A new type of insurance for health was created about a decade ago. These upstarts were armed with billions of dollars in venture capital and believed that modern technology could make healthcare more affordable, simpler, and better.
Oscar Health generated buzz with eye-catching New York subway advertisements and a cofounder called Kushner. Chamath Palihapitiya approved the Reddit-famous CloverHealth. In Bright Health’s case its founders’ connections to UnitedHealthcare (the largest, most wealthy US health insurance company) gave it some credibility.
These companies were a hot topic and they received huge valuations before going public in 2021.
They are the most prominent example of how difficult it can be to get into the insurance industry today. They are no longer considered startups and they face more setbacks. Their CEOs talk about breaking even soon but the companies have to slow down growth, when they barely have a foothold.
To put it mildly, any disruptions have been minimal.
Lawton Robert Burns, a professor of health management at the University of Pennsylvania’s Wharton School said, “I don’t think they’ve had much of an effect.”
It is possible for any startup, or competitor with established giants like UnitedHealthcare and Humana, to replace these insurers that failed to disrupt the industry. The consequences of failing to fix the complex and costly system could be severe.
Burns stated that “we have a high-cost health system that’s only going to get more expensive.”
Oscar was founded in 2012 and Bright in 2015. They set out in 2015 to sell health plans to those who purchased coverage under the Affordable Care Act.
Oscar bet that it could make a simple, local app with personalized data to help members find lower-cost healthcare and encourage them to have health screenings. Bright wanted to partner with doctors to provide them with the data they needed to better care for patients.
Clover was founded in 2014 and focuses on the Medicare Advantage private-health-plan market. Clover Assistant software was designed to reduce healthcare costs. It also eliminated traditional insurance tools such as limiting the doctors that members could see. Oscar and Bright expanded Medicare Advantage later.
The upstart insurers appeared destined to fail in some ways. The industry is highly regulated, requires large amounts of capital, and margins are often tight. Analysts and consultants in the industry say that insurers have faced problems due to operational mistakes and poor business strategies.
According to Scott Fidel, an analyst from Stephens, they failed to grasp basic tasks such as charging enough to cover costs or building cost effective networks of doctors and hospitals.
Bright, for instance, attracted members who had low premiums and didn’t pay for their medical care. It could not handle the influx of new customers.
Oscar also charged too much in its initial years. However, the company now charges higher premiums. Investments in technology, customer experience and marketing were expensive. Some experts question whether these investments were worth it since customers often choose health plans based upon price.
Jackie Kahn (Oscar’s chief communication officer) stated in an email that Oscar has increased its size in areas such as member experience to be able to lower its administrative expenses.
Kahn stated that it is impossible to expect new entrants not to create cost-efficient networks right away. They must scale to achieve those efficiencies. It takes time to scale, operate, and drive industry change. But we have proven that our business is viable, and we are confident in our ability to make a lasting impact on the industry over the next decade.
Clover’s rich benefits and large-open provider network made cost control difficult for the insurer, Whit Mayo, a senior managing Director at SVB Securities, stated.
Clover and Bright declined comment.
These problems have resulted in sharp losses. Bright reported a net loss in the first nine months of 2022 of $691 million, Oscar suffered a loss of $383 million and Clover suffered a loss of $255 million. Their stock prices have dropped more than 90% since going public.
As the dominant insurers in health insurance increase their, it becomes more difficult to break into. UnitedHealthcare is the largest health insurance company with 51.7 million members. Anthem’s parent company, Elevance Health is the No. With 47.5 million members, Elevance Health is No. 2. It just made a deal with a major Louisiana insurance company.
“The incumbency will be one of the biggest challenges to disrupting this industry. Humana, United — The big keep growing. Mayo stated that Clover is unknown to anyone.
UnitedHealthcare increased its membership by more then 1.2 million Americans in 2022. This surpasses all of the upstarts.
Oscar, Clover and Bright aren’t the only ones trying to get in on health-insurance. Other young insurers seem to be doing well financially.
Alignment Healthcare, also going public, has not lost as much money overall as other companies. Although Devoted Health is still privately held, the financial information that it has shows that its insurance plans were profitable in the first half 2022. The companies are still small, and it is unclear if they will make a difference.
It is also uncertain whether these companies offer better insurance or provide better care than their predecessors. Clover and Bright scored lower than the national average in Medicare Advantage star rating, which is one of few available measures of a plan’s quality and customer service.
Alignment and Devoted received higher quality ratings. Alignment CEO John Kao stated that even a high score for Alignment doesn’t “displace big guys”.
Alignment is working hard to achieve this goal.
Oscar, Bright, Clover, and Clover may still be able to survive and turn profits. They’re still far from changing the status quo.
Health insurance is still complex and frustrating. It can be difficult to determine what you will pay before you receive care. Patients are penalized for using outside networks. It can be difficult to find a doctor that your insurance will pay for. Delays can be caused by prior-authorization obstacles.
The prices of medical care have largely influenced the growth in healthcare costs. The Kaiser Family Foundation found that premiums for job-based insurance are 40% higher in the US than they were in 2012. Many Americans have difficulty affording their medical bills.
US consumers need more competition in insurance, but dumping money into startups with poor business models is not the solution, Craig Garthwaite of Northwestern University’s strategy department said. He said that their difficulties could discourage investors and new entrants.
“There is no good answer from society’s perspective for this.” He said it was difficult to introduce competition into these markets.
Experts agree that although the startups may not be as successful as their individual businesses, they have influenced the industry in ways that are beneficial to customers.
UnitedHealth, for example, followed Oscar’s lead and bought Rally Health. This digital-health startup encouraged people to make better decisions about their health. Bob Kocher, a partner in venture firm Venrock, who also invested in Devoted, said.
Accenture’s Kaveh Safavi, managing director, stated that established insurers were more likely to invest in startups that focus on customer experience than those that place a high value on health insurance. They redesigned their apps and improved their customer service.
“This digital-consumer-experience strategy, I would say, became ubiquitous with large health insurers,” Safavi said.