(Veteran tech analyst Jon D. Markman publishes Strategic Advantage, a guide to investing in the digital transformation of business and society. Click here for a free trial.)
Haven, a joint venture between Amazon.com ( (AMZN) - Get Amazon.com, Inc. Report), Berkshire Hathaway (undefined) and JP Morgan ( (JPM) - Get JPMorgan Chase & Co. Report) is dead -- and so too is the dream of disrupting healthcare from outside.
The Wall Street Journal reported Thursday that Haven will lay off its 57 employees. Managers at the Boston, Mass.-based startup claimed healthcare providers gave them little access to crucial data.
In its current form, healthcare is impossible to crack. That is by design.
There is a lot of enthusiasm around the use of data as a transformative tool. Too often investors assume that every part of the economy can be disrupted in the same way Apple ( (AAPL) - Get Apple Inc. Report) changed music with iTunes.
On paper Haven had everything going for it. Atul Gawande was hired to lead the startup. The surgeon and Harvard University professor is considered a “rock star” in healthcare innovation. The money behind the venture came from three big companies with deep pockets and lots of employees for scale. Together the businesses claimed 1.2 million workers. And Amazon.com, the lead backer, has disrupted retail long ago with ecommerce.
Investors immediately assumed it was only a matter of time before traditional healthcare providers like Anthem ( (ANTM) - Get Anthem, Inc. Report), Cigna ( (CI) - Get Cigna Corporation Report) and United Healthcare ( (UNH) - Get UnitedHealth Group Incorporated Report) buckled like the music industry during the early 2000s. The Journal notes that it did not work out that way.
What Haven managers quickly discovered was the $3.4 trillion healthcare sector had no interest in playing by a new set of rules. They were not interested in surrendering any information about how they priced policies for large employers. And given that all of their digital systems were closed, they certainly were not about to give up any of that data, either.
Haven ran into reality.
Healthcare for profit is a big business. Providers work hard to ensure that they are building moats, figurative barriers to entry that protect their profitability. They have no interest in watering down operating margins or competing with newcomers.
In the end, even with Haven’s theoretical access to 1.2 million workers it was not nearly enough scale to be competitive. The startup needed to attract other employers to make an impact.
Ironically Haven was being attacked from within. Gawande left last May to work on COVID-19 responses, according to a report in Stat. At the same time Amazon partnered in July 2020 with Crossover Health to establish care centers for its employees.
It might seem as though Amazon.com never gave Haven a fighting chance. However so-called fast failure is part of the business model at the Seattle, Wash.-based company. Jeff Bezos, chief executive officer, believes failure and innovation are inseparable twins.
Investors should understand that Amazon.com entering a marketplace does not necessarily doom competitors. In many cases it is a buying opportunity for the shares of market leaders.
United Healthcare is the biggest care provider in the country. It has wonderful business metrics and enormous economies of scale.
The Minnetonka, Minn.-based company invests $3.3 billion annually in technology and innovation systems, and processes 1 trillion transactions. Its digital systems collect, manage and analyze data in real time, helping the company become more efficient and ramp up profitability.
Managers at United are not waiting to be disrupted by nimble start-ups. They are constantly using transformation digital strategies to disrupt the business from within. The result has been smooth sales and profit growth.
The company announced in December that 2020 sales should reach $257 billion. Earnings per share are expected to be between $15.90 to $16.25. And managers now believe 2021 revenues will surge to approximately $278 billion, with earnings per share in the range of $16.90 to $17.40.
Shares currently trade at only 20x forward earnings and 1.4x sales. My research suggests this is a bargain given the huge competitive advantage healthcare providers hold, and United’s leadership position in the sector.
Investors should use weakness to add positions.