Community banks are applauding JPMorgan Chase’s foray into the health care business.

You read that right.

While smaller financial institutions often view big-bank efforts with at least a modicum of trepidation, there seems to be very little concern that a recently announced venture with Amazon and Berkshire Hathaway will give Chase a competitive advantage in banking.

In fact, community bank CEOs are hopeful the effort will uncover ways for their institutions to reduce health care costs. While the corporate giants haven’t revealed much about the venture’s strategy, it is possible that some community banks would sign up if products or services were ever offered.

“If they can do anything to help the health care industry become more efficient and in some way keep premiums at bay, that would be great,” said Douglas Manditch, chairman and CEO of Empire Bancorp in Islandia, N.Y. “I think they’ll find a way to market it if they're successful.”

The venture is intended to be “free from profit-making incentives and constraints” with a focus on “technology solutions” designed to provide “simplified, high-quality and transparent health care at a reasonable cost,” Chase, Amazon and Berkshire said in a release announcing the effort.

Some industry observers think the strategy could pair a drug purchasing and delivery business from Amazon with a streamlined payment system from Chase. In addition to lowering overall health care costs, some consultants believe the effort could force health care providers and technology firms that serve smaller banks to become more innovative.

“If JPMorgan, Amazon and Berkshire can create something — whatever it is — it would create an opportunity for imitation,” said Greyson Tuck, a director at Gerrish Smith Tuck. “If they have a great idea, others will figure out how to replicate it or get very close to it.”

Containing health care costs is a persistent challenge, community bankers said.

Average annual health insurance premiums for U.S. employers rose by 19%, to almost $19,000, between 2012 and 2017, according to a survey by the Kaiser Family Foundation and the Health Research & Educational Trust. The employer’s contribution increased by about 14% over that time, to about $13,000.

In comparison, overall inflation was 6% and workers’ earnings rose by 12%, on average, over that five-year span, according to a separate Kaiser report.

Frustration with health care costs has worsened over time, said Anthony Cellucci Jr., a managing member of the Beacon Group of Companies, which provides consulting services for personal insurance, investment and employee benefits. Health care expenses started to rise in the 1990s, he said, in part due to the cost of pharmaceuticals.

“There’s a sense of hope because the only other real alternative that has been presented to the American public is some iteration of a single payer system,” Cellucci said. “This is a breath of fresh air. This is the private sector working to create a solution.”

The $900 million-asset Empire was fortunate; its premium costs went up by about 5.5% the last time it renegotiated its rates, or far below the 10% to 11% increases in other years, Manditch said.

Overall operating costs at Empire rose by almost 8% in 2017 from a year earlier, to $19.5 million, largely because of a more than 8% jump in salaries and employee benefits.

“Our hands are tied unless we want to cut premiums and increase deductibles,” Manditch said. “It is a difficult item to deal with every year.”

Some community banks have cut back the coverage offered to employees, industry experts said.

Terry Jorde, chief of staff at the Independent Community Bankers of America, noted that when she was president and CEO of CountryBank USA in Cando, N.D., health care costs were among the three biggest expense items. (Regulation and technology were the others.)

CountryBank, which initially covered employees and their families, stopped paying for dependents as expenses rose, she said.

“All of us in the industry share the frustration of how to manage health care costs,” Jorde added. “We believe all Americans should have access to health care at a reasonable cost.”

Terry Jorde
“All of us in the industry share the frustration of how to manage health care costs,” said Terry Jorde, chief of staff at the Independent Community Bankers of America. “We believe all Americans should have access to health care at a reasonable cost.”

Companies that cut back coverage also run the risk of losing the best employees, said Trent Fleming of Trent Fleming Consulting. Banks spend an “inordinate amount of time changing providers and then dealing with employee dissatisfaction over that,” he said.

“It is a little bit of an albatross to just keep up with” making health care affordable, Fleming added.

Sussex Bancorp in Rockaway, N.J., looks to keep costs down by offering employees benefits such as Fitbits and health savings accounts, said President and CEO Anthony Labozzetta. Executives at the $1.4 billion-asset company will also look at health benefits as an area to reinvest savings from the recently reduced corporate tax rate.

Providing good health insurance, along with other benefits, is necessary in hiring and retaining personnel, Labozzetta said.

“You can’t have a laissez-faire attitude,” Labozzetta said. “We’re seeing disruptors from different spaces all the time, whether it’s the money-center banks or fintech. We just have to adapt.”

Some banks have found ways to work together to contain costs.

MainStreet Bancshares in Fairfax, Va., participates in a medical coverage program offered by the Virginia Bankers Association, said Chairman and CEO Jeff Dick. The system has been helpful for the $705 million-asset bank, which has less than 100 employees.

Dick, however, was skeptical that anything immediate would come out of the Chase partnership, expressing a belief that it could take 18 months or more before something tangible surfaces. The effort also faces a highly regulated and archaic health care industry, where lobbyists might fight any disruption, he added.

Still, Dick applauded the venture’s long-term potential to create a more efficient health care system.

“If there’s anything that makes an inroad into that, it’s worth keeping an eye on,” Dick said.

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Jackie Stewart

Jackie Stewart covers community banks and mergers and acquisitions for American Banker.