Tag Archives: berkshire hathaway

Does Amazon Threaten Home Insurers?

Amazon has made no secret of its intent to disrupt virtually every industry on the planet, most recently announcing a partnership with JPMorgan Chase and Berkshire Hathaway to create an independent healthcare company. Reportedly, the retail giant has also begun to explore the idea of setting up an insurance price comparison site in the U.K.

The formula is now clear. Amazon and other consumer-first digital disruptors like Google set their sights on a conventional industry with aging distribution and marketing channels, then things start to change rapidly. With an insurtech revolution already starting to brew in the home insurance marketplace, how long will it be before the likes of Amazon and Google enter the market in a serious way? And, if they do, will customers welcome them?

While industry incumbents like State Farm, Allstate and Progressive have begun to speculate on potential scenarios for this kind of digital disruption, J.D. Power’s P&C insurance industry practice went right to the source – the consumer – to ask how real home insurance customers would feel about the presence of tech companies in this space.

Following were the key findings from the J.D. Power Pulse Survey:

20% of Consumers Would Use Amazon or Google for Home Insurance

The data revealed that 20% of consumers would use an Amazon or Google for their home insurance. Millennials showed even higher interest at 33% for Amazon and 23% for Google. Of those who indicated that they would be willing to switch, 80% currently have insurance with a large national carrier.

See also: What if Amazon Entered Insurance?  

75% of Consumers Interested in Home Telematics

While most of the media’s attention has focused on the future of automation technology in automobiles, the disruption to your home experience – and by extension your home insurance – through smart home technologies is likely to have an equal or greater impact.

Smart home technologies are revolutionizing many areas of the home, from simple comfort features that can now turn lights on and off or access in-home entertainment by control of your phone to home security and emergency support with automatic shutoffs and alerts.

The insurance industry wants in on the action. Insurers see smart home technologies as an opportunity to deepen their relationships with customers, while improving home coverage options and underwriting. While leading home insurance carriers have begun to venture into these areas, not much research has been done to understand the consumer’s demand as these features become available. Based on the J.D. Power Pulse Survey, following are insights into the current consumer appetite for this type of technology:

  • Top areas for insurtech disruption: Among consumers polled, following are the top area of their relationship with their home insurance provider that needs the greatest improvement:
    • Product Options/Coverages – 20%
    • Underwriting Sophistication – 15%
    • Claims – 14%
  • Top insurtech technologies: Among consumers polled, following are the top technologies consumers are most excited about coming to the insurance industry:
    • Cybersecurity – 36%
    • Blockchain – 25%
    • Internet of Things (IoT) – 24%
  • 75% of consumers are interested in home telematics. While the bulk of talk on telematics has been focused in the automotive space, home insurance customers are overwhelmingly interested in getting discounts on their homeowners insurance for proper home maintenance and security.
  • 46% of consumers would be willing to allow their home insurance company access to smart home sensor technology in appliances, such as refrigerators and air conditioners to help prevent loss and malfunction (smart tech loss prevention). 56% of consumers who currently have “smart” tech in their home would allow access

See also: 5 Misunderstandings on Home Insurance  

  • 34% of consumers would likely switch to a home insurance company that offered smart home technology loss and protection options:
    • 57% of millennials would likely switch
    • 40% of consumers who currently have “smart” tech in their home would be likely to switch (64% of consumers reported having some sort of smart tech in their home, such as a smart thermostat, doorbell, etc.)

10 Reasons Healthcare Won’t Be Disrupted

Earlier this year, industry titans Amazon, Berkshire Hathaway and JP Morgan Chase (ABC) announced a partnership that would incubate a separate, non-profit entity aimed squarely at healthcare. Given the seed stage of the collaboration, the announcement was necessarily vague, but it did refer to an intent to address healthcare for their employees, improve employee satisfaction and reduce costs. The partnership has now announced the selection of noted surgeon, best-selling author and public health researcher Dr. Atul Gawande as the CEO of the unnamed entity. It’s a bold marketing step to be sure – and I have nothing but respect and admiration for Dr. Gawande – but neither employers nor new ventures will disrupt the fiscal burden of healthcare.

The trajectory of the ABC entity is still unknown, of course, but, like other high-profile announcements before it, I think it’s really targeting a fairly traditional group purchasing business model. At least that was the implication that CEO James Dimon gave to nervous healthcare banking clients at JPMorgan shortly after the press release hit this last January.

See also: Healthcare Disruptors Claim War Is Won  

In fact, there are a number of these group purchasing entities already in existence – and some have been around for decades. With about 12 million members, Kaiser Permanente is arguably the largest. It operates as a non-profit because the fiscal benefits should logically accrue to member companies and not the entity itself. Group-focused healthcare initiatives suggest that there will likely be a positive effect on ABC’s 1 million plus employees, but it won’t make systemic changes to our tiered – and expensive – healthcare system as a whole. Here are the top 10 reasons why this latest venture – or really any group of employers – can’t fundamentally change U.S. healthcare.

  1. Employer-sponsored insurance (ESI) isn’t the product of intelligent system design. In fact, there’s no clinical, fiscal or moral argument to support this unique financing model at all. It’s quite literally an accident of WWII history, and America is the only industrialized country that uses employment as the governing entity for health benefits. We could have changed this accidental system design decades ago, but we never did.
  2. Whatever the business of private industry (either privately held or publicly traded), unless  a company is literally in the business of healthcare, the vast majority have no specific healthcare domain expertise – nor should they seek to acquire it, because it will never be a true focus or core competency. ABC may purchase (or build) components of that domain expertise for their employees, but any of those fiscal benefits won’t auto-magically accrue to other companies – and, let’s not forget, at least some of those other companies are direct competitors to Amazon, Berkshire or Chase.
  3. Unlike Medicare or Medicaid, ESI (and commercial insurance, more broadly) supports inelastic healthcare pricing because it is literally whatever the market will bear based on group purchasing dynamics. This is also why Obamacare health plans are entirely dependent on a laundry list of subsidies. As individuals, few Americans can afford unsubsidized Obamacare plans outright. This also makes it entirely pointless to go through a lengthy legislative repeal process, because it’s relatively easy to simply cripple Obamacare outright. Just remove the fiscal subsidies – which is exactly what’s happened (or planned).
  4. The larger the employer (or group), the larger the fiscal benefit to the individual employer because of the group dynamic. That’s a compelling argument in favor of merger mania (leading to mega groups of millions of employees), but any of those effects don’t just trickle down to small employers. In fact, new business models (some with enviable unicorn status in the sharing economy) are designed to ignore health insurance or health benefits outright. They may funnel employees to group-purchasing options – but that’s a marketing sleight-of-hand to avoid the messy complexities and fiscal burden of managing ESI outright.
  5. Like most other employment functions, ESI — and the employment process known as open-enrollment — is arbitrarily tied to our annual tax calendar, but that has no correlation or applicability to how healthcare actually works. We should all contribute (through taxation) to our healthcare system, of course, but a period of open enrollment (with a very specific number of days) serves no clinical or moral purpose (other than to continually monitor for pre-existing conditions and possible coverage denial).
  6. While commercial titans capture all the headlines for many industry innovations (including high-profile healthcare initiatives like the ABC one), about 52% of private industry (either privately held or publicly traded) is made up of companies with fewer than 500 employees. Each of these employers is effectively its own tier of coverage and benefits. That works to support tiered (highly variable) pricing, but the only purpose of that is to maximize revenue and profits for participants in the healthcare industry.
  7. Big employers are notorious for binge (and purge) cycles of headcount that results in a constant churning of employees. Today, the average employment tenure at any one company is just over four years. Among the top tech titans — companies like Google, Oracle, Apple, Microsoft and, yes, Amazon – average employment tenure is less than two years. This constant churning of benefit plans and provider networks is totally counter-productive because it supports fragmented, episodic healthcare – not coordinated, long-term or preventative healthcare. Insurance companies tried to tackle this – only to be penalized when those efforts (which led to healthier members) were delivered straight to their competitors at the next employer.
  8. ESI represents a fourth party — the employer – in the management of a complex benefit over a long period. That function is administratively difficult for even three-party systems (payer, provider and patient) in other parts of the world. So why do we need a fourth party at all? We don’t.
  9. ESI is heavily subsidized through local, state and federal tax exclusions. While this hasn’t been studied at great depth, it’s not a trivial amount. By some estimates, the local, state and federal tax exclusions combined amount to about $600 billion per year – which makes tax exclusions tied to ESI the second largest entitlement behind Medicare. It’s effectively corporate welfare specifically designed to support expensive healthcare pricing.
  10. The employer contribution to ESI is significant – typically more than 55% of the cost for PPO coverage (family of four) – but this also helps employers keep wages artificially depressed. In fact, in recent years, the galloping cost of healthcare has tilted unequally to employees – and shifted away from employers. The days of sharing those annual cost increases equally are clearly over.

The combined effect of ESI – again, uniquely American – is the most expensive healthcare system on planet Earth and one of the biggest systemic flaws behind this ever-growing expense is ESI. As a distinctly separate flaw (I call it Healthcare’s Pricing Cabal), actual pricing originates elsewhere, of course, but employers really have no ceiling on what they will pay – especially for smaller (fewer than 500) employer groups. This year, America will spend more than $11,000 per capita just on healthcare, and the average cost of PPO coverage through an employer for an American family of four is now over $28,000 – per year.

Chart by Dan Munro; Milliman Medical Index 2018

Employers love to complain openly and often about the high cost of healthcare, but they also benefit from the corporate welfare of tax exclusions and depressed wages. The only evidence we need to see their reluctance about systemic change is their strong opposition to the “Cadillac tax” because it was the one tax proposal (through the Affordable Care Act) that was specifically designed to cap the tax exclusion on very rich (Cadillac) benefits. The Kaiser Family Foundation has a compelling graphic on the long term and corrosive effect of ESI.

Chart by Kaiser/HRET; Kaiser/HRET Survey of Employer-Sponsored Health Benefits

Don’t get me wrong: Employers could band together and lobby to change the tax code to end the fiscal perversion of ESI – but they won’t. They love to complain about high costs – but, collectively, they are as culpable as large providers that work jointly to propel prices ever higher, with no end in sight.

See also: Insurance Is NOT a Commodity!  

Which brings us full circle back to the announcement of Dr. Gawande as the CEO of the new ABC healthcare (non-profit) venture. As a writer, health policy expert and surgeon, Dr. Gawande’s credentials are impeccable, and I’ve faithfully read much of what he’s written for The New Yorker. One of my all-time favorite articles is the commencement address he gave at Harvard Medical School just over seven years ago. It’s a true classic — and worth reading often. It remains online here:Cowboys and Pit Crews.

I’ve often quoted a passage from Dr. Gawande’s address because it encapsulates the very real dilemma faced by practicing physicians and healthcare professionals the world over – from that day to this.

The core structure of medicine—how health care is organized and practiced—emerged in an era when doctors could hold all the key information patients needed in their heads and manage everything required themselves. One needed only an ethic of hard work, a prescription pad, a secretary, and a hospital willing to serve as one’s workshop, loaning a bed and nurses for a patient’s convalescence, maybe an operating room with a few basic tools. We were craftsmen. We could set the fracture, spin the blood, plate the cultures, administer the antiserum. The nature of the knowledge lent itself to prizing autonomy, independence, and self-sufficiency among our highest values, and to designing medicine accordingly. But you can’t hold all the information in your head any longer, and you can’t master all the skills. No one person can work up a patient’s back pain, run the immunoassay, do the physical therapy, protocol the MRI, and direct the treatment of the unexpected cancer found growing in the spine. I don’t even know what it means to “protocol” the MRI. — Dr. Atul Gawande – Harvard Medical School Commencement – May, 2011

It would be safe to say — without reservation — that I am a real Gawande fan, but the fundamental question remains. How much can a single private venture – however well-funded or staffed – change a fundamentally flawed system design? In effect – to change our whole system of cowboys to pit crews?

Until Dr. Gawande can change the tax code, any fiscal benefits of the new ABC venture will be nominal – around the edges of healthcare – and not at the core. What fiscal benefits there are will absolutely accrue to the member companies, but Dr. Gawande is no miracle worker and has no magic wand against the trifecta of accidental system design that keeps pricing spiraling ever upward. That trifecta is actuarial math, ESI and the transient nature of health benefits delivered at scale through literally thousands of employers. Commercial (or private) ventures of every stripe and size can certainly lobby for legislation to change the moral morass of tiered pricing through employers, but they can’t end it.

The bad things [in] the U.S. health care system are that our financing of health care is really a moral morass in the sense that it signals to the doctors that human beings have different values depending on their income status. For example, in New Jersey, the Medicaid program pays a pediatrician $30 to see a poor child on Medicaid. But the same legislators, through their commercial insurance, pay the same pediatrician $100 to $120 to see their child. How do physicians react to it? If you phone around practices in Princeton, Plainsboro, Hamilton – none of them would see Medicaid kids. — Uwe Reinhardt (1937 – 2017) – Economics Professor at the Woodrow Wilson School of Public and International Affairs at Princeton

This article first appeared at Forbes.com.

Insurers Grappling With New Risks

Warren Buffett’s caution about underwriting cyber-insurance put the spotlight on one of the big challenges facing carriers today – how to address a slew of new insurance risks.

The Oracle of Omaha told shareholders at the Berkshire Hathaway annual meeting that he didn’t want the group’s insurance business to pioneer cyber-cover because the risks were largely unknown and potentially too big. Berkshire Hathaway might write some cyber-policies to stay competitive, Buffett added, but it would not be among the top three providers in this market.

Underwriting complex new risks such as cyber-insurance, as well as meeting the rising demand for cover for other risk-heavy occurrences such as natural catastrophes and corporate fraud, promises substantial revenue for carriers. Global premium revenues for cyber-insurance, for example, could hit $7.5 billion by 2020, according to researcher Statista. Cover related to digital products and services could also yield healthy additional income. The new revenue streams are welcome news for many insurers that have watched income from traditional products plateau in the past few years.

However, as Buffett points out, venturing into uncharted territory can be hazardous — especially when we don’t know the scope of the hazards. Catastrophe cover, for example, which must now contend with uncertainty related to climate change, cost U.S. insurers dearly last year. The effects of three major hurricanes, Harvey, Irma and Maria, as well as the extensive wildfires in California, all contributed to a spike in underwriting losses. The net underwriting deficit among U.S. property and casualty insurers leaped from $4.7 billion in 2016 to $23.2 billion the following year, according to a report compiled by research firm ISO and the Property Casualty Insurers Association.

Insurers are not only being forced to make calls on new types of risk. They must also handle the growing complexity of the underwriting required for some of their established offerings. The spread of corporate ecosystems and supply chains across many varied countries, for example, has heightened the complexity of commercial risk assessment. So, too, has the rise in trade and business regulations imposed by governments around the world.

What’s more, insurers must also accommodate a flood of new data streams. While these additional sources of data provide valuable insight into commercial risks and consumer behavior, they also compound the complexity of insurers’ underwriting systems and processes.

To meet the rising challenge of new and more complex underwriting requirements, insurers need to get a lot smarter. Improving workers’ skills and hiring more talent won’t be enough. Insurers need to deploy intelligent technology. Only by using artificial intelligence (AI) will underwriters be able to manage the new, complex risks that are confronting them.

Our research shows that more than 75% of insurers plan to use AI to automate tasks in the next three years. Many of these applications are intended to improve efficiency and productivity. The big gains in AI, however, are likely to be achieved by using this technology to improve decision-making.

In my next blog post, I’ll discuss how advances in AI can help underwriters make smarter, quicker decisions. Until then, have a look at these links. I think you’ll find them useful.

Why Warren Buffett Is Surely Wrong

The Berkshire Hathaway annual report is one of my favorite reads. I always find a mountain of wisdom coupled with humility from one of my mentors, Warren Buffett. He doesn’t know he’s my mentor, but I treat him as one by reading and reflecting on what is in these annual letters. I would recommend you do the same; they’re available free of charge online.

There was a doozy of a sentence in the latest—right there on page 8—discussing the performance of Berkshire’s insurance operations, which make up the core of Berkshire’s business: “We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured losses is about 2%.” Sorry, Mr. Buffett, I have some questions for you on that one.

See also: Whiff of Market-Based Healthcare Change?  

After reading those words, I quickly ran a CATRADER industry exceedance probability (EP) curve for the U.S. My analysis included the perils of hurricane (including storm surge), earthquake (including tsunami, landslide, liquefaction, fire-following and sprinkler leakage), severe thunderstorm (which includes tornadoes, hail and straight-line wind), winter storm (which includes wind, freezing temperatures and winter precipitation) and wildfire. I used the latest estimates of take-up rates (the percentage of properties actually insured against these perils) and took into account demand surge (the increase in the price of labor and materials that can follow disasters).

Bottom line, we believe that the probability of $400 billion in insured losses from a single mega-catastrophe in a given year is far more remote—between 0.1% and 0.01% EP. Buffett is putting this at a 2% EP (or a 50-year return period), which is a gulf of difference. In fact, it is worth noting that, by AIR estimates, the costliest disaster in U.S. history in the last 100-plus years—indexed to today’s dollars and today’s exposures—was the Great Miami Hurricane of 1926. Were that to recur today, AIR estimates it would cost the industry roughly $128 billion. 

So, what is Buffett basing his view on? In 2009, he famously said “Beware of geeks bearing formulas…. Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors.” Obviously, this was a reference to the 2008 financial crisis and the use of models by banks. His view on catastrophe models, however, has never been made public.

See also: Why Risk Management Certifications Matter 

Assuming Buffett’s point of view was not model-based, it would be good to know his methods. For example, was it based on some estimate of insured exposures and a PML%, as was common in the pre–catastrophe model days? But he didn’t get to that level of detail. It would be interesting to know if this is also the view of Ajit Jain, his head of insurance operations, and now vice chairman of Berkshire?

I have lots of questions, and I am not holding my breath for Buffett to respond to this blog. But it would be great to get your thoughts below.

3 Ways to Tame Healthcare M&A

The healthcare business is broken for consumers and taxpayers in America. And we can expect to see more mergers, acquisitions and large alliances in the coming months and years, all forming in the name of trying to control rising costs and taking better care of patients.

The question is: Will they?

Unfortunately, the answer usually is generally no. Let’s take a look at two recent headlines, starting with the CVS acquisition of Aetna.

While the CVS acquisition of Aetna makes financial sense for shareholders, the same cannot be said for consumers. CVS and Aetna, which individually represent severe conflicts of interest, together create an even larger systemic problem. American consumers need healthcare intermediaries to clearly represent the interests of either the patient or provider — they can’t do both.

Maybe we’re suffering from amnesia because we’ve forgotten why the Pharmacy Benefit Manager (PBM) industry exists in the first place. Years ago, insurers managed drugs themselves. However, the conflict of interest and the resulting price gouging was so bad that the PBM industry took off in the 1980s and became the de facto broker (intermediary) for the drug industry. Over the next three decades, the PBM industry “evolved,” and, today, the PBM business model looks worse than the insurance industry it once set out to fix. Considering the conflicted business models involved, it seems highly ironic that today’s largest PBM is buying one of the largest health plans. This was a bad idea 30 years ago, and it’s an even worse idea today.

See also: How Amazon Could Disrupt Care (Part 3)  

So why isn’t this going to control costs? Because it really is just a mechanism to switch roles from the “broker function” to that of the supplier. In this case, there is the added benefit that Aetna can get over the 85% Medical Loss Ratio (MLR) limitations by paying themselves as a supplier. All this does is further reduce choice, lock out competition and increase profitability for itself while increasing costs for purchasers.

Planning on larger mergers to control costs is a fool’s errand. Take a look at UnitedHealth Group (UHG), which owns UnitedHealthcare (UNH) and OptumRx. The company’s structure and scale is on par with a combined CVS and Aetna. UHG owns one of the largest health plan providers and one of the largest PBMs, and UHG continues to aggressively acquire other health care services companies.  Many corporate customers will tell you UNH is one of the most difficult insurers to work with because of restricted data sharing and lack of transparency. UNH also makes it nearly impossible to use services other than their own.  This is not a recipe to control costs, and it’s going to get worse because UHG recently announced the purchase of Davita’s Medical Group, which has hundreds of care facilities and about 30,000 affiliated physicians.

Another major issue with this acquisition is that it enables the combined entity to collect even more patient data and constrict its availability and use. CVS CEO Larry Merlo stated, “By integrating data across our enterprise assets and through the use of predictive analytics, we will create targeted interactions with patients to promote healthy behaviors and drive adherence, and this will further improve the quality of care for patients while also resulting in healthier outcomes.”  Mr. Merlo fails to acknowledge that the data the company integrates, uses for its benefit and sells for its profit is their customers’ data — to which the company claims ownership and restricts for others’ use. After the CVS-Aetna deal closes, restrictive data hoarding will stifle potential health benefits and further limit innovation opportunities.

Just a few weeks ago, another headline about an alliance forming to control rising costs captured our attention. Intermountain Healthcare, Ascension, SSM Health and Trinity Health announced they are joining forces to create a new generics drug company.

Again, on paper, the announcement seems like it could help control costs and benefit consumers. But taking a closer look at the match, the marketing value to the hospital chains has already vastly exceeded the cost reduction of the generic drugs in question as well as the pressure this places on big pharma by at least three or four orders of magnitude. Big Pharma isn’t in the generics business.

As egregious as the examples are that we keep talking about with Valeant and Turing, those are rounding errors in aggregate compared to the global sales of just one brand drug, Humira, which brought in $14 billion last year, alone.

Big Pharma is laughing all the way to the bank as the press keeps writing about how big a deal this is and how four hospital chains are going to change the landscape. These large monopolistic systems get the great publicity as they try to lay claim to the moral high ground. More importantly, we have, yet again, given providers of services (a.k.a hospital systems) who already have the reputation for marking up medicine such as Tylenol the power to mark up these new generics they will manufacture.

The most important announcement of the past few days is the one from Amazon, Berkshire-Hathaway and JP Morgan. While there are few concrete details, the message from the top is clear that these companies have decided to take matters into their own hands to control costs as all the intermediaries they have relied on haven’t delivered.

As those who represent consumers, benefits professionals have a crucial role to play as we continue to learn about more mergers, acquisitions and large alliances. As such, there are three things each of us as HR benefits professionals can do to help tame the M&A beast.

First, insist on transparency. This starts by making sure intermediaries (insurers and PBMs) never control supplier performance data. You should have the right to see whatever data you need about your suppliers — just as you would in any other industry. Stop working with intermediaries and suppliers that restrict or refuse to provide data. You should also require intermediaries to provide all supplier contracts they have in place. Trust, but verify.

See also: The PBM vs. the Drug Manufacturer  

Second, require your suppliers to pick a side — yours, or theirs, but not in between. You, not an intermediary, should be able to choose who provides services to you. You should never be penalized for choosing a supplier that isn’t your intermediary’s preferred choice.

Third, demand independence. Intermediaries must represent the company and customer interests. There’s an obvious conflict of interest when an intermediary also represents a seller of goods that constitutes a significant source of the intermediary’s revenue. Stop doing business with intermediaries who have such conflicts.

Congratulations to all the CVS and Aetna stockholders out there; there’s a big payday headed your way. Because one person’s profit is another person’s cost, expect the price of health care to increase in this brave new world.

However, in the long run, the rest of us are going to bet on the new Amazon/Berkshire-Hathaway/JP Morgan model from Bezos, Buffett and Dimon to lead the charge of purchasers taking control of their own destinies.