The blow-out quarter of Amazon.com, Inc. (NASDAQ:AMZN), which increased CEO Jeff Bezos’ personal fortune to over $115 billion, is just one thing powering the stock higher. Earnings of $3.75 per share on revenue of over $60 billion sent the stock up over 5% in early morning trade Feb. 2, to $1,461 per share.
There is now optimism that, along with JP Morgan Chase & Co. (NYSE:JPM) and Berkshire Hathaway Inc. (NYSE:BRK.A) Amazon can “fix” healthcare.
Health insurance can be enormously profitable, witness the 321% gain in UnitedHealth Group Inc. (NYSE:UNH) over the past five years while Berkshire, with its huge property-casualty insurance arm, is up just 121%.
But this is not about building profits with a new business. This is about saving healthcare.
The Cost of Care
Between them, Amazon, Berkshire and JP Morgan have over 1 million employees. Amazon alone employs about 500,000 people.
Large companies like Amazon self-insure their risks, paying the actual costs of care along with an up-charge to an insurer for administrative work. If the administrative charge is 5%, this comes to as much as $300 million per year, with 1 million employees costing an average of $6,000 per year.
Cloud-based electronic health records can cut these costs profitably. AthenaHealth Inc. (NYSE:ATHN), which has pioneered that model, is up over 300% over the last decade and just announced a blow-out quarter.
The Key to the Market
The best way to save money on actual healthcare is through vertical integration, insurers controlling facilities and their own drug disbursement through Pharmacy Benefit Managers (PBMs).
Centene Corp. (NYSE:CNC), which adopted this “managed care” model to serve Medicare and Medicaid contracts, is up by 387% in the past five years. Centene owns clinics and nursing homes, has its own drug disbursement arm and signs business agreements with hospital groups, assuring them a steady stream of patients in exchange for visibility into costs.
United Healthcare made a move toward this in 2015 by buying a PBM called Catamaran. This allows it to create formularies, recommended treatment regimens, based on best practices and costs. In late 2017 CVS Health Inc. (NYSE:CVS) reacted by agreeing to buy Aetna Inc. (NYSE:AET), a health insurer and brought its MinuteClinics, delivering front-line care, to the party.
There’s even a model for controlling drug costs. Intermountain Healthcare, a non-profit managed care group in Utah, is now working with other hospital systems and the Veterans Administration to manufacture generic drugs, providing competition with generic makers that raise prices.
The Bottom Line
Even bigger savings will come if the three partners can make progress against the key driver of healthcare costs, non-compliance. Some 75% of healthcare costs today are for chronic conditions that could be prevented, like diabetes and heart disease.
Then there are doctors. Some surgeons still don’t use checklists, many physicians still don’t use best practices, and others prescribe the high-priced drugs patients saw on TV where cheap generics would work just as well. Employing them directly can force compliance with best practices, as Centene has shown.
The bottom line is that all the ingredients for cutting healthcare costs are in the market.
Electronic health records, vertical integration, policies that demand compliance with best practices from doctors and with doctors’ orders from patients, can save huge amounts of money when spread across 1 million employees, which is what the three partners here have.
For Amazon.com, saving on its own healthcare puts $2,000 per share in sight.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
