Featured Health Business Daily Story, Nov. 3, 2015

Health Care Start-Ups Are All the Rage, but Will New Insurers Have Legs in Long Run?

Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry. Sign up for a $91 two-month trial subscription today.

By Lauren Clason, Associate Editor
October 19, 2015Volume 25Issue 37

The health care industry overall is a hotbed of new ventures — research suggests the wearables market will reach $70 billion in the next decade, and the number of health care smartphone apps in the U.S. now exceeds 165,000. But health insurance remains practically untouched; while a number of start-ups target ancillary components such as electronic health records, wellness and health system navigation, only a few are attempting to launch fully insured medical plans.

“I think it’s very difficult,” says Mark Rouck, senior director at Fitch Ratings. “I haven’t really seen a successful startup, especially from the standpoint that in other parts of the insurance space — reinsurance, things like that — you can have a large pot of capital and some good underwriting capabilities, and the ability to look at data and price product and build a franchise relatively quickly. On the health insurance side, because of who the end consumer is, whether it’s a benefit manager, an employer or whether it’s individuals, I think it’s harder to build that franchise, that brand awareness, that recognition.”

Those brave enough to enter the insurance field are taking a variety of approaches. Zoom+ Performance Health Insurance, for instance, launched by Portland, Ore.-based provider network Zoom+ this year, aims to dissolve the barriers between payers and providers, while simultaneously re-imagining insurance as an everyday wellness plan, says co-founder and CEO Dave Sanders.

“This is a bold attempt to reinvent what the American health insurance, health care landscape could look like by creating a closely integrated delivery system and insurer that has the ability to really change the cost of care and change the consumer experience,” he says. “In many ways traditional insurance is an industrial model, where large companies aggregate providers and doctors, contracting and selling through wholesale channels. We think of ourselves as being a lifestyle or even ultimately a performance lifestyle brand, a niche brand, primarily organized around millennial individuals, catering to their needs. Frankly, we’re in validation mode right now for that.”

Zoom+ owns primary and specialty clinics, as well as “prime” and “performance” clinics designed to replace medication with food and movement, and to maximize athletic performance. Sanders says Zoom+’s “movement studios” and kitchens, where cooking classes are taught, are placed out front in its clinics, with the doctor’s office in the back. The health plan also offers “Olympian-level circuit training,” certified “brain trainers,” parenting classes and the chance to earn “brain food” and juices. Its new “super clinic” promises to treat 80% of conditions that send patients to the emergency room, at a fraction of the cost.

Zoom+ currently counts three large regional employers as clients — digital creative agency Instrument, pet care company Hannah the Pet Society and New Seasons Market. The company is entering the individual and small group markets both on and off the Oregon exchanges this year, offering the market’s lowest-priced individual silver plan at $233 per month. In small group, Zoom+’s silver plans are the second lowest at $287 per month.

Losses Are Not Uncommon

In its second-quarter 2015 filing with the National Association of Insurance Commissioners, Zoom+ Health Plan reported premium revenues of $67,228 and hospital and medical claims of $58,209. But with $1.5 million in administrative expenses, the company reported total losses of approximately $1.6 million. In May, Zoom+ President Denise Honzel said on a conference call with the Oregon Insurance Division that the company aims to turn a profit within five years, and that it will raise money from investors to cover any potential losses, according to the Portland Business Journal.

Initial losses are no surprise in the insurance sector in the first several years, says Steve Zaharuk, senior vice president at Moody’s Investors Service. Changes from the Affordable Care Act (ACA) have only made it tougher.

“There’s just a lot of risk on the ACA business that I think they weren’t ready to absorb and that’s why you’re starting to see some of these CO-OPs [Consumer Operated and Oriented Plans created by the ACA] go out of business and some of these start-ups struggle,” he says.

On Oct. 14, Tennessee CO-OP Community Health Alliance became the sixth CO-OP to unveil plans to close, after CMS revealed it would only pay 12.6% of what insurers had requested through the risk corridors program. Oscar Health, the investor darling, lost $27.5 million in 2014, according to The Wall Street Journal. But Oscar also has a cool $350 million in the bank to weather its initial losses (HPW 9/21/15, p. 8).

Whether or not they’re considered viable by the public, insurance start-ups are drawing attention from the big players. Google Inc. just invested $32.5 million in Oscar, and the Blue Cross Blue Shield Association is suing Zoom+ over its logo, which is, as one might expect, a blue cross.

Each start-up has zeroed in on a different audience, it seems. Zoom+ aims to deliver individually tailored health and wellness solutions to each member through its own team of providers in Portland. Oscar has shunned employer clients in favor of the individual consumer. New Jersey-based PPO Clover Health is only serving the local Medicare Advantage population (HPW 10/5/15, p. 3).

The goal of San Mateo, Calif.-based Collective Health, a start-up that raised $38 million in Series B funding this year, according to Fortune, is to change the employer insurance market by making it easier for small and mid-size businesses to self-insure. Collective helps employers tailor their insurance plans specifically to their workers’ needs, allowing companies to view and set alerts on health care trends. The platform also allows companies to manage finances, benefits and claims data all in one place, which Collective hopes will save them money when compared with fully insured coverage.

New Insurers Have to Find a Niche

Alex Frommeyer, co-founder and CEO of Columbus, Ohio-based Beam, found his niche in a more unlikely subset of the industry: dental. Frommeyer says dental is typically left out of the broader health care conversation, and as a result is way behind the rest of health care in terms of innovation. Because it’s an add-on benefit, he says the number of potential customers presents a big opportunity.

“One of the things that first really created that ‘aha’ moment for me when looking at the industry for the first time was the access problem that exists still today,” Frommeyer says. “In the dental industry, the number of people who don’t have insurance or dental benefits of any kind so that they can more cost-effectively access provider services is staggering.” The National Association of Dental Plans estimates that 126 million Americans lack dental coverage.

Beam’s plan offers a “technology and perks plan,” which ships dental care packages directly to members every three months, and attempts to turn brushing teeth into a game through a smart brush that connects to members’ smartphones and lets them compete with family and friends, as well as monitor their children’s brushing habits. In addition to the perks, Beam covers visits to the dentist and orthodontist.

Coming from a tech background, Frommeyer says he’s always been interested in how data, sensors, design and user experience can transform an industry. Beam began offering dental insurance in July, and Frommeyer says membership, which is now in the thousands, is growing at “tens of percent” each week. He acknowledges that Beam has skirted a few barriers by selling dental plans instead of full medical options, but says the majority of the hurdles still exist. “Certainly, starting an insurance company, in the broad scheme of things, is extremely painful,” he says.

The new cluster of insurance start-ups haven’t been around long enough to determine whether they have staying power, but analysts say the future is tough for them.

“We haven’t seen much success in start-ups in a long time. There probably are some success stories out there. There are a few CO-OPS that have started in certain states before the ACA that have done well,” Zaharuk says. “But I think the deck is stacked against them, especially if they’re just going to do ACA policies.”

But just because it’s difficult to see doesn’t mean it can’t happen. Sanders recognizes where the doubt comes from, and acknowledges that it is a difficult undertaking.

“That’s a fair statement,” he says. “It wasn’t that long ago, when in American entertainment, we had CBS, ABC and NBC, and you couldn’t imagine a world where those three companies weren’t essentially the primary suppliers of entertainment content, which was then beamed to U.S. TVs. That’s what entertainment was. The analysts in that space and the investors in that space were very skeptical of any other approaches. And then suddenly, overnight, ABC, NBC and CBS are sort of bit players in the world of highly individualized, highly tailored channels and content. What we’re talking about is the same sort of movement in health care. But it’s hard to see that before it actually happens.”

© 2015 by Atlantic Information Services, Inc. All Rights Reserved.

The AIS E-Savings Club offers regular opportunities to buy AIS products and services at substantial savings. Click here to see the current specials — including a $50 discount on the all-new 20th edition of AIS’s best-selling annual resource Health Plan Facts, Trends and Data.

It's quick and easy to sign up for FREE access to AISHealth.com!

Why do I need to register?

Resources for Paid Subscribers
Not a Paid Subscriber?

Check out all of the benefits, sample issues & more!