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September 7, 2018

A ‘blockbuster’ for Warren Buffett? Why investors have high hopes for the Amazon-Berkshire-JPMorgan venture.

Daily Briefing

    When Amazon, Berkshire Hathaway, and JPMorgan announced their high-profile health care partnership, they emphasized the new venture would be "free from profit-making incentives and constraints." But longtime Berkshire investors say it may nonetheless provide Berkshire's CEO Warren Buffett with the groundwork for profit-making lines of business, STAT Plus reports. 

    About the new venture

    When the companies announced the partnership in January, they said their goal was to identify "technology solutions" that would provide "simplified, high-quality, and transparent health care at a reasonable cost" for their employees. The companies said the new health care company will be "free from profit-making incentives and constraints."

    In February, Berkshire Chair Warren Buffett in a CNBC interview added that the venture aims to find a lower-cost way of delivering better health care.

    In June, the companies announced Atul Gawande would assume the role of CEO July 9.

    Investors say the venture will lay the foundation for Berkshire's entry into health care business

    STAT News interviewed two Berkshire shareholders since the 1980s, when Berkshire's share prices cost between $1,000 and $1,500. Today, class A shares cost $315,000.

    The investors said while most experts are focused on how the venture might disrupt the broader U.S. health care system, they believe the partnership might also result in the companies, particularly Berkshire, developing profit-driving lines and investment ideas in the health care sector. 

    According to the shareholders, the venture will provide Buffett a close view of the $3.3 trillion health care sector. While Buffett has largely steered away from health care, investors indicated that  the venture could be a signal that, "[a]fter a long career of picking winners in a wide array of other industries, health care could be Buffett's final act," STAT Plus  reports.

    Steve Wallman, a Berkshire investor and money manager from Wisconsin, said, "I could easily imagine both Berkshire and Amazon creating products for sale out of their nonprofit. I'd be shocked if opportunities don't arise from this experiment."

    Wallman said he views the venture as an opportunity for Berkshire and the other companies to test innovative ways of delivering health care and managing health benefits. He said, "There is no better way to learn the ins and outs of a business than to start a business. All that learning over time will benefit Berkshire shareholders immensely."

    Thomas Russo, another Berkshire Investor and a partner at Gardner, Russo & Gardner—which is among Berkshire's largest institutional shareholders—said when he heard about Berkshire's involvement in the venture, he was "extremely excited," particularly because of the health care industry's size. Russo said, "You can't find a business today that already commands a larger share of [gross domestic product (GDP)] and will outgrow GDP by such a shocking number going forward. And operating in a world that's wildly inefficient and sub-optimal, you can see the possibilities that three extraordinary members of a team like this could come up with."

    One reason why the investors expect the venture might result in the companies launching profit-making product lines is that Todd Combs, one of Buffett's top deputies, who manages more than $12 billion for Berkshire, is involved in the venture. Combs, who serves on JPMorgan's board of directors, last year led the effort to launch the venture and hire Gawande. According to STAT News, Combs "has been the driving force behind some of Berkshire's largest investments, including its $37 billion acquisition of Precision Castparts Corp., a supplier to the aerospace industry, as well many other publicized transactions."

    However, STAT News reports that Combs and Berkshire have declined to speak about his involvement in the venture, and requests for comments on the topic are being directed to an email address at JPMorgan.

    Business experts say companies will have to strike balance between financial and mission-driven goals

    According to business experts, the companies involved in the venture will have to make sure that there does not appear to be a conflict between their financial and mission-driven goals.  Joseph Restuccia, a professor and chair of operations and technology management at Boston University's Questrom School of Business, said, "They don't want to lose money. They want to at least break even. But if they look at the joint venture primarily as a way of increasing profit for their corporations, I think it will be fated to fail."

    Bill Smead, an institutional investor who has stakes in Berkshire Hathaway and JPMorgan, said he hopes the venture will primarily focus on improving the delivery of medical services and the health of companies' employees. Smead said the venture "makes sense to me if you're using incentives to get human beings to engage in better behaviors. But grouping these companies together is only going to be useful in executing that part of it, rather than some revolutionary bypassing of the health system."

    Smead added, "The problem with this is, it could either be a positive thing, or it could be another attempt for (Amazon CEO Jeff Bezos) to gain another massive amount of control over everyone's lives" (Ross, STAT Plus, 9/4).

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