When Amazon, Berkshire Hathaway, and JPMorgan announced its plan to form an independent healthcare company, share prices of insurance and healthcare companies dropped sharply. This was a new reality for insurers. Since the passage of the Affordable Care Act and prior to the new alliance’s announcement, the carrier share prices for the four largest publicly traded insurance carriers have increased significantly.
These carriers provide insurance in three primary verticals: Individual coverage, Medicare, and employer plans. Individual coverage has caused carriers to lose billions of dollars in the seven years since the ACA’s inception. This result proves that carriers do not have the ability to accurately price Individual coverage under the constraints put forth in the ACA legislation.
Medicare operates on a fixed fee schedule and while profitable, it has a limited upside in terms of growing profits. Medicare provides a stable albeit limited revenue stream to carriers. So, where do you generate growth as an insurance carrier?
According to the 2016 Kaiser Family Foundation study, 49% of Americans receive coverage through their employer with the remaining 51% receiving coverage from non-group (7%), Medicaid (19%), Medicare (14%), other public coverage (2%), and the uninsured (9%). It becomes apparent that the largest concentration of revenue is in the employer vertical (49%).
Factoring in what we know about the profitability in the Individual and Medicare verticals the concentration of profits coming from employer sponsored coverage becomes even greater for carriers.
In chess there is a term called “zugzwang” that describes when one player is at a disadvantage because they are forced to make a move when they would prefer to pass and not make a move. Compelling the opposing player to make a move means that their position will become significantly weaker.
Given such a large concentration of revenue in the employer sponsored vertical, an attack on this revenue stream from a more diverse competitor could pose a serious problem for insurance carriers. If Amazon, Berkshire Hathaway, and JPMorgan understand how carriers and providers are vertically integrating the healthcare supply chain and target these revenues, it could put carriers in a position of “zugzwang.” Overhaul the most profitable vertical of your business to combat the new disruptor or lose market share while you contemplate your next move.
Carriers, providers, and advisers have seen attempts before by both private businesses and the government to reform the healthcare industry but as costs continue to rise these challenges become less about disruption and move about survival of the American economy. Amazon, Berkshire Hathaway, and JPMorgan may not replace insurance carriers but if they are successful they will likely have reinvented the carrier business model just as each has done in their respective industries.
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