Health Insurance

Religare is one of the biggest exits so far in InsurTech and it is from India

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The biggest Insurtech exit to date just happened. The news is public. This is no scoop or insider information; that is not our game at Daily Fintech. Yet despite the story “hiding in plain sight”, it did not receive much mainstream media attention. That is our mission at Daily Fintech – to find the needle of insight that is hiding in the public domain haystack.

In this post we look at the big trends behind this news.

First, a bit of deal background explanation is needed.

A Unicorn valuation funding round makes headlines, but what matters is realized value at exit.

It is no secret that VC money is pouring into InsurTech. As any deal guy knows, getting a big headline valuation (the “PR deal optics”) is easy. We will be getting a lot of InsurTech Unicorn headlines. What follows explains how some of those PR deal optics are constructed. Looking below the PR deal optics to the reality will help see why the Religare story is significant.

As an entrepreneur, if you want that Unicorn headline you simply give away egregious preference terms. Say an entrepreneur wants to sell 20% in that round and the investor really thinks you are worth $100m (keeping to round numbers to keep it simple) and the entrepreneur is asking for a $1 billion Unicorn headline. The investor is willing to put in $20m for a 20% stake. To get to your $1 billion valuation you either need the investor to put in $200m or to accept a 2% stake. Both are showstoppers. If the entrepreneur offers 10% Preferential Equity terms, the headline can say “Hot Venture x raises $yyy at $1 billion valuation from Hot Fund z”. When you look at funding valuation data, you see a lot of deals at exactly $1 billion for this reason. Entrepreneurs need to get the amount invested from $20m to more like $100m for the headline optics. Then the headline is “Hot Venture x raises $100 million at $1 billion valuation from Hot Fund z”. Naïve journalists may extrapolate a 10% stake from that headline. With 10% Preferential Equity terms and an exit in 10 years at $300m, the actual realized value at exit for that investor (keeping it really simple and only assuming one round) is 86%. Run a simple compound interest calculator to see that. That 86% looks bad, but it gets worse if you count the more egregious terms where investors get their $100m back before calculating the compound interest at 10%. If you factor that in, or factor in multiple rounds with a whole preference stack at different dates, you can quickly see how an entrepreneur has to build an incredible amount of value for their founding stake to be worth much and why many entrepreneurs walk away with zip after a headline that makes them look vastly wealthy.

Unless the entrepreneur gets to a really big valuation or does it really quickly. Yes, that is really, really hard to do and happens very rarely.

All of this kind of deal optics fancy dancing stops at exit. Then somebody is paying hard cash and what you read is a real number. That is why we track real exit value (whether by IPO by trade sale). This is when the tide goes out and you can see who has been swimming naked.

My reason for giving that lengthy explanation is to make sense of what is not a sensational story, but which is a big deal in real terms. The Religare exit is not a Unicorn – ho, hum, click away now. Yet it is the biggest exit in InsurTech to date and that is a real story. (If anybody knows of a bigger one please tell us in comments).

If my explanation saves any entrepreneur from 10 years of “blood, sweat, toil and tears” for minimal financial benefit, I am happy.

The News

On 9 April, Religare Enterprises Ltd sold an 80% stake in Religare Health Insurance Co. Ltd (a standalone health insurance company), to a consortium of investors led by True North, a private equity firm. Religare will get about Rs1,040 crore for the deal and the health insurance company is valued at Rs1,300 crore. Religare Health Insurance is owned by Religare Enterprises (80%), Corporation bank (5%), Union Bank of India (5%) and the remaining 10% is by the employees of Religare through employee stock options.

Decrypted. Converting Indian Rupees to a well-known global currency like USD, EUR or Bitcoin is simple. But then you have to deal with Lakhs and Crores. When I negotiated my first deal in India that threw me for a loop momentarily (I had my pricing in GBP and was used to negotiating in USD and had the conversion to INR figured out but when the buyer started talking Lakhs and Crores I was blindsided for a moment). A Lakh is 100,000 and a Crore is 10,000,000. To really confuse non-Indians, a Lakh is written numerically as 1,00,000 and a Crore is written numerically as 10,00,00,000. The USD to INR conversion as I write is 64.47. So (rounding to nearest million) that makes the cash portion of the deal worth USD 161m (Rs1,040 crore) and the realized exit valuation worth USD 202m (Rs1,300). Those calculations throw algo-driven reporting for a loop. I saw this reported as a deal worth $10 billion and knowing that Indians don’t tend to pay bubble value this surprised me. So I dug in and I found that the data was incorrect as reported.

In the future, when Bitcoin is mainstream, we will convert Indian Rupees to Satoshis and Crore Rupees to Bitcoin; but that is another story!

Religare Healthcare is what we categorize as Full Stack HealthInsurTech. They offer Health Insurance policies to consumers.

News link is here.

Why mainstream business media missed the significance of this news

We are now accustomed to looking for mega funding events from China. We also look for mega HealthInsurTech deals from America. We have reported on both. These trends jump out of the data. This was a big exit, but it was from India and so it is not a story unless you are in India, or from India (as my fellow Author Arun is) or into India having done a lot of business there (as I am).

And on top of that you would have to decrypt Lakhs and Crores. In short, the story was ignored outside India.

The Three MegaTrends behind this news

  • First the Rest then the West.
  • Corporate (aka Strategic) Funding is getting more prominent.
  • Innovation capital formation is starting in the Rest

MegaTrend 1. First the Rest then the West.

This is a theme that we have been writing about for years (example post here). For most of the 20th century, technology was limited to the West. Countries in the Rest (formerly known as developing, then emerging, then rapid growth economies) were “tech deserts” until those economies started to open up (first China, then India, then Africa). Then technology adoption started to flow from the West to the Rest; the last decade has been a boom time for Western tech firms selling to the Rest.

Now the flow is reversing as technology adoption starts in the Rest and then goes to the West. For example, look at Xiaomi to see the future of mobile phones and Alibaba for the future of e-commerce or PayTM or M-Pesa for the future of mobile money.

This megatrend is not limited to Fintech, but within Fintech mobile payments and mobile e-commerce is the big disruption and that is happening first in the Rest and then will flow to the West.

Technology adoption flowing from the Rest to the West is one of the big 21st century megatrend stories.

Note that I am referring to technology adoption. Where something is invented matters a lot less than where and how it is adopted, as Steve Jobs taught us after wandering around Xerox Parc and seeing the first graphical user interface and using that insight to change how we used personal computers. Adoption, whether through network effect or any other customer acquisition technique, has replaced patents as the technology moat and competitive advantage.

Adoption drives value creation and adoption is happening faster in the Rest.

Now look at Healthcare and HealthInsurTech within this context. Where would you prefer to build value:

  • Option 1: a Red Ocean market where there is a lot of entrenched competition (such as America).
  • Option 2: a Blue Ocean market where demand is small compared to established markets but is growing very fast and where there is very little entrenched competition (such as China, India, Africa and the other Rest).

Corporate (aka Strategic) Funding is getting more prominent

This is particularly true in China, where we see massive rounds done by corporate parents. For example, Zhong An (see our post where we describe their upcoming IPO as the Netscape moment for InsurTech). For more, see our Fintech China Week coverage. We are also seeing this trend in Europe where a lot of the InsurTech ventures are being funded by Insurance or Reinsurance companies rather than traditional Financial VC. This is what we have observed as Reinsurance As A Service. The old idea that the Corporate or Strategic investor is always the dumb money at the table that signals a bubble phase, needs to be re-evaluated.

The Religare story shows this. There are no VCs benefiting from this exit.

The Religare Healthcare exit beneficiary, the company that created the value, is called Religare Enterprises Limited (REL). This is a holding company/conglomerate. The mantra in the West for decades was that the holding company/conglomerate model is dead (core competency focus was the mantra). This deal makes one re-evaluate that mantra (as do other deals in China and India). REL got $160m in cash by selling 80% and kept 20% to ride for future upside. That is value creation.

India innovation capital formation

For a long time, Venture Capital fundamentally meant Silicon Valley. Entrepreneurs everywhere else had three lousy options:

  • Move to Silicon Valley where your costs are far higher and you don’t have a network and where you don’t understand the culture that you are selling into.
  • Find the local subsidiary of a Silicon Valley VC fund. Many Silicon Valley VC funds don’t even bother globalizing, because it is too hard and there are plenty of deals at home. The ones that do have a local Fund often lead to long decision cycles that kill a deal – first you convince the local guys, then you fly to Silicon Valley to convince the global Partners.
  • Find a small local VC that has very little expertise and/or only a small fund.

What the Religare story indicates is pretty significant which is the formation of more Innovation Capital locally. REL will have $160m in cash from the deal and a successful formula to follow. One assumes they will be hungry for more. That is one part of the story. The other part of the story is about the True North private equity fund that bought Religare Healthcare. True North, formerly India Value Fund Advisors, is a local Private Equity fund that started in 2000.  You can see their Fund size growth below:

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The history, as per their site is interesting:

“True North came into existence with the power of one crucial decision. Mr. Gary Wendt, then Chairman and CEO of General Electric Capital Corporation (GECC), decided to set up a US$ 2 billion private equity fund with a focus on transforming businesses in a variety of global markets, one of which was India. Impala Partners, a US-based boutique investment and M & A advisory firm founded by former senior GECC executives, was chosen as a global partner for the venture.

The fund was focused on investments in Japan, India, Israel, Poland and Mexico, and sought local partners in each country. In India, Mr. Wendt tied up with Ambit Corporate Finance and subsequently HDFC to form GW Capital with Vishal Nevatia as CEO. Later, Mr. Wendt took up other responsibilities, and though he and Impala remained as investors, the new company developed a strong local identity, and was reborn as TRUE NORTH in 2004. With its new identity in 2016, True North will continue the company’s journey in transforming businesses.”

It will be interesting to track the value creation of Religare Healthcare after the acquisition by True North.

Note: I use the term Innovation Capital rather than Venture Capital because the term VC implies only one business model (2 and 20, LP and GP) and a lot of the action today is in areas such as Corporate funding, ICOs, Family Office Club deals and so on. All these can be called Innovation Capital, but calling them Venture Capital would be confusing.

American investment bank J.P. Morgan acted as the exclusive financial adviser to Religare Enterprises.

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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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?

Health Photo

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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.