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In an interview this morning, Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett and his counterpart at JP Morgan Chase (JPM), Jamie Dimon, let it be known that their healthcare partnership with Jeff Bezos of Amazon (AMZN) had moved on to the next stage. The three announced in January that they were teaming up to explore an alternative to existing health insurance companies, and at that time, I wrote that the long and short answers to the question of whether conventional insurers should be worried were “yes, and yes, very.”

Now that things seem to be moving along, nothing has changed except the urgency.

After that news in January, stock in all the major health insurers dropped dramatically, even in relation to a more generalized market decline. Since then, however, the fortunes of the big three, United Healthcare (UNH), Aetna (AET), and Cigna (CI) have diverged as the market has focused on the rash of attempted mergers and other consolidation moves in the industry.

However, the very fact that consolidation has been so important in the industry over the last couple of years tells its own story and brings its own risks. There are several reasons that big mergers, or at least big attempted mergers, have become so common in health insurance but essentially, they are all about squeezes on margins.

The most obvious reason for potential margin decline is the repeal of the Obamacare individual mandate that was passed in the tax bill late last year. For health insurance companies, this comes under the category of “be careful what you wish for.”

I have said here before that the frequent complaints by the CEOs of health insurance companies regarding the effects of Obamacare made little sense in the light of charts that look like the one below for UNH over the last five years.

The obligation to provide plans with mandated coverage to the exchanges may have been a burden to the likes of UNH, but, judging by that chart, it was more than offset by a law that required us to become their customers. With the repeal of the individual mandate, that is no longer the case and a big squeeze on their margins looks extremely likely.

Now that having health insurance is a choice, young, healthy people are likely to decide to run the risk of not paying premiums, while the old and the sick will stay insured. That must push up operating costs, and if the companies attempt to counter that by raising premiums again it will make the problem worse, chasing more low liability customers away. So, with lowering margins, revenue has to be increased to maintain and grow profits.

If the Buffett, Bezos, Dimon troika are successful, market share increases for insurers with declining margins will become a thing of the past. The three are, as they reiterated this morning, not focused on profiting directly by their efforts, but rather on providing a better experience for customers and, most of all, reducing costs for employers.

For those that believe in capitalism, that is an important point. While the motives of the three CEOs may be noble, there is still an enough of an element of the good old profit motive to keep things on track.

Skeptics say that many, including the county’s biggest employer, Walmart (WMT), have tried to take on the system and failed, so why should this be any different? But that is to ignore the nature of the businesses involved in this venture. Massive experience in banking and insurance, combined with the data and analytical mastery that Amazon brings is reason enough to believe that this time will be different. You can also add in the fact that these are three people who have a marked tendency to succeed, and it is clear this project has some major advantages.

It should be noted that so far health insurers have taken everything thrown at them and continued to prosper. They have continued to grow profits as the landscape has changed, even as the cost of insurance has become a major burden on not just America’s people, but also its economy.

As I said back in January, that cannot be sustained forever, and with the White House occupied by a populist who loves to take on “enemies” of all kinds, even the almighty health insurance lobby faces unprecedented difficulties ahead.

In their interview this morning, Buffett and Dimon indicated that the new CEO would be named in a couple of weeks. The fact that they were excited enough about the appointment to tease it early suggests that whoever it is, they will be no slouch, and the danger to health insurers once they begin operations is clear and now a little more immediate.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

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