CXA Group $25 million Series B shows the maturing of InsurTech and future of Innovation Capital

 

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Closing a Series A round is tough (the “Series A Crunch”), but closing a Series B is even tougher. You have to show great metrics at all levels. Series B is the “show me round”.

So when we see a big Series B round in the white hot InsurTech sector we pay attention.

In this post we look at the trends and insights behind the news that a Singapore-based health InsurTech venture called CXA Group has closed a $25 million Series B round from Facebook’s co-founder Eduardo Saverin’s B Capital Group and Singapore’s EDBI.

This news illustrates 6 major themes:

– Innovation Capital goes where it feels welcome

– Innovation capital goes where there is opportunity and that is shifting to Asia

– Singapore just scored a goal in the Fintech Hubs Global Tournament.

– The UHNWI Super Angels will shake up the “permanent aristocracy” of top tier VC Funds.

– The role of Government in building Fintech hubs

– This could be Zenefits done right

Note on terminology: we refer to Innovation Capital as the combination of cash + connections + know how that has historically been called Venture Capital. For reasons explained later, the historical term – Venture Capital – has outlived its Sell By Date.

Innovation capital goes where it feels welcome

This is not complex. Countries with zero capital gains tax on long term investments will attract a lot of Ultra High Net Worth Individuals (UHNWI aka Family Offices). Eduardo Saverin is an example – a Brazilian who famously renounced his US Citizenship in 2011 to take up residence in Singapore.

What is new is the blurring of lines between these UHNWI Super Angels and traditional Institutional Venture Capital. More on that later.

Innovation capital goes where there is opportunity and that is shifting to Asia

Asia is the 21st century growth story.

This statement wins the “Captain Obvious Award”. What is interesting is the time lag between when the growth shifts and when the innovation capital shifts. For a while, Innovation Capital in the middle aged world (America) and the old world (Europe) knew how to invest and saw the growth shifting to Asia. It was American VC money flowing into Asia. The next iteration, happening now, is when Asian VC money flows into Asia. This deal illustrates that shift.

Singapore just scored a goal in the Fintech Hubs Tournament.

This deal demonstrates that Singapore is becoming a major Fintech Hub, leveraging smart regulation and its position at the heart of the Asia growth story.

The UHNWI Super Angels will shake up the permanent aristocracy of top tier VC Funds.

The lead investor is credited as “Eduardo Saverin’s B Capital Group”. If the PR said “Eduardo Saverin” then this would be classed as an Angel round. Whether B Capital Group has other investors is not that important because a single UHNWI individual or family has plenty of capital to deploy.

For a long time, we had Angels who led the way by investing early and then politely inviting the big funds to invest. This led to what the Ivey Business Journal describes as a permanent aristocracy of top tier funds.  The Super Angels with an institutional fund, such as Eduardo Saverin’s B Capital Group can give that permanent aristocracy a run for their money. Some of the partners of those top tier funds are now also setting up as Super Angels and just investing their own money. Like Hedge Funds that become Family Offices, they no longer manage other people’s money, they just invest their own money. This is partly driven by tax, as people see the political writing on the wall that signals the end of carried interest fees being taxed as capital gains.

This is why we see the term Venture Capital as past its sell by date and prefer the term Innovation Capital. What we normally think of us VC – funding early stage innovation – is being done by Angels and too many VC Funds have become part of the asset management industry  focussed on AUM fees and short term exits.

The role of Government in building Fintech hubs

Co-Lead on the deal was the corporate investment arm of the Singapore Economic Development Board call EDBI. This post looks at the increased role of governments in Fintech regulatory competition as governments calculate the economic return on innovation. Whether direct investment (“picking winners”) is the right way is debatable, but expect to see more government activity in Fintech.

This could be Zenefits done right

CXA is going after the employee benefits industry (pegged at $100 billion in Asia) with a free SaaS platform monetized via lead generation. If that sounds familiar, think Zenefits, the hyper-growth success that hit the speed buffer (for reasons described here).

CXA goes to the next level by helping employers unlock wellness through prevention and disease management.

The health InsurTech opportunity is no longer only about America.

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Health Insurance InsurTech innovation may start with dentists and a P2P network of providers

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Aforacare does not present like a tech startup. There is no Crunchbase profile with lists of rounds by VCs. Nor do we read about any of the hot technologies that are like catnip for investors. Yet, if you look at Aforacare with fresh eyes, you may see the innovation that could untangle the giant hairball called US Health Insurance (which is driving the biggest VC deals of 2016 in Fintech).
Network of Dentists Vetted by Dentists.
That is how Aforacare presents itself. To a consumer, the proposition is like Insurance; it is a fixed monthly fee. The Basic Plan costs $25 per month and includes two standard cleanings, an annual exam and X-rays. The Premium Plan for $45 per month includes four standard cleanings, an annual exam and X-rays, $1,000 voucher towards comprehensive orthodontics and unlimited $150vouchers towards whitening treatments.
If you want more, you buy more at clearly listed prices.
The revolutionary thing about Aforacare is that they cut out the Insurance Company.
This is a P2P Cooperative Network. The network is owned by the providers. Imagine that for Doctors. Imagine how a self insured Company would view this – taking care of teeth is a good preventative for health problems, so a self insured Company sees the economic benefits of prevention.
This is a big wide open market. As per Aforacare;
“Nearly 50% of adults living in the U.S. don’t have dental insurance”.
Cooperative sounds old-fashioned, so lets call it a P2P Network
In the past, mutually owned businesses were normal. They were networks before the Internet. Now imagine a network owned by doctors or taxi drivers but enabled by the Internet.. Why does Uber take 25%? Because they did it first. Aforacare is the Uber of Dentists but an Uber where the providers own the network.
That is revolutionary, even if the tech looks trivial. If you looked at early Facebook, Uber or any other network effects business, the tech also looks trivial.
Aforacare is classic disintermediation – cutting out the Insurance company. That should worry all Insurance companies – whether Incumbent or Upstart.
Digital Cooperatives and Blockchain
Blockchain enthusiasts like to talk about alternatives to sharing economy services such as Uber and AirBnB with lower transaction costs. I buy the idea – the appeal to the provider side is obvious – but many attempts such as Maaxi have failed. For a great explanation of the idealistic appeal of digital cooperatives to get back to the original sharing economy ideals (which became the on demand Gig Economy) read this post by Chelsea Rustrum:

https://www.linkedin.com/pulse/sharing-economy-social-movement-dying-become-economic-rustrum

Beating a consumer brand with entrenched network effects is really tough – ask any Facebook alternative.

What I like about Aforacare is that it is a digital cooperative in a Blue Ocean market without an entrenched competitor.

 Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Wearables could help to heal Health & Life insurance

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For the Intro & Index to Wearables Week, please click here.

Buying Health & Life Insurance today is like filling in a form to tell Netflix what movies we say we like at that moment in time – versus what movies we actually watched recently. You fill in a snapshot report of your health, with blood samples and other tests run by a doctor and the premium is set. The fact that you later put on 40lbs and developed diabetes – or gave up smoking and alcohol and ran a marathon and reduced your blood pressure – impacts Insurance risk but is ignored by Insurance companies.

 Wearables could change all of that and revolutionize health and life insurance by a) personalizing insurance and risk and b) changing the delivery of healthcare. But first, there are three big hurdles to overcome.

 First we describe how wearables could change the world of health and life insurance with two visions – personalized insurance and augmented intelligence for healthcare workers. Then we look at the three big obstacles.

Vision # 1: Personalized Insurance.

Like Netflix or Amazon recommendations, Insurance could be based on a dynamic rather than a static view of health, fed by data signals from our wearables. Our premiums would go down as we became healthier and vice versa. Becoming healthier would not only make us feel better, it would also save us money.

Imagine an investor basing a decision on a 10-year-old financial statement. That is how Insurance companies work today, with a one-time snapshot of our health. Wearables could give Insurance companies the equivalent of real time financial reporting. That is a big deal.

Vision # 2: Augmented Intelligence for healthcare workers

Health Insurance cannot change the game. It is the delivery of healthcare that matters. Wearables could give healthcare workers augmented intelligence that enable them to deliver healthcare that is better, faster, cheaper.

That improved healthcare delivery could be packaged by next generation health insurance companies into genuinely affordable healthcare.

That is an even bigger deal. Of course, with this much money at stake, politics could get in the way and lobbyists could stop it happening. The obstacles – which we will come to – are real and could be dressed up to kill any progress in this area.

Sensors that track your sports achievements are fun, good for bragging and high fives. For people with medical issues, sensors that monitor vital signs such as heart rate, pulse, blood pressure could be the equivalent of data feeds for financial traders. They give glimpses into a complex system (global financial markets, human body) that can be used by highly trained workers. With the addition of cognitive computing/AI to parse all that data flow, imagine an exchange like this over chat bot:

Patient: I am not feeling well.

Healthcare worker: I can see why; your xxx vital sign does not look good. I suggest you do yyy right now and let’s schedule some time so I can run some more tests.

I am deliberately using “healthcare worker” rather than “doctor” as the latter is a regulated, controlled definition and many tasks could be performed by nurses or health aides of various types. The key is that all the healthcare workers are empowered by data and AI processes. Their intelligence is augmented just like a Hedge Fund trader’s intelligence is augmented by data and AI processes.

Corporations that self-insure could drive this.

Corporations that self-insure have aligned motivations – healthy employees cost less for healthcare and are more productive. The company to watch in this space is Accolade (which recently raised $70m).

Big VC Money going into Next Gen Health Insurance

The reasons why VCs love investing in Health Insurance is pretty obvious – it is a massive market and very broken i.e. customers urgently need something better (ask any consumer what they think of Health Insurance or look at Net Promoter Scores). However, it is very hard to fix. You can say that curing cancer is a big market and customers want something better but that does not mean it is easy to find a cure for cancer.

You cannot change Health Insurance in any significant way unless you can also change the Provider side. That is where VCs have an advantage. They can see that the innovation in digital health is for real. Funding for digital health is on a tear. So that will make innovation on the Health Insurance side more likely. This is where data from Wearables will intersect with Next Gen Health Insurance such as:

Oscar Health which we profiled here.

Bright Health is interesting because this was an $80m Series A ( a lot of money for a first institutional round). There are two VCs (NEA and Bessemer) and both are top tier and have deep pockets; one assumes big follow on rounds will be needed for them to have an impact on such a massive market with big entrenched incumbents. This is not a garage startup with some young techies with a Minimum Viable Product. The CEO, Bob Sheehy, is the the former CEO of United Healthcare. The best analysis is in Modern Healthcare magazine. This is a full stack regulated venture aiming to be an alternative to existing insurance companies.

Clover Health is also a full stack regulated insurance startup. Consumers can buy Health insurance today (as long as you are in New Jersey, Health insurance has to grow state by state). Their round was Series C, so they are more developed than Bright Health, but this is a market where a top team with plenty of capital can do well by learning from those who were early in the market – it is not necessarily a game with first mover’s advantage. Clover Health has an interesting focus on the doctor. The idea seems to be that if doctors have an easier time on the paperwork front the best doctors will want to work with Clover, which will benefit consumers.

Outside the US, VitalityHealth, originally from South Africa, is an early pioneer of wearables before they were called that. They have expanded globally through partnerships; they moved into the UK, with Pru Health and China with Ping An. In the US they have the novel strategy of partnering with 6,000 gyms; they can track actual attendance from a swipe of their membership card.

Atidot and Life Insurance

Atidot is an Israeli startup (classic ex military where they were in the Technological Unit of the Intelligence Corp). They use predictive analytics that can help Insurance with the basic but difficult to answer question – when will this person die? Classic Insurance Actuarial process looks at static data such as age, sex, job and location. Wearables data can give a dynamic view of Health. The world is non-linear and data science for predictive analytics does not follow a linear model. Data is modeled to show different correlations of risk to key variables.

Reality Check # 1: devices not ready for prime time.

A 2014 survey by Strategy Meets Action (SMA), a Boston-based research firm found that 22% of insurers are developing a strategy for wearables. Ironically, the same survey also reported that only 3% of these insurers actually wore a wearable device themselves.

In other words, the theory is good but wearables are not yet ready for prime time (as we covered in our opening post in this theme week).

Reality Check # 2: PreExisting Conditions

One lasting legacy of the Affordable Care Act (aka Obamacare) is that consumers cannot be denied coverage based on a pre-existing condition. That is a problem if the wearables data shows we have a new condition such as Diabetes. We want our Insurance to go down when our health improves, but we don’t want it to go up when our health declines.

Reality Check # 3: Data Privacy

Privacy regulation varies by jurisdiction, with Europe tending to tougher than USA; but even in USA in some States you must communicate to consumers if you use factors such as gender, age, zip code in pricing.

For Wearables to impact Insurance premiums, policyholders must be willing to share data with the Insurer. This maybe an area where Millennial attitudes to privacy (it’s done, put a fork in it) may rule. Or there maybe consumer and regulatory backlash as the data is so sensitive. The companies will need to prove that their aggregated anonymous data cannot be reverse engineered to create Personally Identifiable Information (PII); any hacker that breaches that will create a reputation crisis, so it has to be really secure.

These are real obstacles, but entrepreneurs treat obstacles as something that defines their action list. They find a way to solve those problems. Given the scale of the opportunity, somebody will surely solve them.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

 

We look at biggest Fintech VC deals of 2016 to see where the InsurTech puck is going

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We looked at the 30 biggest VC deals in Fintech for 2016 (courtesy of CB Insights Pulse of Fintech Report) to see where the InsurTech puck is going to. The answer is blindingly obvious when you look at the 3 out of 30 that we tagged as primarily Insurance focused:

  • Oscar Health
  • Clover Health
  • Bright Health

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Yes, big VC money is being invested to fix Health Insurance

Only 3 out of 30 deals does not sound much (10%), but they are all big deals and the total invested in those 3 is $640m and that is nearly 50% of the total that went into North American deals (the amount going into Asia was nearly 2x that going into America, but that is another story). This amount of VC money is a good indicator of traction, so it is worth looking at what they are doing.

The reasons why VCs love investing in Health Insurance is pretty obvious – it is a massive market and very broken i.e. customers urgently need something better (ask any consumer what they think of Health Insurance or look at Net Promoter Scores). However it is very hard to fix. You can say that curing cancer is a big market and customers want something better but that does not mean it is easy to find a cure for cancer.

You cannot change Health Insurance in any significant way unless you can also change the Provider side. That is where VCs have an advantage. They can see that the innovation in digital health is for real. Funding for digital health is on a tear. So that will make innovation on the Health Insurance side more likely.

We already looked at Oscar Health, which scores as the biggest HealthTech round and fortunately Amy Radin has taken on the challenge of analysing the massive complexity of the US Health Insurance business in two posts (here and here).

Bright Health is interesting because this was an $80m Series A. That is a lot of money for a first institutional round. There are two VCs (NEA and Bessemer) and both are top tier and have deep pockets; one assumes big follow on rounds will be needed for them to have an impact on such a massive market with big entrenched incumbents. This is not a garage startup with some young techies with a Minimum Viable Product. The CEO, Bob Sheehy, is the the former CEO of United Healthcare. The best analysis is in Modern Healthcare magazine. This is a full stack regulated venture aiming to be an alternative to existing insurance companies.

Clover Health is also a full stack regulated insurance startup. Consumers can buy Health insurance today (as long as you are in New Jersey, Health insurance has to grow state by state). Their round was Series C, so they are more developed than Bright Health, but this is a market where a top team with plenty of capital can do well by learning from those who were early in the market – it is not necessarily a game with first mover’s advantage. Clover Health has an interesting focus on the doctor. The idea seems to be that if doctors have an easier time on the paperwork front the best doctors will want to work with Clover, which will benefit consumers.

Another full stack regulated insurance startup is ZoomCare, but there is no evidence of recent funding.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Insurtech ventures going after big & complex health insurance pain points

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This is a guest post by Amy Radin. It is the second of a two-parter. (Thursday is always InsurTech day on Daily Fintech).

In my last post I outlined the four dimensions that are defining the opportunities for health Insurtech innovation: the health of the American people, marketplace trends, the role of regulation, and the players.

Incumbent health insurers are pursuing legacy tactics to compete in the ACA world: M&A (big deals either approved — Centene/Healthnet; facing regulator challenge – Aetna/Humana; or being reconsidered – Anthem/Cigna); increasing premiums (also see some of the latest news this week); and reevaluating participation in the public exchanges (notably, United Healthcare withdrew earlier this year).

Innovators addressing the root of user pain points can influence how plans are selected and health care is consumed. The levers are not easy to move. Success requires compliant ways of combining big data analytics and personalization with user-centric digital experiences.

The headline of a just-published New York Times article, Cost, Not Choice, Is Top Concern of Health Insurance Customers would seem to state the obvious. Yet insurers have expressed surprise at the policy mix and which plans are proving to be most popular. Carriers participating in the public exchanges report poorer actual performance than anticipated in premiums (lower) and claims (higher). Users are gravitating towards lower-cost plan options, and show a trend to self-select into higher-cost plans when they know a big health care expense looms.

This is not just an issue for incumbents. Oscar, among the most visible innovators in the US health insurance marketplace, reported a $105MM loss in 2015. Lack of scale is a challenge, but the company has also been impacted by the user decision-making dynamics affecting established carriers.

The results suggest (at least) three pain points:

# 1 People don’t see value because they don’t understand what they are buying.

  • When people think something is too expensive, it is because either they cannot afford it (i.e., it really is too expensive) or the perception of value does not justify the price.
  • Reportedly one in seven employees do not understand the benefits being offered by employers, of which health insurance is by far the biggest piece.

# 2 People are being held accountable for health decisions that they are not equipped to handle.

  • Faced with a complex set of choices and opaque information, it is no surprise that many opt for the easy option: saving money now.

# 3 People don’t always make rational decisions.

  • A basic primer in behavioral economics will tell you that:  (1) emotion, bias, and other limitations drive decisions, not rational analysis, and (2) people discount perceived upside relative to downside. There is not enough upside to pay more in the short term.

Players who manage to affect these behavioral drivers stand to gain.  Here are examples of companies working the issues.

Connecting disparate sources of data

PokitDok creates “APIs that power every health care transaction.” They aim to enable data connectivity across the silos that in today’s world require manual navigation. They define an ecosystem including Private Label Marketplaces, Insurance Connectivity, Payment Optimization and Identity Management. The company closed a $35MM B round last year. PokitDok is a pure technology play. Achieving their vision could be the “holy grail”: better economics and better patient experiences and outcomes without owning underwriting risk.

Helping employers

It hasn’t been lost on the startup world that 150MM employees purchase health care via employers, which is why many companies are focused on improving the benefits buying experience and promising to help employers lower costs. The ACA requires that all companies with more than 50 employees offer health insurance. This aspect of the regulation, coupled with the fact that health benefits expense has risen steadily, provides a specific and large innovation space.

Competitors include:

Lumity, who reported raising $14M last Fall, acting as an insurance broker. The company claims to be “the world’s first data-driven benefits platform for growing businesses” promising to simplify benefits selection for employers and employees.  Employees are asked to provide health data, which are compared with aggregate profiles using proprietary algorithms. The big question: Will employees see enough benefit to share potentially sensitive information?

Zenefits, recovering from widely publicized regulatory issues, has new leadership. The company acts a broker, and focuses on small businesses.

Collective Health is targeting a wide range of businesses via “ready-to-go,” “configurable,” and “advanced” solutions.  The employee experience components of the offering are aimed at helping users make better-informed decisions with less hassle.

SimplyInsured aggregates health insurance plan options for small businesses to make comparisons easier, and aims to automate processes presumably essential to creating a viable cost structure for serving this segment.

A number of established benefits consultants including Aon and Towers Watson (the latter via their acquisition of Liazon in 2013) offer larger employers private exchange capabilities – these include portals for employee benefits enrollment enabled by data analytics and a friendly user interface. They act as or engage brokers to create benefits plans tailored to employers’ goals. Such portals can be helpful to employees, and check a box for employers seeking to improve the benefits experience, not just reduce expenses.

Motivating people to adopt healthier habits

Vitality, reported on in an earlier post, is a cobranded platform offering deals and rewards designed to motivate people who take steps towards better health. Humana offers the HumanaVitality program, integrating Vitality’s rewards program into the insurance relationship. If people see near-term benefit to behavior change this could be a good use case upon which to build.

Facilitating patient payments to providers

Patientco is a “payments hub” supporting “every payment type,” “every payment method,” “every payment location.” Focus is on efficiently increasing revenue for providers, secondarily to improve the payments experience for patients. The company provides the ability to integrate its solution with other health technology solutions.

Providing better experience capabilities to carriers

Zipari is a customer experience and CRM platform providing a product suite including enrollment, billing, and a 360-view of members across engagement channels. The company targets is product line at insurers, both direct-to-consumer and group or employer channels.

The multiple miracles that would have to occur for a quick fix make it unlikely that we will see a simple, logical health insurance experience any time soon. We are relatively early in what is likely to be a long game. But, Insurtech innovators are demonstrating the capacity to go after the possibilities that data and technology offer to mitigate the pain.

Daily FinTech Advisers provides market development services to FinTech ScaleUps, Financial Institutions and Investors and operates the FinTech Genome P2P Knowledge Network.

Can InsurTech make miracles happen in US health care?

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This is a guest post by Amy Radin. It is a two-parter. The second part will be a week from today (Thursday is always InsurTech day on Daily Fintech).

As an American and the de facto administrator of my family’s health insurance, I am reminded routinely of some of the complexities of the methods we employ to maximize health and pay for care in this country.  Forces are driving individuals, providers, insurers and employers to change their approaches or suffer the consequences.

InsurTech companies who take aim at the US health care industry by using software and data to improve efficiency and outcomes can benefit from this opportunity. Depending on whether you are an optimist or pessimist, the health care sector is the land of endless opportunity or unsolvable problems. Since the scale is huge, even small steps forward, aimed at opportunity pockets, can translate into significant wins.

Let’s view the situation through four lenses: the health of the American people, marketplace trends, the role of regulation, and the players. You can unpack any one of these and understand why Venture Scanner has identified over $26BN in funding that is being poured into 1,300 health-technology companies across 21 categories and 48 countries.  The issues and implications arising from any of these categories are intertwined, so even startups focusing on health insurers cannot disconnect from what is happening in the rest of the ecosystem.  This post focuses on health insurance in the US, not the broader health care space or other geographies, because US is a) a massive market and b) a different structure from markets in Europe and Asia).

Americans, overall, do not live a healthy lifestyle

The United States came in last place in a 2013 ranking of affluent countries’ health in a Mayo Clinic Proceedings study which included four factors in its definition of “healthy lifestyle”: diet, exercise, weight and smoking.

Americans are getting fatter. Over one-third of the adult population is obese. Every single state has an obesity rate over 20%, adding an estimated $200BN to the national health care tab.

A piece of good news from the Centers for Disease Control is that the percent of adult smokers has dropped steadily from 42.4% in 1965 to 16.8% in 2014. The trend amongst students has been less stable, but generally downward, peaking at 36.4% in 1997 and dropping to 15.7% in 2013.

This is a huge and shifting marketplace

Consider just a few dimensions:

  • Healthcare spending represents 17.5% of the US Gross Domestic Product, $3.2 trillion, or about $10,000 per person. As the population ages, government spending in the sector is expected to increase. Also consider that 30% of Medicare dollars go towards the 5% of beneficiaries who become very ill and then die each year.
  • Employers are taking action to shift costs to employees, and slow down spending. Employers provide coverage to 150MM Americans. And, according to the 2015 Kaiser Family Foundation total average annual premium per employee has increased from $5,791 to $17,545 since 1999. Employees are being asked to pay more, or to avoid doing so by trading down to high deductible plans. This creates near-term savings back to healthy families who don’t run into any medical surprises. What is rarely highlighted, however, is how many families are effectively assuming the financial risk of facing a large deductible in the event of, say, an unanticipated hospitalization. Since 62% of Americans have less than $1000 in savings and 21% have no savings, the potential is real for individual families to face serious financial consequences as a result of this choice.

Regulations focus on changing behavior, protecting patient data, and stimulating innovation

ACA, signed into law in 2010 and upheld by the Supreme Court in 2012, is watershed legislation that set the sector up for reinvention. ACA takes both a carrot and stick approach to increase coverage and care effectiveness while lowering costs, e.g.,

  • If as a user you don’t purchase coverage, you face penalties.
  • If as an employer of 50+ people you don’t offer coverage, you face penalties.
  • Health care providers are being incentivized to make ‘meaningful use’ of electronic health records to create efficiencies and improve care decisions, and face penalties if they fail to use such tools
  • Primary care providers and general surgeons are being incentivized to move to low-coverage geographies.

These are just a few examples of how ACA is attempting to get people to change how they select, use and administer health care payments and services.

Two other regulations impact Health Insurers:

  • The Health Information Privacy and Protection Act, better known as HIPAA, the privacy, portability and security rule designed to protect patient health information, while improving data portability. HIPAA impacts how data is stored, protected, used and transferred.
  • The HITECH Act (Health Information Technology for Economic and Clinical Health) was enacted to support the development of a nationwide health IT infrastructure, as well as define and maintain standards for health information technology products and how they interact with each other.

Any health care player — incumbent, startup, or investor — must understand how the regulations work

For those who question the likelihood that ACA is repealed, consider that while this year’s election suggests anything can happen in politics, keep in mind that there have been over 50 failed attempts by Republicans in Congress to undo the legislation. So, better to understand how the incentives and disincentives relate to any potential new business model, and appreciate how big a departure ACA’s core principles are from the traditional way in which the US health care system has operated.  The latter is vital to understand the dynamics of the new playing field and how individuals, providers, insurers and employers are responding.

The winning business models will be those that:

  • Link to the regulatory levers – carrots and sticks for individuals and providers – and move them. This is where the commercial value lies.
  • Prove they can deliver better outcomes at lower cost.
  • Demonstrate potential to scale, by itself, via B2B partnerships, or via exit to a scale incumbent.
  • Have a viable basis for underwriting and risk management.

Success will be a function of software + data + tactical knowledge of the levers – both the regulations and how to motivate behavioral change where people are being asked to make radical changes.

Daily FinTech Advisers provides market development services to FinTech ScaleUps, Financial Institutions and Investors and operates the FinTech Genome P2P Knowledge Network.

Oscar tries to untangle the giant hairball called American Healthcare #InsurTech

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Entrepreneurs like to attack huge markets where the customers hate the incumbents. The $2.8 trillion US H­­­ealthcare market fits the bill on size. Re hating the incumbents, ask consumers to name one entity that they hate the most and many will skip Banks and Telcos and zero in on their Health Insurance company; look at Net Promoter Scores for some quantitative data. Being denied coverage when you or a loved one face a life threatening illness is as stressful as it gets. The hairball complexity of the claims process leaves plenty of room for Health Insurance to deny coverage; enraged customers call it the “cost avoidance industry” that makes money by denying coverage for some ingenious reason.

Today’s Research Note looks at one startup that is trying to do something about this – Oscar. I spotted them in the wild during a recent visit to New York, when their ads were plastered all over the subways.

You need deep pockets to go after massive markets with entrenched incumbents. Tick in the box for Oscar, which has raised $327.5m.

You also need to be grown up & regulated.

Grown up & regulated

Two weeks ago our InsurTech research note focused on the execution problems of Zenefits. Since then, more news has surfaced via excellent journalism at Buzzfeed by William Walden who describes a sales culture run amok. I stick with our original analysis that Zenefits will emerge strong after correcting the execution missteps. Creating a sales management process that is hard-charging without getting caught in compliance and reputational risk is what grown-up companies do. If Zenefits cannot fix the execution issues, some other entrepreneur will copy the business model and execute properly. The opportunity remains huge.

Buried in the news is the fact that Zenefits primarily makes money on health insurance. That makes sense because health insurance is not just massive; its hairball complexity is ideal for entrepreneurs who can innovate on the Customer Experience (CX).

Last week we looked at another high ambition InsurTech venture – Lemonade. They have not yet announced which Insurance sectors they will target. It is possible that they too will tackle the hairball complexity of US Health Insurance. It does seem clear that Lemonade plans to be an Insurance company and not just a Robo Broker (which is how I would categorize Zenefits). So it looks like Oscar and Lemonade are more comparable. As Lemonade is still in stealth mode, we look at what Oscar is doing as they are already out in the market.

Does Size Matter?

Health Insurance is consolidating through massive deals (Anthem + Cigna, Aetna + Humana, Centene + Health Net). The question is whether size is an advantage or a disadvantage. Size is clearly an advantage against a traditional competitor – imagine the crushing sound when a Sumo wrestler lands on a normal sized person.

However, disrupters aim to change the rules of the game – for example, that small guy can beat the sumo wrestler if speed is the goal. To change the rules in a huge market like health insurance, new entrants need the magic combo of new technology plus a regulatory change. We look at Oscar in that light below.

innovate around disruptive technology to cut costs by a factor

Incumbents can copy a new mobile experience and hip ads in a heartbeat. Oscar cannot rely on those for competitive advantage. Nor can Oscar compete on price/terms unless they also change the cost fundamentals. Incumbents will simply drop their prices until Oscar are forced out of business; even deep pocketed investors will soon give up that fight.

When we looked at Education Finance we could see the need to tackle the fundamental problem of education inflation. Just financing a cost that was spiraling out of control was not enough. The inflation numbers are staggering. In the USA, during the period 1978 to 2008:

– Cost of living = 3.25x

– Medical costs = 6x

– College tuition and fees = 10x

In order to reduce that 6x inflation, Oscar needs to find a way to change the whole healthcare experience, not just the insurance part of that experience. That is certainly their ambition as per their site:

“You can use our app to talk to a doctor and get prescriptions without ever leaving home. Keep track of your health history with a timeline and earn rewards for staying active with a free Misfit step tracker.”

Oscar are selling what they can deliver easily today to fix two of the most annoying things about healthcare:

  • The need to make an appointment face to face to get advice. That is a double whammy on costs – direct costs for deductibles plus indirect via time off work and travel costs. That is the “use our app to talk to a doctor” part of the proposition.
  • The need to make an appointment face to face to get a prescription. This is cost driver they are pitching with their “get prescriptions without ever leaving home”.

Some of this is generational. Some articles write about “hipster” health insurance, which is code for younger. It makes it sound as if consumers are being enticed by something fashionable and cool (“wow, mobile interface, cool dude”), but it is much more practical than that. Older generations may have “Cadillac” health insurance schemes from a lifetime employed by a Fortune 500 or by Government. They don’t worry about deductibles. For the many who are retired, they don’t worry about the time to visit a doctor. That kind of healthcare experience is only a historical story for younger people buying health insurance today.

Customers buy health insurance but they consume healthcare. It is reasonable to review Oscar as a health insurance company because that is where consumers are being given a choice. However what really matters is how consumers consume healthcare. That is what can change costs and change the competitive landscape.

Digitization of healthcare is a 21st century megatrend.

In the near term, digitization of healthcare will enable easier access to experts and personalized data will make those experts more effective. That is near term innovation – the technology is already in the market. Longer term, the digitization of healthcare will impact how drugs are created (personalized medicine), how diagnosis is performed (telemedicine), how surgery is performed and new forms of therapy based on genomic data and quantified self data from wearables. Those are powerful innovation tail winds.

Enabling small business to compete

The American healthcare system dictates that employers provide insurance. This goes back to the history of health insurance, which this site outlines:

“Employee benefit plans proliferated in the 1940’s and 1950’s. Strong unions bargained for better benefit packages, including tax-free, employer-sponsored health insurance. Wartime (1939-1945) wage freezes imposed by the government actually accelerated the spread of group health care. Unable by law to attract workers by paying more, employers instead improved their benefit packages, adding health care.”

This gave an advantage to large companies, which had negotiating leverage with health insurance companies. Some large companies took this to a logical extreme by self-insuring, basically replacing the health insurance company.

This leaves the employees of small businesses needing a cost effective solution. This is where Oscar could score. One of the big themes we track on Daily Fintech is the use of technology to level the playing field between BigCo and SmallCo. Access to finance is a huge part of that, which is what Jessica Ellerm is covering every Wednesday. Access to cost effective Health Insurance is a key part of that level playing field.

Refactor or rewrite? 

Giant hairball is the name we give to old legacy systems where new modules get layered on top of old code that nobody dares to touch. This was the insult that Scott McNealey of Sun hurled at Microsoft.

If you own a giant hairball of legacy code, you tend to have two choices – refactor or rewrite. Given that a rewrite is so high risk, most IT departments choose to refactor (gradually fix one part at a time).

Of course, US Healthcare is not owned by a single company, so fixing it tends to become a political decision. Which brings us to political risk & opportunity.

Political risk & opportunity

US Healthcare costs are far higher than in other countries as a % of GDP.

Healthcare costs

There are three ways to drive down US Healthcare costs and all of them require political change: 

  • # 1. Universal Healthcare aka single payer aka Medicare for all which gives one entity the negotiating leverage to drive down prices. This is what many European countries have and what Bernie Sanders is proposing.
  • # 2. Enable consumers to buy health insurance nationally. Today you have to be licensed state by state. That would simply increase completion, within which digital InsurTech innovators such as Oscar could thrive. Today Oscar is only available in New York, but their model could clearly be applied nationally. Donald Trump seems to favor this approach.
  • # 3. License more people to provide healthcare services. Doctors in America have a very effective union called the American Medical Association who control the supply of doctors and thus keep prices high. Getting the balance right is tough – people need motivation for those long expensive college years and consumers need protection from incompetence and charlatans.

For a non-political and analytical view of the whole American healthcare system, it is hard to beat the Drucker Institute.

Oscar is going into a tough market with tough incumbents. It will be a tough fight, but the prize is a big one.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.