As of last week, the heart of Obamacare is upon us with the opening of the health insurance exchanges (HIXs). And while some think this represents the heart of darkness, it is hard to imagine that anything will stop January 1, 2014 from coming and, with it, a new legal requirement for all Americans to have health insurance. Ushering in this new world order, the HIXs are essentially a “Match.com” to put people together with insurance products, representing a way that, for the first time, Americans will directly purchase healthcare without the prospect of being denied coverage or having their employers buy on their behalf.
In fact, the new HIXs create a direct relationship between consumers and health insurers in a way that has never existed before, and with that comes the need to fundamentally disrupt traditional methods of delivering health insurance products. Not since the advent of employer-paid health insurance after World War II or the start of the Medicare program in 1966 has there been such a broad-scale opportunity for health system transformation. There are few markets that are mandated by law to include virtually every single American man, woman and child, making the opportunity particularly juicy to investors. For those entrepreneurs who figure out how to transfer the secret sauce from cheeseburgers that impair health to insurance-related products and services that improve it, the next few years offer an opportunity to turn market confusion into gold.
Among the biggest opportunities are investments in technologies and services that power the new healthcare exchanges. Venture-backed companies, such as GetInsured.com, have emerged to provide the various state-sponsored exchanges with the back-end technology that enable comparison-shopping, financial transactions and enrollment support essential to operating the HIX marketplaces.
But while state and federal healthcare insurance exchanges are the main topic of conversation this week, much of the real action has and will continue to take place in private exchanges serving the large and small employer market, particularly as employers do the math and figure out it may be in their financial best interest to end their role as benefit plan intermediaries.
Private HIXs: The Big Innovation Opportunity
There are important differences between public and private exchanges that make the investment opportunity particularly good on the private side. Most importantly, private exchanges can more broadly customize and personalize the products offered, as well as the consumer experience itself. And this is key, because for the very first time, health insurance companies are being forced to sell directly to the consumer marketplace when they have previously sold almost exclusively to businesses. This fundamental change in orientation opens up an increasing demand for innovation to help health insurers shift their gaze from the group to the individual.
The first great investment opportunity afforded by the changing healthcare marketplace has been in the private HIXs themselves. One of the first healthcare exchanges to receive venture funding was Extend Health in 2007, well before anyone had ever heard of the Affordable Care Act. Psilos Group, the investment firm where I work, was the lead investor in Extend Health, which is currently serving hundreds of thousands corporate retirees at companies like General Motors, GE, IBM, and FedEx. When retirees purchase plans in a free market where local carriers compete, such as in the Extend Health model, they typically reduce their out-of-pocket expenditures while the sponsor company saves money through lower individual insurance premiums on an ongoing basis. Extend has saved its customers literally billions of dollars, much of which goes straight to their bottom line.
When Psilos invested in Extend Health, the company was one of the only private exchanges in the country. Last year, we realized more than a 10x return when Towers Watson acquired Extend Health for $435 million. Aon Hewitt, another large health benefits administration company, acquired Senior Educators, a competing venture-backed private exchange, delivering a 3x-5x return to the company’s investors. Towers’ and Aon’s new business units are prime examples of how private healthcare insurance exchanges will radically reshape the way Americans shop for healthcare insurance. We have seen a large wave of private HIX companies and related technology-enablers follow their footsteps through venture capital’s doors.
As the HIXs expand we will also see growing demand for new and creative insurance products, such as value-based health plans that integrate wellness and prevention, to help consumers and payers realize the potential for increased health and decreased healthcare costs. Those are two of three goals, alongside universal coverage, that started this whole Obamacare drama in the first place. SeeChange Health, one such value-based health plan in the Psilos Group portfolio, has demonstrated the ability to deliver on this promise.
Educating the Consumer
Unfortunately, the HIXs are far more mysterious to consumers than should be the case. Despite scores of media stories and government attempts at market education, a September 2013 USA Today/Pew Research survey found that only 25% of Americans say they understand the law’s impact on their families. As a result, the HIXs also need new products and services that help educate and engage consumers of all types, whether they are from underserved populations or being dropped from their Blue Chip employer’s Cadillac health plan. In a post-reform environment, there will be an even greater need for educational tools and “plain-English” translation of medical and insurance information to help consumers make good choices and manage their new-found clinical and financial accountability, as well as customer service capabilities when they fall short of the mark. Each of these areas is ripe for innovation and investment.
Filling the Toolbox
As HIXs become an increasingly common way for people to buy insurance, they will require a whole new array of capabilities to respond to consumer demands. Consumer decision-support and personalization tools are necessary to help millions of new customers select the best plan and take best advantage of its features. The HIXs need everything from call centers to enrollment, shopping and financial software–to serve tens of millions of people efficiently.
There is also an increasing need for financial services products that help people pay their insurance premiums, especially those who do not have credit cards or bank accounts or who live paycheck to paycheck. Some may not get adequate subsidies or have consistent-enough regular income to pay the new required monthly premiums exactly on schedule and those people will need special credit facilities. For those enrolled in high deductible health plans, which now serve more than 1/3 of the U.S. insured population according to the Kaiser Family Foundation, there will be further demand for financial products to manage the different buckets of money that come into play as healthcare services are utilized.
Let’s Not Forget the Care Itself
A companion investment opportunity is consumer-facing engagement technologies and services that help people make better self-triage decisions about where and when to get care in oder to maximize the value of their chosen health plan. For instance, a consumer might save money and time by using a nursing hotline for self-triage in non-critical situation or telemedicine services when the only locally available alternatives are high cost and hard to access. New products that encourage compliance with medication regimens or allow people to be treated at home instead of in the hospital are also gaining currency and investment interest from the venture capital community.
Turning Chaos Into Gold
While much of the U.S. populace sees chaos as they watch Obamacare unfold, the investment community sees opportunity to prosper. Times of massive system transformation, such as we are in today, pave the way for new market entrants and disruptive technologies a la Clayton Christensen’s stories about other industries that have endured dramatic change. The HIX and associated products and services that are catalyzed by their existence may just be the NetFlix to the old insurance model’s Blockbuster. In a world where such disruptive innovation might also bring about a healthier populace, it is a fine time to be an investor who can do well by doing good.