Three of the world’s largest corporations – Amazon, Berkshire Hathaway, and JP Morgan – announced a joint venture this past week to take on the task of finding ways to reduce healthcare costs for their employees. The three companies represent a combined number in excess of 500,000 employees. The joint venture will be set up as a non-profit corporation with the goal of finding innovative ways to reduce the costs of healthcare for this vast number. The hope is that the pioneering innovations will be something that can be duplicated by others.
It is nice to be, for once, talking about healthcare reforms that come from the free market rather than from government. It’s nicer still that those attempts at reform are coming from such large employers and outstanding business management talent. The entire industry of healthcare is in dire need of reforms. It’s something nearly everyone supports. We just always argue about what reforms are needed and who should design and carry out those reforms. It is exciting that these three companies have stepped up to take on the task without the forceful goading of anyone. Just a desire driven not only by altruism, but also by financial need. 500,000 people is a lot of people with a very high cost of healthcare. Reducing that cost can add tremendously to the bottom line of these companies, as well as reduce employee turnover and satisfaction costs for them. It proves the notion that the best ideas come from need in the free marketplace, and not from government central planning. At least, I believe that is what we will see.
While there has yet to even be a CEO chosen for this new company (much less an explanation of how it will work), it is easy to speculate on some of the things that are likely to come about from such a venture. Likely, we will see an elimination of a lot of layers of costly administration. Likely, there will be direct deals with healthcare providers, drug companies, and other ingredients necessary for meeting healthcare needs. There likely will be the cutting out of a lot of middle men. Every layer between doctor and patient is another layer of costs, and if those layers can be removed, costs go down. It’s probably the most obvious place for the new venture to innovate, and it will be very interesting to see the solutions. Health coverage for employees has been around for many decades, and there hasn’t been a lot of things that other people haven’t already considered, but with enough scale and enough will, I feel a little more confident that something can happen.
Another obvious area that the new venture is likely to tackle will be in putting healthcare options in the hands of the people seeking the healthcare. When people are presented with options, they tend to choose the ones that are most efficient for their needs. If there are lower cost options that produce the desired result, people will choose them when they are sharing in those costs. Right now, many employers address this with health savings accounts and similar instruments. Letting people shop for their services means not only that they can select less expensive options, but also lets doctors deal directly with their patients, cutting an enormous amount of costs in dealing with the massive administration built into health insurance. Many times, providers offer lower fees for dealing directly with the patient, because it costs them much less.
Insurance is supposed to be a product designed to protect against sudden, unexpected catastrophic expense. For example, if you wreck your car and don’t have the $3,000 it costs to fix it, then it is very useful to have protection in place that makes it so that you can get back on the road without being in financial ruin. Your car insurance doesn’t pay for oil changes and gasoline. At some point along the way, health insurance became not insurance, but an incredibly expensive way for a company to hold and distribute your money for every day healthcare costs that, on their own, would not necessarily break you. I would like to think this would also be an obvious innovation. It’s expensive to have another party act as your personal healthcare billing department.
So, while all of this potential innovation is great, it still does not address an important key issue. Making your employer be the bearer of your healthcare is more expensive than acting on your own behalf. The reason individual health insurance is more expensive than employer group insurance is that 1) your employer pays half the cost of your premiums, and 2) the population of people who don’t have coverage through an employer tends to be much heavier on the side of high costs of care, because often these are people who already have many health care needs that do not enable them to work through employers in a traditional sense. If there were more people getting individual coverage, then the cost of that coverage would go down. And, if you think that the portion your employer is paying is not coming out of your pocket, think again. If your employer wasn’t paying half your healthcare, you’d be getting paid more. It’s a cost of hiring you, and your employer views it as part of your pay. Getting a tax cut on the funds you spend on health insurance through your employer also makes it less expensive, but there are ways to address that and still allow you to buy your own coverage.
I have written about all of this before, but current events in these circumstances make it worth repeating. It is very exciting that such a large backing in the free market is likely going to innovate new ways of covering healthcare that may never have been attempted before. I am thrilled that for once, the government is not simply imposing changes on everyone, without regard to what works best for individuals in the marketplace. However, until healthcare is separated from being provided from employers it will always be more expensive than it could be. I am hopeful that this grand experiment will somehow demonstrate that to the public, and maybe even drive a change in that direction. I suppose we can sit back and look forward to what the free market might provide.
Danny Chabino
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