AMZN, BRK.A/.B, and JPM Look Set to Fire (or at least seriously trim back the roles of) Their Healthcare Agents

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Richard Evans / Scott Hinds
203.901.1631 /.1632
revans@ / shinds@ssrllc.com
@SSRHealth
January 30, 2018

AMZN, BRK.A/.B, and JPM Look Set to Fire (or at least seriously trim back the roles of) Their Healthcare Agents

  • Before the partners’ announcement we were already convinced AMZN would disintermediate chain pharmacy and PBMs (for a broad group of consumers, not just their partners’ and their own employees); now we’re even more convinced
  • In light of the announcement we suspect the partners will largely (but perhaps not completely) disintermediate HMOs from the much narrower base of their own employees; the partners may need HMOs’ help in negotiating payment rates in the (many) local markets where the partners lack purchasing power and may want the planning benefits of certain HMOs’ longitudinal datasets. The rest of what these partners have purchased from HMOs arguably can be replaced and/or re-fashioned by the partners themselves
  • The impact on PBMs (e.g. ESRX, CVS) and chain pharmacy (CVS again, also WBA, RAD, FRED) is obviously far greater than the impact on HMOs, since the former occurs more quickly, more completely (all the services can be disintermediated), and across a far larger group of consumers
  • The impact on HMOs is eventually likely to be significant but should unfold more gradually (even accounting for the likelihood of more partners joining the platform), since the effects are limited to the partners’ US employees. In fact, the pace at which HMO alternatives emerge from the partnership may give HMOs an opportunity to modify their offerings in an effort to have a continued role – something that cannot be said of the pharmacy space. And, the impact on HMOs obviously should be felt much more by the commercial-predominant names (e.g. UNH, CI, AET) than by HUM (Medicare Advantage) or the Medicaid-predominant names (CNC, MOH, WCG)

The AMZN, BRK.A/.B, JPM announcement begs the question of what you’d do about healthcare if you had a modest number of US employees and an immodest amount of technical and financial expertise. Personally, I’d start by dividing healthcare costs into the costs of agents (e.g. HMOs, PBMs, wholesalers, retailers, etc.), and the costs of actual care (e.g. prescriptions, diagnostic tests, surgery, hospital stays, etc.). The simple logic is that my technical and financial horsepower can be more readily used to replace intermediaries and agents than it can be to replace actual care providers; and, there’s plenty of evidence that agency problems must be addressed if I’m going to reach my goals

We’ve long used the analogy of a travel agent who can choose either to sell vacations to the Greek Isles, or to the Jersey Shore. The obvious choice is to sell vacations to the Greek Isles; because these packages are more expensive, the agent stands to capture a higher absolute margin on these vacations. By similar logic, the travel agent should be perfectly happy to see the cost of Greek Isles vacations rising, provided two conditions are met: 1) the price increases don’t create an economic loss through declining volumes; and, 2) the agent is able to provide its clients with Greek Isles vacations packages that are no more expensive, and arguably just a little less expensive, than the packages offered by competing agents. Price inflation on the underlying vacation package plainly works against the traveler’s interest but can (and often will) work in the agent’s interest. So, if my agent: 1) isn’t working to hold back underlying prices (and may even have an economic interest in prices rising, 2) is charging me a substantial percentage margin; and, 3) is performing services that I could perform for myself, then it’s perfectly logical to fire (or at least seriously renegotiate the role of) my agent

As we’ve argued elsewhere[1]AMZN is able to disintermediate pharmacy agents (PBMs and chain drug retailers) if it so chooses, and we believe the announcement of the healthcare partnership only makes AMZN’s entry into pharmacy more likely. Because pharmacy is covered in detail in our prior notes, we’ll focus our attention outside of pharmacy

The three companies are almost certainly all self-insured, so they’re relying on HMOs as agents to organize their access to care, and to negotiate the unit costs of care, but not using agents to carry risk. Even in this relatively narrow role HMOs are subject to the agency conflicts reflected in the travel agent example; because of this conflict (and the long trailing history of underlying price inflation), the partners have every motive to set aside HMOs if possible, or to at least trim back their roles. The question becomes how these technically and financially enabled partners might best go about replacing (or refining, or narrowing) the HMO role

An immediate issue the partners will face, if they choose to limit the HMO role, is access to negotiated pricing. The partners cannot realistically pay ‘list’ rates for physician and hospital services, so they’ll need to negotiate these prices in each of the geographic markets that are relevant to the partners. However, because the partners may not have – with the exception of Seattle and possibly NYC –significant numbers of beneficiaries in many local markets, negotiating provider rates in these non-core geographies will be hard to do without an established HMO. The partners can – and almost certainly should – scale back this problem by giving ‘airplane diagnosis[2]’ patients the option of traveling to lower cost, higher quality preferred providers wherever practical. It may be that the partners need an HMO to negotiate rates for ‘non-airplane’ diagnoses in geographies where the partners lack local purchasing power – until and unless the partnership grows to include others whose beneficiaries give the partnership sufficient local purchasing leverage

Yet another issue the partners would face, should they decide to fire (or restrict the role of) their HMO, is access to the large amounts of longitudinal patient data they’ll need to optimize care pathways for their employees. The volume and quality of data available (thanks to electronic health record standards), and the sophistication (AI) with which these data can be processed, both have grown to a point that learning from longitudinal patient records is an increasingly essential part of the drive to lower-cost, higher quality care

Other than those two things (negotiating local prices and access to longitudinal patient data), everything else HMOs do for the partners arguably is a jump ball. Here’s where the HMO model really falls short: patients generally don’t know the unit costs of care (much less the cost of an entire episode of care), can’t distinguish good quality from bad; and after out-of-pocket (OOP) limits have been met are relatively insensitive to prices anyway, since by that point they’re spending someone else’s money. As a natural result, price /quality and price / quantity links are weak at best, opening the door to real price inflation, inconsistent (and low average) quality, and a tendency to overconsume. Of these factors real price inflation is the main driver of greater health costs in the US as compared to the balance of the OECD, i.e. on a per-capita basis the number and technical sophistication of care consumed by Americans isn’t that different from our OECD counterparts – we just pay a lot more for each unit of care[3]. If reducing unit costs is a priority (and we believe it is), then you can go about this in either or a combination of two ways: 1) the traditional route of shifting your patients to the lowest cost / highest quality settings (you’re large enough to do this on your own for the airplane diagnoses, but not large enough for the remaining diagnoses); and/or 2) setting the stage for your employees to be informed, price-elastic consumers of healthcare, so that they naturally select the lowest-cost, highest-quality option(s). This latter part is missing from the HMO model, and is something the partners can create

These partners have the technical capacity to show patients the unit costs of care, predict for patients the costs of an entire episode of care, show patients the relative qualities of various care options, and have the financial capacity to maintain patients’ interest in the marginal costs of care[4] (without discouraging necessary care). The logical goal is to create a population of informed and elastic consumers, give them choices, and then rely on these choices to forge the price / quality and price / quantity links that are otherwise missing

  1. “AMZN: How to enter (and ultimately dominate) pharmacy”, SSR Health LLC, November 5, 2017; “AMZN: a pharmacy role beyond fulfillment”, SSR Health LLC, December 4, 2017 
  2. Diagnoses for which patients are readily transportable (sufficiently healthy and with a condition that isn’t escalating so rapidly as to preclude delays associated with arranging travel), and for which concentration of volume can improve outcomes (volume of procedures is heavily correlated with quality of outcomes) and lower costs 
  3. https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.22.3.89 
  4. E.g. see “Health and Capital” pgs. 158-171, here: https://www.slideshare.net/slideshow/embed_code/key/dhcoJw5rTwIMNX 

 

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