DEAR DIGITAL HEALTH STARTUP?-?YOU'RE GETTING INSURANCE WRONG

(This is the second post in my "Dear Digital Health Startup" series. Thoughtful comments, shares, and likes are always welcome)

About three months ago I was invited to give a lecture to a large group of early stage Digital Health founders in Jerusalem. 

I asked them: “How many of you are going to sell your data to insurance?”

About two thirds raised their hands.

“Every one of you needs to reconsider what you are doing”, I said.

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In my experience with Digital Health, almost every single pitch deck I see ends with the same punch line: some version of selling data (and/or insights) to Health Insurance. 

In my neck of the woods, this narrative is supported by countless VCs as well. 

It is extremely rare that I come across a founder who actually understands what this means.

IMHO, the problem is that founders (and frequently also VCs) overwhelming do not understand the underlying economics behind insurance. This means they are setting themselves up for a Sisyphean Task. 

So let’s begin to dissect this, starting with big US health insurers.

Why US? Because that is where the cash is. Total direct written premiums in the US, just for private health insurance, reached over $850B in 2017! 

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The US healthcare market has a number of idiosyncratic quirks (Uncompensated Care, PBMs, no universal coverage, etc…). One of these quirks underlies the entire health care system. 

Because of the private nature of US healthcare, economic motivations between payers and providers are misaligned.

Providers have an underlying incentive to keep patients in care because they make more revenue. 

Payers (Insurance) have an underlying incentive to keep patients out of care because they reduce outlay. 

This is for the simple reason that the overwhelming bulk of expenses for an insurance company is benefits — effectively paying for medical services. 

This is what Anthem, which covers over 40M Americans, looks like:

See that big red bar for “benefits”? 

80% of revenue earned goes straight back to care providers (hospitals, doctors, clinics, etc) for services rendered. 

Every private health insurance company would love to decrease that outlay in some way or another. 

“But this is exactly what our data and insights will do!” Say the founders.

Sure, in theory, but there are 3 hard realities that digital health founders need to contend with.

→ Size Matters

By the sheer size of big money American health insurance, a 50% reduction in outlay for 1,000 members is not nearly as attractive as a 1% reduction in outlay for 1,000,000 members. In order for you to get the payers interested in your product, you need to show viability at massive scale. This means you need to prove you can move the needle broadly and affect a wide variety of cases. 

 → Insurers are Listed

Most large private health insurers are public companies, which means they have constant pressure to hit quarterly/annual EPS targets. Whether we like it or not, the reality is that US capital markets value short term gains over long term results. 

Therefore, pitching insurance an idea that will maybe have some effect in five years is extremely difficult. 

→ Insurers are Actuaries

They live and die based on correctly computing premium rates, dividends, risks, etc., according to probabilities based on statistical data. All of this is quantifiable. This fits perfectly in a world of Fee For Service medicine (FFS), where everything is immediately measurable. 

Unfortunately, many DH founders want to pitch insurance based on value-based-care, which is significantly harder to quantify, and is far from being widely accepted, and therefore less interesting to insurers. 

In summary, if you want to get interest from American payers, you need to understand the underlying economic incentives. You need to show you can have a broad effect, with measurable ROI, and over a relevant fiscal cycle. 

That is why the startups who are successfully selling into health insurance actually have nothing to do with health. They do ML driven claims automation, optimization, processes, etc…; things that have quantifiable results, at scale, and over a short time period. (Or, like Oscar or Clover, they try to tackle healthcare insurance end-to-end, which is a whole other post). 

* * * *

So if traditional US health insurance is a pain in the ass, what is a digital health founder to do? 

Actually, there are LOTS of options, but founders need to do their homework and understand the underlying economics — who is paying for what and why. 

Option 1: Employers

Let’s get one thing straight. There is no such thing as “Employer Insurance” in the US. There is “employer sponsored insurance”, which is part of the benefits package that employers give to employees. Employers do not insure their employees, they purchase insurance on behalf of their employees. 

This is a complex subject, but it is important for founders to understand the underlying economic motivation in order to be able to spot opportunities.

Employers purchase (“sponsor”) health insurance in bulk, which typically results in lower premiums. Employers decide three things: 1. Whether to offer health insurance at all, 2. Amount of benefits and coverage, and 3. Whether to assume the risk or let the insurer assume the risk.

Why would they do this? Two main reasons:

1. To attract potential talent
2. To retain existing talent

Employers decide what benefits to give employees, and employers suck up the bulk of the costs as well. This creates a third key economic motivation, which is where digital health startups can find opportunities.

3. To maintain peak performance of existing talent

Employers are increasing realizing that offering (and paying for) benefits that keep employees in their cubes and working can pay off. This is where companies like Livongo have found great success. 

Employers, as an effective middle-man to health insurance, create an opening for startups dealing with things like mental health, wellness, fitness, etc. The key to success in this niche is proving to employers that you can create positive ROI. For example, depression is estimated to cost about employers over $100B/year in the US (lost days, lower productivity). 

Another interesting example is a new startup called Rezilient, which aims to help caregivers deal with the overwhelming stress in their lives. Caregiving is a massive issue in the US and globally. 20% of Americans are full time caregivers, and caregiver absenteeism is estimated to cost US employers at least $25B/year in lost productivity. 

Or think about how many days are lost due to chronic back pain. 

The point of these examples is to show yet another way of tapping in to insurance, but this time through employers, and based on a deep understanding of the economic motivations and proving ROI.  

Option 2: Health Insurance literally anywhere BUT the US

Besides the US, the rest of the modern world has a public healthcare system, whereby the vast majority of citizens are covered by public funding (even when private options are widely available on the market). Providers may be private, but payers are public entities backed by tax contributions from citizens. 

In order to understand the opportunities for DH in these countries, it is critical to understand the economic motivations. The vast majority of these countries (effectively OECD) use a blended form of payment, combining capitation with fee-for-service and pay-for-performance.

The most important aspect of these three is CAPITATION. 

CAPITATION: A system of medical reimbursement wherein the provider is paid an annual fee per covered patient by an insurer or other financial source, which aggregate fees are intended to reimburse all provided services.

To explain: Capitation is where the government sets a PRE-DEFINED budget for reimbursement, which gets allocated to providers per patient. For example, the government says: each person in our country gets $5000 of reimbursed medical care (on average). If the provider succeeds in giving care at an average of $4900, they get a nice bonus. If the provider succeeds in giving care at an average of $5100, they suck up the cost and in the next budget cycle will argue with the government for more.

The reality is much more complex than I describe, with all sorts of incentive mechanisms, clawbacks, risk segmentation, etc… But at the core of it, capitation, along with the public nature of health insurance, does one important thing: IT ALIGNS THE ECONOMIC INCENTIVES OF PAYERS AND PROVIDERS.

Effectively, in public health care systems there is a mutual incentive to reduce outlays. 

And, don’t forget that that public nature of health insurance means they are not beholden to short term earning’s calls. These countries can afford to look at longer trends, over a broader swath of the population.

As opposed to the US, there are opportunities in other countries for digital health products that aim to reduce costs and/or reduce unnecessary treatments and/or increase efficiency. Preventative medicine and telehealth solutions fit perfectly into this economic model. It is the reason why companies like KRY, Doctrin, Babylon, etc, are finding success in Europe. 

Option 3: NON-Health Insurance

One of the more interesting trends percolating under the surface of the insurance world is the overlapping of domains between life, health, and even auto insurance. 

For example, very recently Sompo, a massive insurance agency from Japan, held a challenge competition in Israel, in conjunction with EcoMotion, the leading smart mobility community in Israel, to look for innovative solutions to address the problem of “Auto-Shiyori” — automobile accidents involving elderly drivers. 

As the Japanese population rapidly ages, car crashed caused by old people are becoming a major issue. 

The economics here should be obvious — It is cheaper to deploy software that detects driver deterioration than it is to outlay cash to cover accidents. 

Enter digital health.

There are countless DH startups out building novel no-touch ways to “sense” biometrics. Everything from sub-THz, voice, molecular vibration, RF-based 3D imaging, etc… Any one of these can offer an interesting solution to Sompo that aligns with the company’s economic motivation. 

The Sompo example is just one of many under-the-radar examples of where digital health can find traction. Interestingly, non-health insurers are more lenient regarding clinical validation as well. But again, founders need to do their homework and understand the value chain. 

Option 4: Other Verticals: Voluntary Health Insurance

There are a number of additional interesting angles for digital health startups to integrate with insurance. One avenue is the world of Voluntary Health Insurance (VHI).

VHI sits alongside public insurance and typically offers two tracks:

Supplementary: Offers faster access to the publicly funded benefit package, or greater choice within the publicly funded benefit package, sometimes with additional amenities.

Complimentary: Offers additional services beyond what is available in the publicly funded benefit package.

Again, understanding the economic motivation behind these players is critical.

VHI is overwhelmingly private (commercial), highly concentrated (the top 3 providers make up a notable market share), and largely unregulated regarding benefits offered.

What this means is that these players face a lot of competition between themselves for members, which creates opportunities for Digital Health startups that can give these players a leg up regarding access, services, patient engagement, etc... 

A good example of this is Harmonie, a French mutuelle that offers complimentary services. Harmonie recently acquired MesDocteurs, a startup offering a user-friendly platform for patients to interact with doctors for medical advice. 

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Insurance is extremely complex, but it is also an unavoidable major stakeholder in the world of digital health. 

Unfortunately, it is all-to-frequent for founders to assume that insurance wants your data/insight without a deep understanding of the underlying economic motivation of how insurance works, and not just in the US

What I tried to illustrate in this long, generalized post is that even within the complexity, there are opportunities. But founders need to dedicate time and effort in understanding why insurers make the decisions they do. 

For founders and investors alike — don’t take it at face value that insurance will want your data/insights. And feel free to reach out if you have questions. 

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For further reading:

“An introduction to value-based healthcare in Europe” — Economist, 2015

“Voluntary Health Insurance in Europe; Role and Regulation” — WHO, 2016

“Better Ways to Pay for Healthcare” — OECD, June 2016

“Economic crisis, health systems and health in Europe” — WHO, 2015

“Convergence and determinants of health expenditures in OECD countries” — Nghiem and Connelly Health Economics Review, 2017

“Healthcare in Europe, 2018” Y.W. van Kemenade

Livongo’s S-1 filing regarding their upcoming IPO