The Giants Unite

Public policy problems have typically been the domain of governments, although the recent announcement of a healthcare alliance seeks to shake up this equilibrium. The news of three corporate behemoths forming an independent company to tackle the burden that healthcare places on America marks one of the most ambitious efforts yet by private firms to address the nation’s inflated healthcare costs. Amazon.com Inc., Berkshire Hathaway, and JPMorgan Chase & Co. are creating a company that will attempt to reduce healthcare costs for hundreds of thousands of U.S. employees, and potentially all Americans in the future.

While Amazon has long been rumored to be eyeing the U.S. healthcare space, details remain scarce as to what form an Amazon healthcare entry will take. The latest news of the healthcare alliance reiterates Amazon’s seriousness in entering the healthcare value chain in some capacity. However, given the usual veil of secrecy Amazon operates under, pundits are left guessing as to how things could unfold. While any initiatives devised by the alliance will apply only to the firms’ own employees, there is the possibility to roll out any changes across the wider U.S. population if successful.

Jamie Dimon, the CEO of JPMorgan, commented: “The three of our companies have extraordinary resources, and our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans.” The initiative was positioned as being “free from profit-making incentives and constraints.” If the venture is successful, the initiative could have a meaningful impact on the cost of healthcare for Americans – more than 150 million Americans get their health insurance from an employer, representing a large group that successful changes can potentially be rolled out to.

Expensive healthcare has long been an issue plaguing the American economy – U.S. healthcare expenditure was 17.9% of GDP in 2016, much higher than other advanced economies. As the below chart illustrates, employee health plan premiums have increased materially faster than employee earnings and general inflation, placing an additional cost burden on individuals and companies that self-insure.

Expensive healthcare affects the competitiveness of American companies – Warren Buffett, the CEO of Berkshire Hathaway commented that “the ballooning costs of healthcare act as a hungry tapeworm on the American economy”. Whilst the formation of an independent company by these industry heavyweights might optically appear to be altruistic, healthcare costs represent a genuine cost for these firms and this is in effect a “cost out” program for these businesses. Any reduction on the cost of U.S. healthcare benefits the bottom lines of these firms.

The endeavor has the potential to enact meaningful positive change, and if successful longer term, it would mark a victory of private companies solving complex societal issues. However, challenges remain for this alliance. With around one million people employed by the three firms (and an even smaller number of this total residing within U.S.), there is a question mark over just how much clout the alliance will have in extracting better economics from hospitals and other healthcare providers.

Furthermore, many of JPMorgan’s and Amazon’s employees already have some of the best health plans in the country. It’s an open question as to how many of those employees will actually experiment with a new healthcare model, and furthermore, how relevant any of the insights or improvements will be for the broader insured population, as well as those that are uninsured.

Perhaps private firms are better placed to solve the healthcare debacle in America. The political climate in Washington has continued to devolve, with partisan bickering and political grandstanding leading to policy gridlock. Despite the Republicans controlling the White House, Senate and House, they were still unable to enact their long spoken about healthcare reforms. However, the jury is still out as to whether this new alliance will be able to have a meaningful impact on the U.S. healthcare system.

Image source: via Associated Press; Mike Blake/Reuters

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George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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Our Montaka Active Extension strategy strives for maximised return over the long-term. Owning the Montaka long portfolio typically scaled up to approximately 130 percent - and the Montaka short portfolio typically scaled down to approximately 30 percent – this strategy results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net strategy strives for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this strategy is our flagship long-short

Our Montgomery Global strategy strives to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka strategies, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark. Branded as “Montgomery Global” in Australia to reflect a key.