What Jeff Bezos Can’t Do

Word that JP Morgan Chase, Berkshire Hathaway and Amazon.Com were exploring ways to “fix” health care caused a lot of reporters to quickly make asses of themselves. 

They had little choice. The announcement was deliberately opaque. The goals are amorphous. The aims of the players are different. Warren Buffett is looking for a legacy, Bezos for a profit, Dimon for cash flow.

All very fine, but it will come to nothing if they can’t make progress against the key driver of health care costs, non-compliance. Some 75% of health care costs today are for chronic conditions that could be prevented, like diabetes and heart disease. If people took care of themselves, if they even took their medicines as prescribed, we would save trillions.

Some doctors are just as bad. Surgeons don’t use checklists, physicians don’t use best practices, others prescribe the high-priced drugs patients saw on TV where cheap generics would work just as well. Still others think a medical license means they can push any quack nostrum that comes into their head. It’s not just malpractice. It’s abuse of the system in the ordinary course of business, most of it perfectly legal, even ethical.

Obamacare made a start at dealing with some of these problems. But it didn’t go far enough.

To start, Obamacare delivered technology, in the form of sweet, sweet stimulus cash, and it delivered vertical integration, although that wasn’t its intent. The intent was to create a massive individual marketplace, data-driven competition between carriers that would, with subsidies, get everyone covered and at a reasonable cost. It was a step on the road to being Germany, where patients pay two-thirds of what Americans pay, covering everyone and everything.

The Health IT stimulus means everyone who is insured now has an electronic health record. Getting everyone into the computer means we can do population studies at low cost. It means we can measure doctors against one another, using data instead of anecdote. We can also measure non-compliance by patients.

Vertical integration was led by companies like Centene, which built a “managed care” model based on owning facilities, clinics, and their drug disbursement system.

This was done to serve Medicare and Medicaid contracts. Such contracts pay a set fee, per patient, an estimated cost based on wellness. Deliver a living patient for less than that fee and profit. This is what the market wanted, because there is no such thing as health insurance. You can’t insure against a certainty. The need for care is certain. The only question is how much you’ll need at any time.

The cost constraints of Medicare and Medicaid put a premium on cost control, and on assuring patient compliance. If you can get a young Medicaid patient into exercise, if you can get a middle-aged one to cut back on the doughnuts and drink, if you can get a Medicare patient to take their diabetes drugs on schedule, you’ll avoid complications, avoid hospitalization, you’ll profit.

In addition to owning clinics and nursing homes, and having its own drug disbursement arm, Centene signed business agreements with hospital groups. Hospitals are like cruise ships or hotels in that a bed that’s unslept-in makes no money. Centene got discount prices. The deals helped Centene control costs and gave it an entrée into how hospitals are run. Are they using checklists, following recommended treatment regimens, administering the highest quality, lowest cost drugs? Centene has a thumb on the cost scale. Centene makes money.

Mainline insurers moved toward the model when United Healthcare bought Catamaran in 2015. Catamaran is a “pharmacy benefit manager.” That means doctors’ orders go through them, before drugs are administered. If this is done right, the PBM can make sure doctors get the most bang for their drug buck. When this is done wrong, as with the Valeant scandal, it means patients are given the most expensive drugs regardless of what their doctor ordered.

United moved its insureds into Catamaran, and almost by magic the profit margins of competing PBMs shrank, while those of United rose. Drug stores also came under pressure. In late 2017 CVS acted, agreeing to buy Aetna, a health insurer, assuring that its Caremark PBM would at least keep some of the market.

CVS already owns a lot of front-line clinics, MinuteClinics, staffed by nurses and physicians’ assistants, directed by technology and only overseen by physicians. MinuteClinics can deliver front-line care to people with health records at a fraction of the cost of a doctor’s office. That’s another thumb down on the cost scale.

Those thumbs have been met by a health industry complex with powerful friends in Washington and every incentive to cheat.

The key is monopoly.

A new drug has a 17-year monopoly, and its maker can charge what the market will bear. Some new drugs are “priced” based on blackmail, the value of the life being saved. Generic drug companies have been bought up by sharks to the point where hospital systems are working on making their own. Hospital chains have been creating local and regional monopolies, which is why an Obamacare patient in the countryside pays many times more than the same patient in a city, where the monopolization process is still underway. 

With this history in mind, let’s see what Berkshire, JP Morgan and Amazon could do.

We know what Amazon wants. They want to be a PBM and a pharmacy. They want to deliver an increased amount of that front-line care as well. Their cloud can take health records, it can handle transactions, and they have the infrastructure to deliver the drugs.

Berkshire wants to get out of the box it’s currently in, a big player in property-casualty insurance without a play in healthcare. The exchanges offer a way in, but it needs to move quickly, before Trump kills them outright in his hatred of everything Obama. Buffett also wants to move quickly because he’s going to be 87 this year. He wants an operating challenge for one of his successors, Ajit Jain (left), that’s as big as the job energy chief Greg Abel has in buying solar and transforming the electrical grid.

JP Morgan Chase wants to be in the health insurance business. Sure, it’s worth $400 billion, but United Healthcare has doubled its gains over the last decade, and Centene’s gains have doubled that. Health care represents 18% of America’s GDP, that percentage continues to grow as Americans age. If you’re smart this is the train to get on.

But what can these three companies do, together?

Not as much as you think. Yes, Amazon can create its own PBM, it can deliver the drugs. Yes, Berkshire and Morgan can handle the money.

That won’t do the job. What will do the job is bargaining power. The law, as currently written, forbids even Medicare from bargaining on drug prices. While the Three Musketeers lobby for that, they’re going to want to create “formularies,” recommended procedures. Do this, don’t do that. Prescribe this, not that. They also need a way into care. They’re going to need front-line care, baseline clinics for handling chronic conditions, and control over acute care that hospitals do.

Most important, if anyone is to create real cost control they need the power to say no.

That’s because there is no such thing as an unlimited draw from a limited pool.

This is the silent reality of those of us facing death, which is to say all of us. Medicine can only do so much. Father Time is undefeated. Life is unfair. It’s America’s rejection of this reality, and our insistence that the system bear any burden because LIFE, that is the ultimate cause of our health care cost crisis.

Think even Jeff Bezos can beat that?