Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. are publicly traded, profit-oriented corporations. So it is interesting that when they announced their new joint health care venture this week they made a point of saying it would be “an independent company that is free from profit-making incentives and constraints.”
Interesting but maybe not all that surprising: Around the world, health, life and property insurance, as well as various other financial services, have long been provided by nonprofit organizations, mostly in the form of customer-owned mutuals. From the 1960s through 2000s, wave after wave of conversions turned many of these entities — especially in the U.S. and U.K. — into shareholder-owned for-profit corporations. But since the global financial crisis, the idea that corporations out to maximize shareholder returns might not always be the best at managing financial and other risks has undergone something of a revival.
Just to be clear: It looks like this new Amazon-Berkshire-JPMorgan entity will be owned by the three companies, not the employees it serves. That is, it won’t technically be a mutual. But the three companies’ apparent belief that the for-profit-insurer-dominated private health care market in the U.S. isn’t cutting it — and that “profit-making incentives” are at odds with improving health care delivery and cutting costs — got me thinking about the strengths and weaknesses of mutuals and other nonprofits relative to conventional corporations.
Mutuals that are owned by and distribute excess cash to their customers have been around for centuries, in many cases predating their for-profit counterparts. Some of the first insurance companies were organized in the 1600s and 1700s in the Netherlands and U.K. as customer-owned cooperatives, and the mutual organizational form has remained prominent in life and property insurance ever since. The 1800s saw an explosion of mutual activity, with fraternal organizations, trade associations, labor unions, social reformers and philanthropists starting co-operative lenders, health care providers, pension funds, groceries, farming enterprises and even factories. This continued into the 20th century, although in Europe these mutual organizations were often co-opted or supplanted by government social insurance programs.
In the U.S., mutuals and nonprofits with mutual-like characteristics have continued to play major roles in insurance, money management, health care and other fields — including outdoor gear, which is top of mind at the moment because I recently spent a bunch of money at customer-owned Recreational Equipment Inc. But these mutuals and co-ops have just spent several decades on the defensive, with “demutualizations” in which mutual customers are given shares in newly created for-profit corporations transforming sector after sector.
I think this trend started with mutual funds, sort of. The first mutual fund, Massachusetts Investors Trust, was founded in 1924 as a true-blue customer-owned nonprofit. Most of the funds that followed in its footsteps were controlled by for-profit investment advisers, but for decades after the 1929 stock-market crash, those advisers acted more like cautious trustees than risk-taking profit-maximizers. Things changed during the booming stock market of the 1960s, with fund advisers getting much more aggressive in their investing and marketing, and in some cases acquiring competitors. In 1969, Massachusetts Investors Trust threw in the towel, demutualizing and transforming itself into Massachusetts Financial Services, which is now a subsidiary of Canada’s Sun Life Financial Inc. Mutual funds themselves are all still technically mutual, but the business (with one huge exception that I’ll get to in a moment) really isn’t.
Savings and loans demutualized in a more formal fashion in the 1980s, after the Garn-St. Germain Depository Institutions Act of 1982, in an attempt to attract new capital into the struggling industry, made it much easier for customer-owned S&Ls to convert to shareholder-owned corporations. (Credit unions remain the banking industry’s mutual holdout in the U.S.) Then life insurers began a great demutualization wave in the 1990s, with many of the industry’s biggest names — MetLife Inc., Prudential Financial Inc., John Hancock — switching from customer-owned to publicly traded. The Blue Cross and Blue Shield Association of mutual health insurers began allowing its members to switch to for-profit in 1994. And with Sweden, of all places, leading the way in 1987, stock exchanges began demutualizing as well.