BRK/JPM/AMZN healthcare tie up

[Cigarbutt]

On the potential squeeze and potential transformation, we appear to be very early in the game.

There will be certainly pressure on the suppliers but demand will have a strong tendency to go up.

 

Potential winners may the ones able to position themselves to achieve satisfactory rates of regulated returns and gain market share. DVA seems to be a good example.

 

Simply getting to move at the speed of an elephant may be a comparative advantage to slow moving dinosaurs.

The "customer" cost/value proposition can be improved.

 

[Guest longinvestor]

https://www.forbes.com/sites/brucejapsen/2018/02/08/cvs-health-ceo-on-amazon-berkshire-threat-weve-got-this/#be65822276ae

 

A partner or a fox in the hen-house?

[Cigarbutt]

A partner or a fox?

 

If your thesis lies on the assumption of more of the same, the CEO’s assessment is reasonable. I would say that this status quo reasoning reinforces a false sense of security, an ideology of cautionary principles and stationary states.

 

If your thesis lies on a coming disruption with many small, unknown and bold players waiting to deploy their ideas, given the opportunity, then the big-three announcement may signal that the door is opening.

 

It may be reasonable to think that Amazon will set up some kind of technology-based transparent marketplace for the providers and the “consumers”. Something like a consolidated middleman.

 

A relevant example is what happened with the transportation logistics revolution that occurred since the early 80’s, although few people realize it was a revolution and it is often a neglected factor in the economic growth of the last few decades. Transportation logistics specialized in maximizing efficiency at all levels: from the order, to temporary storage, to the coordination of carriers, transfers, warehousing and delivery. Most transportation firms (asset-heavy) have an in-house logistics hub but this side of the business has been somewhat overtaken by asset-lite specialized entities (CH Robinson, Expeditors, etc) who became sophisticated brokers (middlemen). Transportation is not healthcare but nobody would go back in time in the transportation industry. Transportation costs are way down and these specialized brokers have been very profitable investments.

 

My humble take on the article and on the position of the “industry” is that if they want to partner with the big-three project, I see it more as a Trojan horse situation. The crafty Odysseus was able to bring the horse right in the middle of the city of Troy. Not a technology expert but I understand that a “Trojan” is used in the techno area as a trick or strategy that creates a context where the “virus” is spontaneously loaded into a protected or secured bastion and then fashioned to induce the host to willingly activate and use it.

 

[Cigarbutt]

"Somehow I personally consider this initiative an employer-owned PBM, that will be running on some kind of non-profit basis.

 

Attached is a part of note 1 from Novo Nordisk Annual report 2017 released yesterday. It's ludicrous...

 

What US politics haven't been able to fix so far, will eventually be fixed by Corporate America."

 

John,

 

Your last post was a source of reflection and research.

 

This post lies halfway between this thread and Novo Nordisk (more on that later).

 

Concerning your non-profit basis comment, some say that this has been a key long-term characteristic of Amazon :). Notwithstanding the "profit" part, because of Amazon, I keep receiving on my doorstep, delivered rapidly and reliably, affordable specialized equipment that comes from far away places. Somehow, I get connected with sellers and delivery people who otherwise would have been outside of my reach.

 

I started looking at Novo Nordisk. If I understand you well, you seem to imply that the rebates etc are rising and affecting NVO's profitability in the context of a challenging pricing environment. Politely submitted, in my present limited understanding, it seems that the "value" of an american diabetic patient remains still relatively higher than other patients in general (ie Europe) even if pricing there is felt to be more "publicly" regulated. It seems also that the rebates and others are not passed on to the end user (the one who needs the product).

 

Concerning your "fix" comment, It seems that what a lot of the present players are saying is: "if it ain't broken, don't fix it".

 

This cost containment issue has been around for a long time and pharmas such as Novo Nordisk have always managed to preserve (and even increase) their profitability so this is nothing new perhaps. To help assess the cost pressure trends, here's a link related to a hot off the press report. If short on time, read the executive summary, the conclusion and the other Bloomberg link which gets the flavor of the report.

 

https://www.whitehouse.gov/wp-content/uploads/2017/11/CEA-Rx-White-Paper-Final2.pdf

https://www.bloomberg.com/news/articles/2018-02-09/drugmakers-dodge-another-bullet-in-trump-s-drug-pricing-report

 

Government reports are, by nature, political (we don't want to get into that, don't we?) so issues may not assumed head on and the plan may change but, for what it's worth, my opinion is that 1-we may reach a point (soon?) when significantly more pressure will be applied on the profit margins 2-pharmas will need to "prove" the value of their products and 3-now there is an added component aimed at the reduction of "free-riding abroad".

 

I understand that Novo Nordisk has a focus on diabetes (and obesity). Long term, diabetes industry dynamics may be changed by revolutionary new products (who knows when but the discovery of insulin itself is instructive in terms of the difficulty to identify where threats will come from and when) and pricing pressures may increase. However, the diabetes "market" will likely increase (a lot). Thinking of morbidity and mortality, did you know that, despite what the healines say, the global percentage of people dying violently has gone down tremendously in the last century and now, relatively, more people die from direct complications of diabetes (which is mostly a preventable disease, at least type 2)? Sugar (excess) is dangerous. One would think that preventive measures may eventually decrease demand for diabetic meds but, if history is any guide, when tobacco products were determined to be deadly products, tobacco companies were on the eve of long term stellar returns.

 

Sometimes I wonder about the usefulness of these general discussions so, when I read more about Novo Nordisk and if I become bright enough, I may try to contribute to that specific thread.

 

Final words related to your "political" comments and a way to go back to the essence of this thread. Health care costs have gone up ++ and, in many ways, this is not sustainable (tapeworm argument). Two links below using essentially the same data and coming to vastly different conclusions. The first link suggests that governments are too intrusive. The second link (Baumol's disease) suggests that the high prices we pay for health care may be in correlation to our relative affluence.

http://www.aei.org/publication/chart-of-the-day-century-price-changes-1997-to-2017/

https://www.vox.com/new-money/2017/5/4/15547364/baumol-cost-disease-explained

 

[dwy000]

I was at a startup conference last week and the head of a new healthcare insurer was commenting on the announcement.  Take the source for what you will....but he raised a couple of good points.

 

He first questioned whether this would actually turn into anything meaningful.  Apparently the average Amazon employee stays there less than 2 years.  As the market shifts from fee-for-service to value-based-care that makes it a very difficult population to structure and price for long term coverage given you have 50% turnover in the underlying every year.  Also tough to apply pre-emptive health services that many insurers are focusing on.

 

The other point was that this is hugely beneficial for Amazon but he thought probably negative for everyone else.  The vast majority of Amazon's employees are under 40 years old.  This is the most desirable target group for insurers because they use very little healthcare and end us subsidizing the chronic care and older patients that account for over 80% of healthcare costs.  By pulling it's "cheap to insure" population out of the broader insurance environment and self insuring, Amazon is both saving cost for itself and increasing cost for the rest of the insured population. 

 

I have to assume JPM and Berkshire employee bases have much broader age ranges and less turnover but it was an interesting observation.

[Jurgis]

I thought other tech companies also self-insure on the money basis, but still contract with healthcare companies (United/Aetna/Cigna/etc.) for actual handling/benefits/accounting/etc. So that would be no different from Amazon and would have the same two points.

 

Amazon/JPM/Berkshire project IMO is interesting only if it does more than above: does not contract with healthcare companies for service?

 

But perhaps tech self-insure is something that comes and goes. I can't quote how many companies do this year to year.

[Cigarbutt]

Good points.

 

Employee turnover appears to be high at Amazon but I'm not sure about the age profile.

Amazon is apparently even encouraging workers to quit with a 5000$ "offer".

https://www.theatlantic.com/business/archive/2018/02/amazon-offer-pay-quit/553202/?utm_source=feed

"Officially called “The Offer,” this proposition is, according to Amazon, a way to encourage unhappy employees to move on."

The jobs are physically demanding and many stay on the job for the health insurance coverage.

 

Concerning self-insured firms and the captive market, a practical experience (read from the scientific journal USA Today):

"As the founder and CEO of a mid-sized company that employs 180 people in the United States, I know this well. In 2018, we will pay $2.8 million to insure our workers and their families. Year after year, we have wrestled with the costs of our health care plans. And despite trying every trick in the book, our per-employee costs have tripled over the past 14 years. A family plan in 2018 will cost us $27,000, which is higher than the annual salary of one-third of all working Americans. To put it another way, we are paying $13.50 per hour per employee just to cover the health care benefit. It’s a model that’s completely unsustainable, and needs to change."

 

Employers, self-insured or not, (and the government) want to pay less.

Patients are not satisfied with the value proposition.

Providers are looking for more efficient processes and technology.

Insurers (who now connect all these actors) don't see ingredients for meaningful change.

 

Still early in the game and a lot of resistance expected but a potential for change.

Example:

https://www.apple.com/newsroom/2018/01/apple-announces-effortless-solution-bringing-health-records-to-iPhone/

 

[Cigarbutt]

For those who follow this "venture", here are some potentially useful links:

https://25iq.com/2018/02/23/what-might-the-amazon-berkshire-and-jp-morgan-health-care-joint-venture-actually-do/

https://www.wsj.com/articles/hidden-profits-in-the-prescription-drug-supply-chain-1519484401?mod=pls_whats_news_us_business_f

http://fortune.com/2018/02/27/apple-health-clinics-ac-wellness-employees-amazon-warren-buffett/

 

Not clearly investable yet but Medicare Advantage type scenarios and bundled payments may become subjects of interest.

 

 

[DeepSouth]

I was at a startup conference last week and the head of a new healthcare insurer was commenting on the announcement.  Take the source for what you will....but he raised a couple of good points.

 

He first questioned whether this would actually turn into anything meaningful.  Apparently the average Amazon employee stays there less than 2 years.  As the market shifts from fee-for-service to value-based-care that makes it a very difficult population to structure and price for long term coverage given you have 50% turnover in the underlying every year.  Also tough to apply pre-emptive health services that many insurers are focusing on.

 

The other point was that this is hugely beneficial for Amazon but he thought probably negative for everyone else.  The vast majority of Amazon's employees are under 40 years old.  This is the most desirable target group for insurers because they use very little healthcare and end us subsidizing the chronic care and older patients that account for over 80% of healthcare costs.  By pulling it's "cheap to insure" population out of the broader insurance environment and self insuring, Amazon is both saving cost for itself and increasing cost for the rest of the insured population. 

 

I have to assume JPM and Berkshire employee bases have much broader age ranges and less turnover but it was an interesting observation.

 

Amazon is not paying a blended average American rate for their employees. They are paying for insurance based on the risk of their employee pool.

[Cigarbutt]

For those who wonder if less is more in healthcare:

http://www.nejm.org/doi/full/10.1056/NEJMms1713248#t=article

https://www.medscape.com/viewarticle/891091?src=WNL_infoc_180301_MSCPEDIT_ONC&uac=15207AZ&impID=1569981&faf=1

 

Relevant because the outcome of this debate will impact some players more than others.

 

The two articles are written by respected authors who, despite conflicting views, elevate the debate and help to find the way.

Perhaps not inappropriate in an era where people have never been more inundated by data (of unequal quality) often leading to the triumph of ignorance.

Need humble guiding lights in order to "see" the data-driven answers and filter out the hype-driven and purely profit-driven promises.

At the risk of raising the ire of zealots, I'll disclose that I subscribe to a sensible less is more approach but remain open to other ideas as there are no perfect answers in this difficult "market".

 

For those interested, an important contributor to the the field is Atul Gawande who got praise from Mr. Charlie Munger after "The Cost Conundrum" article.

 

[Dynamic]

https://www.businesswire.com/news/home/20180620005747/en/Amazon-Berkshire-Hathaway-JPMorgan-Chase-appoint-Dr.

 

Amazon, Berkshire Hathaway and JPMorgan Chase appoint Dr. Atul Gawande as Chief Executive Officer of their newly-formed company to address U.S. employee healthcare

 

The new company to operate independently and be based in Boston

 

If you're interested he has 2012 TED talk and presented the 2014 Reith Lectures on BBC Radio 4, both of which seem to revolve around fixing healthcare systems, and both of which should still be available to listen to.

[CorpRaider]

For any who haven't read his books, especially the Checklist Manifesto, get on it.  What an incredible polymath!

[Dynamic]

I remember that from his Reith lecture and various other podcasts from a few years ago. Amazingly smart idea.

[sleepydragon]

 

wow, I wonder if Buffett or Bezo was reading this

 

For those who wonder if less is more in healthcare:

http://www.nejm.org/doi/full/10.1056/NEJMms1713248#t=article

https://www.medscape.com/viewarticle/891091?src=WNL_infoc_180301_MSCPEDIT_ONC&uac=15207AZ&impID=1569981&faf=1

 

Relevant because the outcome of this debate will impact some players more than others.

 

The two articles are written by respected authors who, despite conflicting views, elevate the debate and help to find the way.

Perhaps not inappropriate in an era where people have never been more inundated by data (of unequal quality) often leading to the triumph of ignorance.

Need humble guiding lights in order to "see" the data-driven answers and filter out the hype-driven and purely profit-driven promises.

At the risk of raising the ire of zealots, I'll disclose that I subscribe to a sensible less is more approach but remain open to other ideas as there are no perfect answers in this difficult "market".

 

For those interested, an important contributor to the the field is Atul Gawande who got praise from Mr. Charlie Munger after "The Cost Conundrum" article.

[DTEJD1997]

Good points.

 

Concerning self-insured firms and the captive market, a practical experience (read from the scientific journal USA Today):

"As the founder and CEO of a mid-sized company that employs 180 people in the United States, I know this well. In 2018, we will pay $2.8 million to insure our workers and their families. Year after year, we have wrestled with the costs of our health care plans. And despite trying every trick in the book, our per-employee costs have tripled over the past 14 years. A family plan in 2018 will cost us $27,000, which is higher than the annual salary of one-third of all working Americans. To put it another way, we are paying $13.50 per hour per employee just to cover the health care benefit. It’s a model that’s completely unsustainable, and needs to change."

 

A family insurance plan costs $27k per year? 

 

That could almost be the wage for an employee per year!  When I was working as an attorney a couple years ago, the pay rate was $21/hour.  Something has gotten seriously, seriously out of whack.  A lot of people in America (not just fast food workers & clerks) just simply can't afford to pay that...not even close.

[gfp]

You made $21/ hour pretax as an attorney??!  Yikes!

[sleepydragon]

You made $21/ hour pretax as an attorney??!  Yikes!

 

Maybe a real estate attorney? :)

[CorpRaider]

He was a first year at Cravath...but he said hourly.  ;D

[DTEJD1997]

You made $21/ hour pretax as an attorney??!  Yikes!

 

Maybe a real estate attorney? :)

 

No, I was a "contract attorney" brought in to work on massive lawsuits.  It was preparation/sorting/analysis of documents.

 

At that point in time (2015), there were attorneys POUNDING down the door to get in...

 

A lot of attorneys did that work "for the big kash money!".  I was surprised and dismayed at that.  it was then explained to me that $21 an hour was SUBSTANTIALLY more than a lot of attorneys make in the Detroit market. 

 

Thankfully, I don't do that any more.  I feel bad for the people who still do.

 

It was boring, tedious work.  It was the best outcome a LOT of people could hope for though.

 

I could tell so many crazy/sad stories...

[mbreject]

$27k is actually pretty good for a family.

 

My parents paid ~$35k a year (PPO, California) before my dad got Medicare. My mom's counting the days until she's 65 lol

I think free health insurance for the unemployed is why a lot of people are unhappy about Obamacare. People like my parents saw a lot of their friends quitting their jobs to travel and getting free insurance while the people who kept their jobs had to keep paying for this crazy thing.

 

Also, I'm pretty sure a lot of people think insurance is cheaper than it really is, because their employer subsidizes it.

 

I'm very hopeful about this new company and hope they open it up to other people as well.

 

Good points.

 

Concerning self-insured firms and the captive market, a practical experience (read from the scientific journal USA Today):

"As the founder and CEO of a mid-sized company that employs 180 people in the United States, I know this well. In 2018, we will pay $2.8 million to insure our workers and their families. Year after year, we have wrestled with the costs of our health care plans. And despite trying every trick in the book, our per-employee costs have tripled over the past 14 years. A family plan in 2018 will cost us $27,000, which is higher than the annual salary of one-third of all working Americans. To put it another way, we are paying $13.50 per hour per employee just to cover the health care benefit. It’s a model that’s completely unsustainable, and needs to change."

 

 

A family insurance plan costs $27k per year? 

 

That could almost be the wage for an employee per year!  When I was working as an attorney a couple years ago, the pay rate was $21/hour.  Something has gotten seriously, seriously out of whack.  A lot of people in America (not just fast food workers & clerks) just simply can't afford to pay that...not even close.

[Cigarbutt]

The venture is shaping up.

I understand that the recently posted "data scientist" position may have something to do with the adventure.

https://www.amazon.jobs/en/jobs/715945/data-scientist-healthcare-benefits

 

FWIW, I think there is a huge talent basin for this position.

The profile requires to be data driven, transformative and multi-disciplinary.

 

The #1 candidate on my list is Mr. Andrew Bartley.

https://itpeernetwork.intel.com/lean-startup-approach-predictive-clinical-analytics-healthcare-part-ii/

https://www.intel.com/content/www/us/en/healthcare-it/solutions/documents/predictive-analytics-in-healthcare.html

 

Was looking recently at work being done on workers injuring themselves at work and ending in the downard spiral of an opioid addiction problem. Big issue, huge costs (human and financial) and...mostly preventable. All you need is a relatively intelligent tool that would spot the risk factors early on, provide alternatives and remedial actions before it's too late. And it would cost less too.

 

An unrecognized concept is that the approach that the data scientist will apply is very similar to what clinicians do on the field.

They will:

-observe and collect data (listen, ask, examine and read test results)

-try to answer a question (diagnosis)

-finds way to predict what will happen based on the above two (risk factors and natural history)

-try to prescribe a solution in order to obtain a positive change in outcome

 

Hippocrates would be proud and advanced analytics is closer than you think.

[handycap5]

Hippocrates would be proud and advanced analytics is closer than you think.

 

Shane Parrish did a very interesting interview with Atul which I recommend.

 

Also, since you mentioned the Hippocratic Oath, I can't help but think of Milton Friedman's criticism of the same (search for Oath here: http://www.freerepublic.com/focus/f-news/1684832/posts). I suspect the greater opportunity and greater challenge will be changing human behavior and organizations, not mining data. But maybe the latter can aid the former.

[Cigarbutt]

Shane Parrish did a very interesting interview with Atul which I recommend.

 

Also, since you mentioned the Hippocratic Oath, I can't help but think of Milton Friedman's criticism of the same (search for Oath here: http://www.freerepublic.com/focus/f-news/1684832/posts). I suspect the greater opportunity and greater challenge will be changing human behavior and organizations, not mining data. But maybe the latter can aid the former.

 

Thank you for the link handycap5. It was an interesting conversation and I hope that the BRK-led venture amounts to something.

 

Mr. Gawande is a humble leader with conviction and I guess he is not the type to underestimate the challenge.

 

Benjamin Friedman must himself turn in his grave if he sees the growing portion of GDP spent on healthcare and he did make a distinction between the oath and the man behind the oath. Going forward, we will need to continuously rebalance the tensions between the freedom for alternatives and the reliance on third party payments.

 

The foreseeable future is fuzzy, as always, but I think health outcomes, for at least a while for the tapeworm to grow, will come down to a race between growing "system" productivity and diminishing returns on "scientific" inputs. All the hype around the big data and predictive analytics is really about gradual and evolutionary application of method where science meets humanity.

 

Interesting to note that Mr. Gawande does not talk about increasing intricacies and opacity, he explains that we will try to "unknot the complexity". In my own humble on-the-ground experience, the most effective improvement projects were simple, automatic and "natural", irrespective of the degree of underlying complexity, insight or sophistication. The underlying design will continue to require human intelligence but the application of the design will increasingly require the assistance of artificial intelligence.

 

Concerning incentives and changing people, I remember an episode where I was part of a group responsible, in a self-regulating type of environment, for adjustments in payment amounts (code) for listed procedures. There was a typing mistake and a rarely performed procedure became more rewarding financially. Guess what happened after the new list was disseminated. People, medical or otherwise, respond to incentives, good and bad.

 

Concerning changing people and systems, nobody likes it to be told about the huge gap that exists between the assumed "performance" and actual results but Mr. Gawande sees himself as a bridge builder and Fortune favored the prepared mind. A relevant example is the integration of the thermometer into the "system". Historical example but highly enlightening. Just like the BRK-led projects to come, the iniatives may first be seen as threats but, before you know it, it's not the the people that will change the system but the system that will change the people.

https://blogs.scientificamerican.com/observations/why-doctors-reject-tools-that-make-their-jobs-easier/

 

I'm long human intelligence since ignorance has reached the level of ineptitude.

[Jurgis]

I'm long human intelligence since ignorance has reached the level of ineptitude.

 

OT.

 

I'd be long Elon Musk's Neuralink, since human intelligence and knowledge acquisition in particular seem to be hitting walls dealing with complex multifaceted problems.

 

Although I continue to be amazed by new discoveries, especially in math and physics where problems and their solutions have moved beyond being understandable by very very few.

[gfp]

Not sure where to link this, but Warren did an event sponsored by newly acquired MLMIC, New York's largest medical malpractice insurer - where he had a public conversation with Dr. James Reed, CEO of St. Peter's Health Partners.  (if you've reached your 'free limit' for reading the article, open the link in private or incognito mode to read)

 

https://www.bizjournals.com/albany/news/2018/10/18/warren-buffett-health-care-st-peters-reed.html