How Berkshire Is Disrupting Healthcare

Jan 30, 2018
Finance

SMITH BRAIN TRUST – For those who listen closely to what Warren Buffett says, the announcement that Berkshire Hathaway was hooking up with Amazon.com and JPMorgan Chase to create an independent healthcare company didn’t come as a big surprise. Buffett, the billionaire investor and Berkshire Hathaway CEO, has been lamenting the state of healthcare in the country and its corrosive effect on the economy for much of the past year.

“He has been hinting that there is a problem here that needs to be solved, and now this morning he is saying that he is going to begin to try to solve it with Amazon.com CEO Jeff Bezos and JPMorgan Chase CEO Jamie Dimon,” says David Kass, clinical professor of finance at the University of Maryland Robert H. Smith School of Business. Kass is a former health economist for the federal government and has followed Buffett’s investments and philosophy for more than 35 years. 

Details remain limited about the new initiative, which brings together the country’s best-known billionaire investor, its biggest online retailer and its largest bank by assets.

The three companies said Tuesday the entity, which would be “free from profit-making incentives and constraints” would use technology to provide simplified, quality health care at a reasonable price. The news sent shares of established health insurers sharply lower on Wall Street.

The notion of divorcing health care from profit incentives answers a criticism that’s been rising, with unchecked cost increases in the healthcare sector wildly outstripping rates of inflation in recent years. Buffett has referred to the rising costs of healthcare as “a hungry tapeworm” attacking the U.S. economy. “Our group does not come to this problem with answers,” Buffett said Tuesday. “But we also do not accept it as inevitable.”

In the United States, health-care spending increased 4.3 percent in 2016 to $3.3 trillion, accounting for an 18 percent share of the country’s gross domestic product, according to the U.S. Centers for Medicare and Medicaid Services.

“I think there are opportunities to reduce the prices and price increases of pharmaceuticals in this country,” says Kass. “It is quite glaring how much lower prices are for specific pharmaceuticals in other countries. There is enormous potential for cost savings.”

Buffett last year warned that health insurance – not the U.S. tax code – was “crippling” American business around the world. Speaking at Berkshire Hathaway’s annual shareholder meeting in Omaha, Neb., last May, Buffett urged business leaders to shift their focus away from their tax bills and take a closer look at skyrocketing health care costs. He warned that increases in health care costs in recent years were crushing profits, touting the broad benefits of a single-payer or universal type of health coverage for all U.S. citizens, perhaps with an opt-out provision that would allow wealthy individuals to choose a more upscale plan.

In the same year, Amazon announced that it had obtained licenses to operate pharmacies in at least 12 states: Alabama, Arizona, Connecticut, Idaho, Louisiana, Michigan, Nevada, New Hampshire, New Jersey, North Dakota, Oregon and Tennessee. The move, announced in October, followed months of speculation that Amazon was looking to disrupt the country’s dysfunctional healthcare sector.

“Warren Buffett has referred to Jeff Bezos as the best manager in the world,” Kass says. “It was probably just a matter of time before they partnered on something. And Bezos has been, through Amazon.com, quite innovative.”

Kass adds that Buffett has had a close professional relationship with both Bezos and Dimon. “These are three prominent corporations and three prominent corporate leaders. They talk to each other periodically and they are each pretty innovative,” Kass says.

The partnership could be transformative for the wider corporate world, Kass notes. “It will certainly be in the interest of other corporations to observe what is happening here,” he says.

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About the Expert(s)

Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Sophomore Wall Street Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway.

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