Aligning Insurance and Primary Care to Fix Healthcare

This post originally appeared as part of the weekly Create The Customer newsletter, where I discuss the business of healthcare. To see more posts and subscribe, visit createthecustomer.com

Oscar Health is profitable. Well, sort of. 

A year ago the company announced it had made its first profit on its underwriting activities. Now CEO Mario Schlosser says the company made an actual profit in the first quarter of 2018 (and that they still expect 2018 to be unprofitable overall). This is likely great news to the VC firms that have sunk $727 million into the company in its five-year history. 

Today we’re going to examine Oscar, their take on insurance in the 21st century, and how they’d make a fascinating dance partner with Iora Health. Then I’ll make some bold statements. 

Let’s go! 

Insurance, the model

After a long journey through wilderness, five homesteaders arrive at a suitable valley in which to build their new homes. For months they toil, milling lumber from felled trees and painstakingly arranging them into . Once they’re done, they agree to a five-way pact: if any one of their houses burns down, the other four homesteaders will help him rebuild it. 

That, in essence, is insurance. It’s a pooling of risk to help mitigate the threat of individual calamity.

Health insurance is founded on that basic model. We contribute to these pacts in the form of our premiums, and when any of the members of the pact endures calamity, our pooled funds are used to pay their medical bills. Our smaller individual contributions ensure no individual ends up with a burden too big to bear. 

Modern health insurance has drifted away from that sort of blissful simplicity. As the cost of basic care has gotten higher, health insurance has become less catastrophic-coverage and more of a pre-payment plan for all health-related expenses in our lives. 

This transformation has shifted the role of the health insurer from an administrator paying out claims to that of an active player in determining what kind of care patients receive, how much of it they can get, and where and by whom it’s delivered. 

Even though the complexity of the health system and their business operations have increased, health insurers still have a fairly simple business model. They bring in revenue through membership premiums and earn as a profit the money left over after they’ve tended to member claims. Given they can no longer cherry-pick the healthiest populations, this leaves health insurers with two broad levers for controlling their profitability: 

• Reduce overall utilization of services by their members
• Lower the cost of the services utilized by their members 

Reducing utilization

This strategy is premised on the idea that healthy people need fewer healthcare services. It holds up, both intrinsically and empirically. It’s also an impressively challenging goal for health insurance companies to pursue as it requires wholesale behavior change among their members. 

Oscar Health is pursuing this goal. The first of their five strategic points for innovation in healthcare is to engage their members in their own health. They argue that by having a simple, clean, and friendly user-experience, their members will be more likely to choose to engage. Once they’ve engaged members, they then have a much better chance of steering them to make better decisions. This manifests in Oscar’s use of step-tracking to incentivize members to walk more with the promise of Amazon gift cards upon certain activity thresholds. 

Never-mind the fact that step-tracking has been shown time and again to do little to improve overall health. 

That said, if any health insurer has a shot at actually improving member health through behavior modification, it’ll be the one that strives to have a closer, more engaged relationship with members. 

It’s important to note that this goal is also fraught with all kinds of moral hazard. While improving overall health is complex and challenging, denying coverage is simpler. This is one of the major pitfalls of our insurance system: health insurers benefit when patients get less treatment. The only way to ethically achieve the goal of reduced utilization is to have a healthier patient population. 

If an insurance company had cracked the secret to changing behavior to improve health, you’d have heard about it. 

Lowering the cost of utilization

This second strategy is where most insurance companies focus, and where Oscar strives to differentiate itself. It can be broken out into two key tactics:

Negotiate lower payment rates with providers

I’ve harped time and again on the fact that health insurers are patient demand aggregators. If an insurance company has more patients in a geographic locality they have more leverage at the negotiating table with providers. More leverage, in turn, leads to lower prices for services. Insurance companies thrive on their ability to control the flow of patients to providers.

But what if you’re an insurance upstart with relatively small patient populations, like Oscar? You turn to a narrow network strategy.

Rather than following the standard strategy of offering as many providers as possible in their network, Oscar’s narrow network strategy allows them to reshape negotiations by forcing providers to self-select into Oscar’s network based on their willingness to accept Oscar’s offered pricing. Oscar will need to adjust this pricing to ensure they’ll have enough providers for a complete offering, but they are largely in control of negotiations as if a given provider won’t acquiesce to pricing, they’ll simply move on to the next. 

The for members is that while they have access to a comprehensive network of providers, they have fewer options for each specific provider type. Given Oscar’s high net promoter score (which they love to tout), their members don’t seem to mind the limitation. 

One might worry that Oscar’s physician network is largely dictated by price, and thus sacrifices quality. It’s important to remember that price and quality of care have only a distant relationship in healthcare services. 

Oscar also touts their algorithmic approach to assembling provider networks, which ensures certain quality measures are met, and that providers are geographically distributed throughout the membership catchment area. Essentially, they claim that applying advanced technology to the problem of building a provider network can make a narrow one feel much wider. 

Oscar took the narrow network strategy to its logical conclusion with its deal with Cleveland Clinic. This arrangement has Cleveland Clinic and Oscar as 50/50 partners on premium revenue, with Oscar acting as a insurance administrator to acquire patients from individual insurance exchanges who will then patronize Cleveland Clinic’s provider network. 

Joel Klein, Oscar’s Chief Policy Strategy Officer, put it this way: 

“With over 11,000 sign ups in the first year, there is clearly strong demand for a product that combines Oscar’s member engagement and navigation capabilities with Cleveland Clinic's comprehensive, high-quality clinical network.”

When pursuing a narrow-network strategy, it also doesn’t hurt to be exceedingly provider friendly. Oscar Health has prioritized technology above all else and has built out all of their systems in-house, and from scratch. Given Schlosser’s background as a computer science undergrad, as a data scientist in the finance world, and later as the of a social gaming startup, it’s not surprising that Oscar would have a technological view of the world. 

One example of how this technology serves as an advantage is in Oscar’s increasing ability to process claims in real-time, which would actually ease the workflow of the provider with whom they’re interfacing. Additionally, Oscar offers “direct scheduling” with many of their providers, making it easier for providers to fill their appointment slots with Oscar members. By building their own technology, Oscar is better armed to modify it on the fly to suit their needs, and thus provide, in this example, ancillary benefits to providers who might consider taking lower service prices if it means an easier time interacting with the insurance company. 

Steer patients to lower cost providers & care

All healthcare services are not equal. Especially when it comes to price. 

Much of the waste and spending in our healthcare system is due to utilization of care at the wrong levels. Patients who present themselves at the ER with a scraped knee might end up paying $1,000 for a bandage, while the same case handled at urgent care would cost $250, and at a retail clinic might only cost $80. Care setting, and provider factor heavily into healthcare prices. 

There is huge potential for insurers to control the cost of care by helping their members navigate the system and receive the appropriate level of care in the most setting. In addition to ruling out expensive providers with a narrow network, Oscar is pursuing this with its concierge team which is available by phone, text, and chat to help members find providers who are in-network and appropriate to their care needs. They also offer telemedicine services to all members, and actually see utilization rates much higher than those of comparable services like Teladoc. 

Broadly, by having members who are more engaged with their health and insurance plan, Oscar will be better able to control the flow of patients to the right levels of care. 

Even still, insurers do a poor job of this. Regardless of how engaged a patient is via the app or by using the concierge team, insurers are entirely secondary to the patient navigating the healthcare system. And there will always be the worry that in steering you to one type of care vs another, the insurer is engaging in behavior that benefits their bottom line first; the moral hazard I referred to above. 

Now bear with me while we take a bit of a scenic route to the main point of this post. 

A New Model For Primary Care 

As I’ve discussed often, Primary Care is the focal point of much of the healthcare conversation. If the system is working properly (we can agree it isn’t), primary care is the entry and exit point for all patients. They’ll have a regular primary care physician they see for annual checkups, and in the the patient requires specialty or hospital-based care, that physician will help with referrals, coordination, and decision-making. Once the patient returns to normal life, the primary care physician will help manage any follow-up care and ensure the patient is recovering normally. 

In reality, primary care physicians are too overburdened with massive patient panels and onerous paperwork to engage in this kind of care. Never-mind the fact that poor interoperability inhibits patient data exchange between providers, thus presenting a technical barrier to coordination and collaboration. And physicians don’t always get compensated for care coordination as it doesn’t always fall into the standard fee-for-service billing rubric. There are impediments throughout the system to what would obviously be a better paradigm for primary care. 

There are a wave of companies, lead by Iora Health, that are attempting to redefine primary care in a value-based context. These companies reject fee-for-service, charging a per-member-per-month (PMPM) fee for patient care. They are free from the need to tie their revenue to the number of patients seen in a and can focus more on actually caring for patients in whatever way is most effective at improving overall health. This has manifested in a care team with physicians, nurses, and health coaches, with coaches spending most of their time building relationships with a smaller subset of patients. 

The desired effect of this more intensive, value-based primary care is that it will mitigate the need for higher cost healthcare down the road. It pushes primary care closer to the ideal model described and allows primary care to act as the gateway to the system. In that patient flow, providers at the bottom, who are interested in patient health rather than billings, are helping this patient decide which care is appropriate, which providers are quality, and what type of care they need. 

Iora Health CEO Rushika Fernandopulle says the company’s strategy is to manage patient risk - they want to become an insurer. This makes perfect sense for Iora as, if they are executing well on delivering primary care that mitigates downstream cost, they are surrendering the value they are creating to the insurance company. If they own the risk for that patient, they reap the value for themselves. 

Fernandopulle also argues that Iora can utilize its status as a gatekeeper to be selective about which specialist providers they’ll refer patients to. Right now this process is geared towards finding specialists who will work collaboratively with Iora in terms of information sharing and decision-making. Should Iora go down the path of patients, there is little doubt they could flex this control in terms of pricing as well. 

Value-based primary care, seen through this lens, is actually much better positioned to accomplish the strategic goals of health insurers. 

• They have a much better shot at positively influencing overall patient health and behavior.
• They can steer patients to secondary and tertiary providers who adhere to their philosophy (and pricing requirements)
• Through the above patient control, they have leverage in negotiations 

In his deep dive into the economics of new primary care models, Kevin O’Leary notes systemic impediments include the insurance company’s unwillingness to let primary care discriminate which physicians it will and won’t refer patients to, as well as the data sharing issues around coordinating care between primary and tertiary care. If the insurer and primary care provider were the same entity, these issues would be dramatically minimized if not eliminated. 

(For more on Iora, check out this interview with Fernandopulle)

A Primary-Care Insurer

When you combine a value-based primary care practice with a forward-thinking insurer, you have a potent combination. This entity would control the patient flow from both a systemic entry point perspective, as well as through its payment network. It would have a much closer relationship with patients. And, most importantly, it would have both the capability and incentive to actually reduce overall utilization by improving patient health and avoiding unnecessary expensive care.

It would come as an antidote to the hospital-focused ACO push, one which contains a fundamental flaw. ACOs are meant to see patients holistically and manage the entirety of their care within the system. However, as long as hospitals reside at the center of these systems the financial incentives will always be to utilize the expansive and expensive facilities. An ACO with a hospital heart will always focus first on filling inpatient beds before improving overall patient health. 

Insurers and value-based primary care plans are aligned in this core incentive of improving overall patient health. Combined, they possess the market position to squeeze the more costly elements of the system into and actually bend the cost curve in healthcare. Iora and Oscar would both be interested in building narrow networks of providers that adhere to likeminded care philosophies that result in lower overall care cost. 

While I’ll be dreaming tonight of merging Iora and Oscar, the CVS Health - Aetna merger is actually looking more and more like what I’m describing. Through CVS Health and MinuteClinic, this entity would cover a good amount of low-end primary care activity, while covering patient risk through Aetna. Should they decide to do so, the new CVS Health could scale up primary care activity to include physicians and thus satisfy a wide range of primary care needs targeted at more holistically working with patients. Given they just recruited Iora Health’s CMO to the endeavor, this doesn’t seem out of the question. 

Much of what needs to happen in healthcare is properly aligning incentives around the patient. While much of the industry benefits when patients are sicker and consuming more services, there are elements on the fringes that actually do well when keeping patients healthy. The goal should be to align and empower these patient-centric and then let them force the rest of the industry into conforming their model. 

This would bring health insurance, and , closer to the ideal state of the homesteaders. No trickery, no perverse incentives; just a pact that should calamity strike, someone will be there to help you get the care you need, and help you pay the bills.