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JPMorgan Chase

Amazon promises ‘health care at a reasonable cost’ - causing biggest Dow drop since May

The promise of a healthcare company that is ‘free from profitmaking incentives and constraints’ has sent shocks through US stock markets

PUBLISHED : Wednesday, 31 January, 2018, 1:34am
UPDATED : Wednesday, 31 January, 2018, 5:44am

Amazon will create a company that helps their US employees find quality health care “at a reasonable cost,” the company announced Tuesday - and in doing so caused stocks for other health care providers to tumble.

The Dow Jones Industrial Average closed at 26,077.58, down 1.4 percent - the biggest drop since May - after Amazon announced its plans to team up with Warren Buffett’s Berkshire Hathaway and the New York bank JPMorgan Chase.

The broad-based S&P 500 fell 1.1 per cent to 2,822.42, while the tech-rich Nasdaq Composite Index shed 0.9 per cent to 7,402.48.

The ballooning costs of [health care] act as a hungry tapeworm on the American economy
Investor Warren Buffett

The leaders of each company, Amazon’s Jeff Bezos, Buffett, and JPMorgan’s Jamie Dimon, offered few details on Tuesday and said that the project is in the early planning stage.

“The ballooning costs of [health care] act as a hungry tapeworm on the American economy,” Buffett said in a prepared statement.

“Our group does not come to this problem with answers. But we also do not accept it as inevitable.” The new company will be independent and “free from profitmaking incentives and constraints.”

The businesses said the new venture’s initial focus would be on technology that provides “simplified, high-quality and transparent” care.

It was not clear if the ultimate goal involves expanding the ambitious project beyond Amazon, Berkshire or JPMorgan.

However, JPMorgan’s Dimon said on Tuesday that, “our goal is to create solutions that benefit our US employees, their families and, potentially, all Americans.”

The need for a solution to the health care crises in the US is intense. With about 151 million non-elderly people, employer-sponsored coverage is the largest part of the US health insurance market.

Health care costs for companies routinely rise faster than inflation and eat up bigger portions of their budgets.

Americans are mired in a confusing system that creates a mix of prices in the same market for the same procedure or drug and offers no easy path for finding the best deal.

The rising costs of health care have dragged on US companies, big and small, and employees are increasingly feeling that pain. 

Employers have hiked deductibles and other expenses for employees, meaning less spending power for almost all Americans.

Only 50 per cent of companies with three to 49 employees offered coverage last year, according to the non-profit Kaiser Family Foundation.

That is down from 66 per cent more than a decade ago. The federal Affordable Care Act requires all companies with 50 or more full-time employees to offer it.

Amazon, Berkshire and JP Morgan say they can bring their scale and “complementary expertise” to what they describe as a long-term campaign.

Amazon’s entry into the health market has been perceived as imminent, even though the company had announced nothing publicly. It has been watched very closely on Wall Street, which has seen Amazon disrupt numerous industries ranging from book stores to clothing chains.

Amazon, which mostly sold books when it was founded more than 20 years ago, has radically altered the way in which people buy diapers, toys or paper towels. 

Most recently it has upended the grocery sector, spending US$14 billion last year for Whole Foods Market Inc.

This story includes additional information from AFP.