Investors across the health care industry supply chain had a collective heart attack on Tuesday after ubiquitous tech giant Amazon teamed up with J.P. Morgan Chase and Berkshire Hathaway to announce they would form an independent, non-profit health care company. This upcoming outfit’s purpose? To lower health care costs for the three firms’ U.S. Employees. “[The new entity will be] free from profit-making incentives and constraints” within health care, the companies said in a press release.
That’s a fairly audacious goal (and a different one from what the rumor mills had been suggesting Amazon’s upcoming intentions were, including that it would try to become a benefits manager or drug distributor or online pharmacy—although the company may choose to get involved in those spaces down the line). And the suggestion of Amazon health care disruption sent investors fleeing from insurance companies, drug distributors, and retail pharmacies alike. CVS stock fell 4.5% as of mid-day Tuesday; Walgreens was down more than 5%; health insurers like Anthem, Aetna, and UnitedHealth all plunged anywhere from 3% to 6%; and drug distributor McKesson was down more than 3%. Those are all massive companies, and the declines amount to several billions in lost market value.
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But, as experts like the nonprofit Kaiser Family Foundation’s Larry Levitt point out, it’s probably a little too early to freak out (or cheer on) for a simple reason: We simply don’t know what, exactly, it is that Amazon, J.P. Morgan, and Berkshire are going to do.
We've seen plenty of attempts to disrupt health care from the outside by entrepreneurs, and so far they haven't amounted to much. We should be skeptical of this Amazon/Berkshire/JPMorgan venture, especially until they provide further detail.
— Larry Levitt (@larry_levitt) January 30, 2018
And the fact that the announcement doesn’t represent an acquisition or a new mass market-focused product line may actually be good news for health care companies in the short term, as some argued.
PBMs, insurers, pharmacies and drug distributors all down on this. One would think this signals $AMZN not as close to pharmacy/drug supply chain – so would see distributors get some relief. But $CAH -4.3% https://t.co/m0E612Fsy8
— Meg Tirrell (@megtirrell) January 30, 2018
That’s not to say that the project isn’t interesting, and potentially an important experiment in controlling health care costs. After all, workers’ wage increases haven’t kept anywhere on pace with health insurance premium increases, and the propagation of high deductible health plans has pushed more and more costs onto employees at a time when drug prices and medical service fees continue to rise. With more than 1.2 million employees between them, Amazon, J.P. Morgan, and Berkshire could leverage some serious bargaining power to get better deals for their employees.
What might be a long-term risk signal to health supply chain investors is if more large employers follow suit in actually trying to control these costs by flexing their muscles or taking matters into their own hands. It’s possible this is Amazon’s long-term goal. But as of now, there just aren’t very many details about what’s going to happen.