Amazon announced on 30 January that it plans to team up with Warren Buffett’s Berkshire Hathaway and JP Morgan to create a company that helps their US employees find quality care at a reasonable cost.
“The ballooning costs of [healthcare] act as a hungry tapeworm on the American economy,” Buffett said in a statement.
Few details were released; the project is in the early development stage. But the price of shares of leading retail pharmaceutical and insurance firms fell sharply on the news of the initiative.
There’s speculation the plan is to set up a company that will use technology to cut healthcare bills and be run on a non-profit basis. Around 20 per cent of US GDP is absorbed by spending on healthcare. Forecasts suggest this figure will continue to rise for the indefinite future.
The fact that three of America’s leading corporations are addressing this issue is a welcome development. But the creation of a new company is no answer to the intensifying challenge of rising healthcare costs.
Conventional economists argue that excessive costs in any industry can only persist where there is no competition. They blame high US healthcare costs on the dominance of a small number of insurance companies capable of providing collective insurance on the scale the US economy needs, oligopolistic trends in the US pharmaceutical industry and the medical profession’s control over recruitment and training of physicians.
Their answer is action to break down monopolies and barriers to entry. The new healthcare service provider for companies that employ about 1m people is the type of thing they want more of.
In the UK, the NHS is the dominant healthcare service provider. Conventional economists find this unacceptable and press for ways for competition to be introduced. In the past 30 years, there have been initiatives designed to give GPs more power to choose hospitals and hospitals greater choice in their product and service purchases.
Economics2030 argues these initiatives are not without merit but fail to tackle the key issue.
For all healthcare workers — whether they are doctors, nurses, ambulance personnel or support staff – the principal challenge is finding information efficiently about patients as they interact with the healthcare industry.
Treatment is a fraction of the total cost of healthcare. Most resources are devoted to getting relevant patient information.
The productivity of the industry measured by time spent on individual patients could be increased by at least 100 per cent if that was freely shared.
Perversely, more competition among insurance companies is exactly the wrong diagnosis.
That is because insurers make superior profits in healthcare by capturing detailed information about individuals that can be used to charge a premium for those it does insure and reject those unable to pay the prices their health record require.
This flaw is only partly offset when a health company is run on a non-profit basis. Non-profit firms still pay their senior managers massive salaries and seek to monopolise patient data like their for profit counterparts do.
Reducing health costs requires all patient data to be freely available to service providers. This would allow them to compete both in terms of price and quality.
The data upon which effective value creation in healthcare depends must be held securely and provided on a non-profit basis and preferably free.
It might be that Amazon, Berkshire Hathaway and JP Morgan are thinking in such terms.
But their track record suggests they aren’t.