5 takeaways from JPM-Amazon-Berkshire health venture

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If it were anybody else, it would be easy to say this idea is overly vague, idealistic and too good to be true: a health company that relies on the latest technology, makes workers happy, saves employers money, and, oh, is completely free of the constraints of profit motive.

But the protagonists here are three of the biggest, most successful U.S. companies: JPMorgan Chase, Amazon and Warren Buffett’s Berkshire Hathaway. For that reason alone, it has to be taken seriously. Just ask the health care industry. Even though the companies avoided any language that said they are going to go into the health insurance or pharmacy businesses, for instance, stocks in those sectors fell quickly on the announcement Tuesday.

There are lots of details that still need to be understood about the venture, including whether it’s a health plan that disrupts insurance companies, doctors and hospitals, or is a targeted big-data project that supplements the current health system; whether it could have a for-profit arm; and if it could be opened to the broader public at some point. JPMorgan CEO Jamie Dimon’s comment that “our goal is to create solutions that benefit our U.S. employees, their families and, potentially, all Americans” suggests that opening it up to the public is a long-term consideration.

If the venture comes together and works — still a big if — it could have an impact on financial services. It raises questions about how it might give JPMorgan an edge in competing with other banks, lead to innovative products or create unforeseen issues.

Following are several of those questions, and our initial stab at the answers.

What exactly could the three companies build?

A small industry of fintech startups, referred to as “insuretech,” has been attempting to make finding and using insurance easier for consumers and businesses. It has had limited traction as the field is dominated by huge insurance companies.

But the three heavyweights involved in Tuesday's announcement could do something game-changing.

Given the strengths of the three companies, Amazon could try to start a drug purchasing and delivery business, JPMorgan could create a payor-to-payee system to streamline health care payment transactions, and Berkshire Hathaway could contribute the insurance expertise it has developed from years of owning insurance companies.

(See also: How Chase, Amazon tech could transform health care payments)

All three companies could benefit by reducing their employee health care costs.

“If this new company makes zero money, they still win,” said Suresh Ramamurthi, chairman and chief technology officer of CBW Bank in Weir, Kan., which has built its own health care payments system. “They’ll still save a ton of money.”

Collectively, they can knock out some of the nodes in the health care supply chain, said Oppenheimer health IT and distribution analyst Mohan Naidu. There are pharmacy benefit managers (Express Scripts and CVS Caremark, for instance), dispensaries and many other players that take a cut as care and drugs are passed from provider to consumer.

“If you add up all the margins across several entities involved in providing care, there’s a decent amount of margin that can be passed back to employers and consumers,” Naidu said.

Could it give JPMorgan a competitive advantage in recruiting and retaining employees? Could it help it with customers somehow, too?

The banking industry scrambled to make sense of the announcement — and how the new venture could give JPMorgan a competitive advantage in the years ahead.

“This is one of the first truly new and radically interesting announcements coming out of the banking industry in some time,” said Kevin Travis, an executive vice president with Novantas, describing his initial reaction to the news. “If you think about banks and the challenges they’re facing, it’s about relevance and, if they have consumer trust, how do they use it?”

Most immediately, JPMorgan is expected to help the new company with payments-related issues and managing consumer data. That could involve helping health care providers provide more accurate and easier-to-understand information tor consumers, Barclays analyst Jason Goldberg wrote in a Jan. 30 note to clients.

It could also involve working with health care companies to develop mobile and online payments options, or helping them integrate complex accounting, payments or reimbursement systems, Goldberg said.

But while the health care is the primary focus of the partnership, JPMorgan’s participation is expected to have a significant, residual impact on the traditional banking industry as well.

For instance, if JPMorgan succeeds at shaving off costs in its annual employee health care bill, it would give the company a major competitive advantage over its primary competitors. At most retail banks, compensation and “people” costs account for about 60% of direct operating expenses, according to Travis.

At JPMorgan, compensation expenses accounted for 51% of total noninterest expense in the fourth quarter.

“The idea that you could even get a 5% cost advantage, scaled over many years, that’s pretty significant,” Travis said, noting that competitors such as Bank of America and Wells Fargo “would have to react.”

More broadly, the news sends a clear message to smaller and regional peers: Big banks are getting bigger, and they are playing a more significant role in markets that are central to nation’s economic health.

During Berkshire Hathaway’s annual meeting last year, its chairman and CEO Buffett noted that health care costs have ballooned to nearly 20% of gross domestic product. With the latest announcement, JPMorgan has planted a flag that signals its interest in a big role in the health care industry in the years to come.

“Regional banks are under extreme pressure,” Travis said, noting that big banks are outpacing them when it comes to deposit gathering in particular. “This is going to exacerbate that.”

Could the venture's health products be sold to customers as an add-on, fee-based service?

It’s too soon to say how — or even whether — JPMorgan could leverage the new partnership for its own commercial gain. The new company will initially focus on lowering costs and improving health care for employees at the three companies in a way that is “free from profit-making incentives and constraints.”

It’s unclear if the new company will be set up initially as a nonprofit or whether it could evolve into a profit-making business down the road. Still, the bank appeared to leave open the possibility of offering services to a broader marketplace of clients.

“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,” Dimon said in the release.

Asked whether the partnership opens the door for JPMorgan to offer add-on health care services to companies — similar to the way the bank offers treasury management services, for instance — Travis, the Novantas consultant, hesitated to answer but said such a move would be easy to imagine.

“It’s such early days, it’s very hard to say,” Travis said.

However, Dan O'Malley, the CEO of Numerated, a fintech lender that recently spun off from a unit of Eastern Bank in Boston, said he would be surprised if a product did not emerge eventually.

"It’s hard to believe that these entities would enter into an agreement and dedicate this amount of resources without the eventual end goal of bringing a product to market," said O'Malley, who previously was a payments executive at Capital One. "Amazon is looking to be a leader in every industry. Retail, then banking, and health care is a next logical step."

Ramamurthi said the payor-to-provider market is $2 trillion of business that JPMorgan could somehow tap into.

“JPMorgan gets to play in one of the largest payment businesses in the country and save money on its employees,” Ramamurthi said.

A JPMorgan spokesman did not respond Tuesday to inquiries about whether the venture could have any possible business tie-ins. Officials at Amazon and Berkshire declined to make any executives available for interviews.

Perhaps more importantly, given that health care costs are a significant source of stress for consumers, any move by JPMorgan to help them manage their health care bills will undoubtedly help the bank stay relevant in the years ahead — particularly as consumer preferences for retail banking continue to change.

“It’s an interesting thought game to imagine banks playing a bigger role” in the health care market, Travis said.

Does this venture set the stage for broader cooperation between Amazon and JPMorgan?

Naidu said it could but he predicts their relationship will be very focused for the near term.

“Amazon is a big player and they have also started doing Amazon Pay,” he said. “Reading between the lines, this is going to be pretty focused on health care, and anything that comes out of it is all gravy on top of that."

Naidu estimates the new consortium won’t make itself felt for two years, partly because of the health care enrollment cycle. JPMorgan’s 2018 health care enrollment season ended in December 2017. There may not be enough time to make changes for 2019; everything would have to be in place by the third quarter of this year, since enrollment takes place in the fourth quarter.

“It would be very optimistic to think they’ll have anything before the 2019 calendar year,” Naidu said.

Amazon’s enrollment season is in March, which is also too soon to disrupt.

“Too many things need to happen before this can become a viable opportunity,” Naidu said. “I’m thinking of 2020 when these guys create something and start offering to own employees.”

Will anybody be hurt by this venture?

Spiros Margaris, founder of the venture capital firm Margaris Advisory, says the joint venture in the short run could have a negative impact on people who don’t work at the three companies.

“It will be bad obviously for the insurance industry, since we will see many copycats from other large companies,” he said.

Insurers will lose good working clients, which will force them to raise premiums, he said. So people who don’t work at the three companies will be disadvantaged. And employees will be tied to these companies.

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