Market disruption comes from the establishment as well as the startup

By Rick Huckstep

Last week, I wrote about Silicon Valley tech startup Zenefits and how their free to use HR software platform is disrupting the health insurance broker market in the USA. And I return to this subject one week later because, as I was writing and researching the piece on Zenefits, my curiosity grew for a better understanding of the impact of the Affordable Care Act, fondly referred to as Obamacare.

Behind this curiosity was the whole notion that it isn’t just the upstart Fintech new boys that disrupt the financial services marketplace. Just as powerful a force exists in the form of the market reforms from the “establishment” i.e., regulators, politicians, industry bodies,  and the like who have the power to change the way markets behave.

Whilst they can also be the very force that prevents change, which is more often the case, I wanted to explore this notion of establishment disrupting markets and look specifically at the case of Obamacare.

The first thing that caught my eye in the Affordable Care Act is the ‘medical loss ratio’ rule. This rule determines that insurers must spend the majority of their premiums on improving the quality, efficiency and effectiveness of the healthcare services to the tune of around 85% of the premiums. Whilst the aim of this is to reduce the spend on healthcare, it also had some unintended consequences.

The direct intention of this rule is to put an end to the system of inducements and rewards for remove unnecessary tests and procedures and thereby lower the cost of healthcare.

But, as a consequence, what this means in practice for an insurance provider is that they must now redeploy capital within the business before they can return it to shareholders.

Secondly, it also drives a different behavior pattern within the insurance providers. Now we are seeing a much greater interest in the actual delivery of healthcare services from insurers, and especially in the technology that innovates lower cost, better patient care services.

These consequences of the medical loss ration rule has led to a growing number of insurers investing in startups through their own funds and in creating accelerators to support the startup ecosystem.

The size or nature of these investments from the insurance firms are not always publicly available, but one example I saw was with Horizon Healthcare Services, a New Jersey insurance provider who invested $3.7m in the $7m Series A round in COTA.

COTA is an acronym for Cancer Outcomes Tracking and Analysis and they are “the first big data platform designed by practicing oncologists to deliver real-time clinical outcomes data and cost analysis for cancer care in support of healthcare’s new value-based reimbursement model.”

For both the insurance and the healthcare providers, both sides of the supply model share some common goals as a result of Obamacare. The COTA platform addresses this by controlling the runaway costs of cancer treatment without compromising patient care.

Another key feature in Obamacare is the creation of the Health Insurance Exchanges, also known as “Marketplaces”, within each state. These marketplaces are online comparison websites where consumers can purchase health insurance from insurance providers licensed to operate in that state.

The marketplaces will ensure that everyone gets “minimum essential coverage”. They also offer a central place to receive federal subsidies and handle exemptions (such as applying mid year because of moving from one state to another). The marketplaces operate an open season that runs from mid November to mid Feb and health insurance can only be bought during this period, unless it is deemed an exemption.

Which brings me back to where I started with the reference to last week’s article…because number 2 in the Finovate Unicorn list was Oscar and their $2bn valuation.

“Hi, we’re Oscar, a better kind of health insurance company” is the greeting on the front page of the website.


Oscar is a health insurance company that provides health insurance through the New York and the New Jersey Health Insurance Exchanges or marketplaces. It already has upwards of 40,000 members and claims to have 12-15% market share for individual health insurance in New York. As well as doubling the size of its workforce in the past year. Oscar also has plans to expand into Texas and California in 2015 subject to regulatory approvals in these states.

Their customer proposition is to keep the entire act of buying and relying on health insurance as easy, mobile and as simple as possible.

First and foremost, they are a technology-based business with a mobile app that is designed for the millennials. This is reinforced by the youthful name and the child-like branding to their target audience during the annual enrollment season. The casual and uncluttered tone of the brand appeals to the millennial generation and a mobile tech audience.


This clearly differentiates them against the established, some might say “stuffy”, marketing from the corporate insurers in this market.

The Oscar app is a modern ecommerce platform that is built on a back-end system that delivers an agile and responsive platform to provide their customers with mobile help from physicians, easy access to records, help in make a claim, and guidance through the healthcare system.

The app organizes medical information on a timeline in reverse chronological order and it uses Google maps to search for healthcare services based on the users needs. It also has a straightforward search and enquiry system for ailments using plain English such as “my tummy hurts”.

Oscar also offers features to encourage preventative measures, such as each customer getting a Misfit Flash fitness tracker that syncs with the Oscar app. The daily goals start easy, at around 3,000 steps per day and they gradually increase over the year to around 10,000 a day. As the user hits their daily goal they receive a $1 credit, up to $240 a year as an incentive for keeping fit and active. In keeping with the branding for the target audience, these are paid back as Amazon gift certificates

One of the common themes with all insurance startups is the imperative to keep the insurance policy details simple and transparent. Oscar is no different and their basic plan provides for free check-ups, generic drugs, flu shots and basic preventative care. They use plain English instead of medical and insurance jargon as best that they can which is a practice that we’ve seen earlier with the likes of Riskeraser and Abaris.

In the recent PWC annual CEO survey, now in its 18th year, the survey reported that 88% of insurers thought that changes in industry regulation would be disruptive over the next 5 years. This was the highest score for any category of disruption and shows that insurance leaders see the threat of disruption coming from the establishment as well as from tech startups.

Examples like Obamacare and also the pensions shakeup in the UK, covered recently in the article about Recordsure, support these findings from the PWC survey.

Obamacare has shaken up this massive, expensive and inefficient industry in the US. Now, all sides of the supply and demand model; consumers, producers and providers alike are changing the way the healthcare market works. It’s not just the startups that are driving innovation and change in how markets behave, the market reforms imposed by the establishment, through regulation and political action are as effective a disruptor!

Which is what Fintech is all about, isn’t it?

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