at $14,000 per employee for large companies. The Annual Kaiser Employer Health Benefits Survey puts it closer to $18,000 for employers of all sizes. The ABJ partnership has 1 million employees. If, conservatively, half of those employees are receiving health benefits from their employer, that is $7 billion annually spent on healthcare by these three companies.
Amazon has stated that they plan to hire more than 100,000 people nationwide by the middle of 2019, which (again, conservatively) would mean an additional $700 million spent on healthcare — at an average annual increase of 3-5 percent.
Such costs of competition are widely considered unsustainable. So while Buffett, Bezos and Jamie Dimon have all spoken about their heartfelt desire to change the whole healthcare ecosystem, they are undoubtedly driven to change their own houses first to both leverage their existing competitive advantages and to extend those advantages through active participation in managing the growth of a significant component of their annual budgets.
This problem, of course, is faced by virtually every large employer in the United States. Many companies have already set down the path outlined by Bezos and now Buffett and have seen meaningful results by simply using the self-insurance model to take control of their employee healthcare consumption and costs. Apple, another clear industry (and world) leader, just announced plans to more actively manage their employee population health and, as a result, healthcare costs. Walmart has been a strategic leader for years in this regard, implementing plans like paying 100 percent of employee costs for getting treated at “Centers of Excellence” because of the better (and ultimately cheaper) patient outcomes.
Yet a limiting factor of such active approaches is that the employer-based coverage system is naturally disjointed, which limits and unevenly distributes results. The U.S. model of self-insurance driving employer-based coverage enables employers greater control of their healthcare spend, but many have left that spend up to consultants, administrators and insurance carriers who have less vested interest in lowering costs. “Most people that are on the reception end [of $3.3 trillion on healthcare costs] are happy with things,” said Buffett about the lack of motivation to change. “The system, by its very nature, is not cost-conscious.”
The key drawback of the self-insurance model in this regard is that it leads to broad inconsistency in its effectiveness. Self-insured Company A may have a highly skilled, motivated consultant that is able to slow or even reverse the costs of coverage for their employee health plan. Self-insured Company B may have a broker or consultant with little interest other than to present quotes for annual insurance costs and collect their commission. Meanwhile, fully-insured Company C must accept whatever cost increases their carrier wants to impose, with limited options to “shop around” for better rates.
(There’s also this unspoken acknowledgement: If these current efforts don’t prove successful in controlling company costs on healthcare spend, the “last resort” course of action is to get out of the healthcare business altogether. But that’s a subject for another day…)
So why don’t companies just band together like ABJ and improve their leverage and economies of scale even more? Because many of them are ultimately competing for the same talent. ABJ’s workforce needs likely have less overlap than, say, Amazon and Google. Likewise, you’d have to hold your breath for a very, very long time before you saw JP Morgan Chase and Wells Fargo banding together on healthcare or much of anything else.
The economies of scale are perhaps the greatest barrier to the ABJ ideal making it past that partnership without a more collective approach and spirit — and such a spirit frequently runs headlong into deeply ingrained attitudes on corporate competition.
Perhaps the most vexing issue of the U.S. system is its astonishing complexity. It defies simple explanation but for a brief understanding, read Steven Brill’s Time Magazinearticle, which he turned into a book, “Bitter Pill: Why Medical Bills are Killing Us.”
What has been created over time is something in which inherently complex systems (medicine, actuarial, finance, logistics, government regulation) have been laid out for employers, employees and individuals to figure out largely on their own. They have little time or inclination to do so and therefore intermediaries have stepped in to provide services and support — each taking a cut for their trouble. In some cases, this service and support has been invaluable and in fact essential to there being a system at all. In other cases, it’s been wasteful and parasitic.
The challenge of our time is to unravel this system in such a way that it drives efficiency while, as Buffett notes, provides a level of service that is both measurably good (outcomes-based) and satisfactory (emotionally-based).
This challenge is where the most greenfield optimism comes into play among those excited by the ABJ partnership. With Berkshire-Hathaway, Buffett has created a holding company like none other in existence that works from his philosophy of “if you don’t understand it, don’t buy it.” Bezos has driven innovation by being obsessed with customers. And Dimon has captained a “too big to fail” financial institution to new heights. Surely these guys can unravel this mess.
The answer is…we just don’t know. Certainly whole industries have transformed before — heck, it seems to be a regular occurrence these days between the sharing economy, AI and alternative energy.
And yet, healthcare is different. It’s not something we’d like to have. It’s something we need. All of us, at some point in our lives, will be a customer of this huge, complex system. And we decided collectively decades ago that employers should be heavily involved in it. Now that they are, they must stay engaged. The real shocker isn’t that these three companies made the announcement that they did — it’s that more haven’t. In a system where everyone seems to have a vested interest, everyone should play an active role. That means employers holding suppliers feet to the coals, providers favoring value-based services and cost transparency without prompting from carriers, pharmaceutical companies accepting modest returns to in the name of public health and well-being, and health insurers providing more transparency to both employers and employees to help them make better decisions year-in and year-out.
“This goes beyond just trying to improve the bottom line of the three companies involved in it,” said Buffett.
Let’s hope he’s right.