So Garipalli persuaded a couple of venture funds to pump $135 million into his own bid to build an insurer he describes as a technology-based clinical company, rather than “an actuarial engine” like the big legacy players.
His company, Clover Health, sells only Medicare Advantage plans and has enrolled 16,000 members as of this month. It differs from UnitedHealth Group and other giants, Garipalli said, in the way it uses real-time patient data to connect seniors to the care they need. The plans also provide free primary-care visits, and notably, don’t charge extra for seeing out-of-network providers.
“The really large companies, like an Aetna or a United, they’re really insurance companies at their core,” Garipalli said. “They spend a lot of money on technology, but we all know there’s a big difference between spending a lot of money on technology and being a technology company.”
Venture capitalists and entrepreneurs have been investing and building new health insurance and related companies at a torrid pace—which may seem odd, because the industry is highly regulated and has relatively low profit margins.
But widespread consumer dissatisfaction with dominant carriers and the Affordable Care Act’s new marketplaces for individual plans has created an opening for innovators to come up with alternative approaches and has primed investors to take a chance on what they’re pitching.
“There’s a big difference between spending a lot of money on technology and being a technology company,” said Vivek Garipalli, CEO of Clover Health. “It’s abundantly clear that today’s health insurance market is broken,” First Round Capital founder Josh Kopelman wrote this past September when his venture firm poured $4 million into Clover Health. “When it comes to technology, the giants shaping the industry are trailing 20 years behind. They have vast stores of data, but aren’t leveraging them to improve the standard of service or care.”
However, these alternative companies, many of which are in their infancy, have a lot to prove. The ACA’s not-for-profit co-ops, which are essentially startups, have demonstrated how difficult it is to launch a new health plan. Twelve of the 23 co-op plans have failed, and others are in serious financial trouble. And some of the new for-profit darlings have already stumbled.
New health insurance investments “are really quite speculative,” said Scott Harrington, a healthcare management professor at the University of Pennsylvania. “And in many instances, they are not likely to bear fruit.”
Health-insurer and insurance-technology startups raised more than $1.2 billion in venture funding in 2015. That’s more than double the $570 million raised in 2014, and 10 times the $123 million raised in 2013, according to CB Insights, a data company that tracks private startups and venture capital.
With healthcare representing 17.5% of the U.S. economy, investors say they believe there’s money to be made in controlling costs, and it will come from the pockets of legacy insurers, brokers and third-party administrators. “This is a market that’s measured in trillions of dollars,” said Scott Raney, a partner at Redpoint Ventures, who led the firm’s investment in Collective Health, a newcomer that helps employers self-insure. “That’s appealing to us.”
Today’s health insurance startups generally fall along two branches.
One branch is composed of actual insurance companies that pay medical claims, contract with hospitals and doctors, and take on some kind of risk on behalf of their members—all with a bigger emphasis on consumer-friendly technology and data. Those include Oscar, Zoom+, Clover Health, Melody Health Insurance and Beam Dental. Oscar, which hired a Google veteran last week as its chief technology officer, recently completed a $400 million round with Fidelity Investments, giving the New York-based insurer a valuation of $2.7 billion.
The second branch comprises purely tech-focused companies that are involved with buying, selling or managing health insurance. These include Zenefits, Collective Health, Stride Health, GetInsured, SimplyInsured, Gravie and Picwell.
The founders of many of these startup companies have contagious exuberance for changing the healthcare system.
Garipalli at Clover Health is an evangelist for using technology to provide a seamless care experience at a lower cost to seniors.
Garipalli has a background in investment banking, and he previously started CarePoint Health, a for-profit company formed to acquire three struggling New Jersey hospitals. Clover Health’s other investors include Sequoia Capital, which was an early investor in Google and YouTube.
Dr. Dave Sanders is CEO and co-founder of Zoom+, an insurer that owns neighborhood medical clinics and has raised millions from Endeavor Capital. Sanders, a physician by training, and founder of two other healthcare startups that were bought out, calls his Oregon-based company “Kaiser 4.0,” referring to the vertically integrated Kaiser Permanente system. Now, more than 250,000 mostly young people use Zoom+ regularly for all of their care.
“We are a millennial health system insurer,” Sanders said.
“We are a millennial health system insurer,” said Dr. Dave Sanders, CEO and co-founder Zoom+. Noah Lang began Stride Health after noticing that many self-employed Americans struggled to obtain health insurance.
Stride essentially works as a broker exclusively for those who work in the on-demand economy and their families. It has secured partnerships with car-sharing service Uber and crafts commerce site Etsy, and has enrolled thousands of people through the ACA’s exchanges.
“Everything’s shifting, which is usually a good moment to jump in,” Lang said. “Yes, it’s risky, but the incumbents have been shaken up as well.”
But old rules apply even amid tectonic shifts in the industry. Zenefits, which offers employers a free platform to shop for employee health benefits, drew intense regulatory heat because it hired unlicensed brokers. The controversy was a reminder that healthcare can be a treacherous industry to disrupt.
And earlier this month, Oscar disclosed it lost $105 million in 2015, largely because it booked higher-than-expected medical costs in its exchange plans, just like traditional players UnitedHealth and many Blue Cross and Blue Shield carriers.
Venture capital firms have often avoided highly regulated industries. Dr. Bob Kocher, a partner at Venrock, has invested in insurance technology companies such as Stride and Zenefits.
The firm has not, however, put money into full-fledged health insurers because Kocher worries “about difficulty in achieving competitive provider contracts, high selling costs and low margins.” Medical-loss ratios also put a cap on how much insurers can make.
Yet companies like Oscar and Clover Health are still receiving gobs of venture capital because they handle large volumes of premium dollars. “Margins are technically low but are off a really high revenue base,” Garipalli said.
The onus now falls on both startup branches to show their value.
Providers, employers and individuals will judge the companies’ success by how much they grow and, more importantly, by how much they lower healthcare spending and improve patient outcomes.
“Companies like Oscar and Zoom are going to have to show that their core model is effective at not only acquiring members, but also caring for members and managing the costs of members in ways that are as good or better than traditional models,” Sanders said. If so, they’ll get more money from investors. But, Sanders said, if it turns out “their MLRs are way out of whack, I think maybe you’ll see a freezing.”
Emerging companies also have to prove they actually have something different to sell.
Clever ads, video chats with doctors, data analytics and smartphone apps are appealing novelties in a conservative business. But there’s some skepticism about whether technology alone can shake up and improve the conventional insurance model.
“You’re in a business where people pay premiums, and they want to go to the doctor and have the agreed-upon portion of their claims paid,” Penn’s Harrington said. “It’s still fundamentally a business of collecting money to pay claims.”