01/30/2018

Amazon.com Inc, Berkshire Hathaway and JPMorgan Chase & Co will form a healthcare company aimed at cutting costs for their U.S. employees, they said on Tuesday, sending shares in the broad healthcare sector sharply lower.

The independent company will be “free from profit-making incentives and constraints,” they said. It will initially focus on technology to provide “simplified, high-quality and transparent healthcare” at a “reasonable” cost for its more than 500,000 employees in the United States, they said.

Investors in the healthcare sector have been nervous about technology giant Amazon becoming a competitor and eating away at profits, just as it has done in the retail sector.

Amazon has been looking at the pharmacy business and pharmacy distribution, according to numerous media reports and Wall Street analysts.

With Amazon (AMZN.O) teaming up with JPMorgan (JPM.N), a leading financial company, and Berkshire (BRKa.N), the third largest public company in the world, the behemoth online retailer could broaden the scope of its efforts to affect U.S. health insurers.

The announcement knocked about $19 billion off UnitedHealth Group Inc’s (UNH.N) market capitalization in premarket trading.

U.S. healthcare spending increases each year faster than inflation, and in 2017, accounted for 18 percent of the U.S. economy.

Corporations, which sponsor healthcare plans for more than 160 million Americans, and the U.S. government are trying to cut costs.

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“Investors have continually asked what unexpected development might spoil the strong investor sentiment toward managed care. Unfortunately, this seems tailor-made to fit the bill,” BMO Capital Markets analyst Matt Borsch said in a research note.

Shares in health insurers UnitedHealth, Anthem Inc (ANTM.N) and Cigna Corp (CI.N) all fell 5 percent premarket. Drugstore operators CVS Health Corp (CVS.N) and Walgreen Boots Alliance (WBA.O) as well as pharmacy benefits manager Express Scripts Holding Co (ESRX.O) dropped between 5 percent to 7 percent. Drug distributors Cardinal Health (CAH.N) and McKesson (MCK.N) were down more than 4 percent.

The plan, currently in the early stages, will be spearheaded by Berkshire investment officer Todd Combs, JPMorgan managing director Marvelle Berchtold and Amazon senior vice president Beth Galetti.

“The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”

Reuters (Additional reporting by Ankur Banerjee and Aparajita Saxena in Bengaluru; Editing by Savio D'Souza and Jeffrey Benkoe)