No one wants to hear Odysseus go to the corner store.
– Alex Blumberg, StartUp
The other day Ben Thompson released yet another great Stratechery piece on Amazon’s latest foray into the world of healthcare. It repeats Amazon’s desire to take a slice of all global economic transactions (healthcare is nearly 1/5th of the U.S. GDP alone), and lays out a potential strategy for Amazon to create a “common health interface” that employers and providers can sign on to. Using Amazon’s model of converting a market into “primitives”, they could then match things like payors/payees, or providers/patients and garner some of the profits as a middleman.
It is, as Ben Thompson’s writing always is, a very compelling argument, but I think it fails on a few accounts that are worth noting. First and foremost, the joint health effort was not created with the goal of disrupting healthcare. It’s easy to see evil everywhere Bezos lurks, but Dimon stated that the first group he wants to see benefited are his U.S. employees. The bank employs hundreds of thousands of people in corporate offices and branches across the country that could be helped by this. I think that Occam’s razor applies here and we should try to avoid overthinking this.
Secondly, J.P. Morgan does not need to drastically disrupt the healthcare industry in order to get a major win. Last year, the bank spent $1.25 billion alone on healthcare costs. This amounted to 2 percent of companywide expenses. That’s an incredible amount for a single benefit! According to their most recent 10-K, non-healthcare compensation amounted to just over $28 billion, or 45 percent of companywide expenses. With healthcare costs growing at nearly 6% annually according to a recent AMA report, it is crucial for Dimon to control this expenditure or it will continue to balloon as a non-salary expense and prevent the firm from giving bonuses and raises that can help retain and motivate talent.
Finally, the healthcare system may just be too complex and regulated for Amazon to truly be effective. Amazon has never played in a highly regulated industry, and there is an open question of whether it would be able to execute in healthcare. Of course, the news of Amazon obtaining pharmacy licenses in 12 states in November sent the first shockwaves through the healthcare industry, but the real story was more nuanced. Amazon later cancelled one of those applications (in Maine) and announced it will not even sell drugs in multiple applications. So what could it do? It could gather more retail data from the operation of a pharmacy/retail chain and launch a broadside against industry stalwarts like CVS and Walgreens. The recent Whole Foods acquisition bolsters the case for this.
At this point you might be saying, “Well, Amazon may not be able to play in the healthcare industry, but Dimon and Buffett run highly regulated firms (including insurance) that could make major waves when combined with Amazon’s technological prowess!” And that is partly true, but mostly uncertain. For starters, JP Morgan has no experience with the healthcare industry’s regulations, which are covered under separate acts like the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA). It is unclear whether JP Morgan’s compliance, legal, and regulatory departments would be able to effectively transfer their skills successfully handling Dodd-Frank into the healthcare space. Similarly, Buffett’s Berkshire Hathaway has only been involved in healthcare reinsurance, not the primary payor system. Navigating the world of electronic medical record handling, billing, network management, contract negotiation, and more is not one of Berkshire’s core competencies.
I think what we are seeing in the market is a repeat of late last year’s “Amazon panic” that sent Kroger shares into a spiral (losing 20% or $5.4 billion in enterprise value in a single day). In fact, since I commented on Ben Thompson’s piece on the Whole Foods acquisition, Kroger recovered to its pre-Whole Foods acquisition price. With the recent hits to United Healthcare and CVS stock it is worth remembering Twain’s oft-quoted adage, “History does not repeat itself, but it often rhymes”.
 This is even after suffering a temporary earnings miss in Q4