The Pros and Cons of Insurtech Startup Expansion

One insurtech startup CEO says that single-point startups are "contributing to fragmentation. The key is to solve problems in the marketplace for customers and carriers alike."

To borrow from a 2021 Freakonomics podcast, the U.S. healthcare system is a "hot mess."

If you prefer industry terms, healthcare is generally seen as fragmented, failing to deliver appropriate, accessible, quality care at a reasonable cost in an equal way for all people. This is despite the fact that the healthcare sector represents the largest sector of U.S. GDP at 17%, or $3.5 trillion.

It’s not like healthcare isn’t trying to transform. The Affordable Care Act, in addition to expanding coverage for millions, has created a "gazillion-dollar startup machine" as a continuing wave of entrepreneurs seek to help solve these challenges. But have the growing number of startups become indispensable or are they inadvertently adding to the problem?

To help answer these questions, let’s begin with how insurtech startups have been working to innovate in three key areas:

• Plan comparison. Technologies to help shoppers compare and choose exchange plans include those from startup Stride Health.
   
• Online enrollment technology. Exchange platforms and the adjacent technologies that support them have grown.
   
• New health insurers. First-time carriers like Oscar compete and sometimes partner with large payers. 

Early entrants like Oscar and Stride were just the beginning. In a 2016 Inc. article, Bob Kocher—a physician, venture capitalist, and leading healthcare policy advisor during the Obama Administration—puts it this way: "Anytime you take a sector and apply a whole bunch of regulatory changes and economic incentives to it, it creates enormous opportunities for new entrants to come and take advantage."

Startup growth beyond the exchanges

This has come to fruition. PitchBook reports that as of June 2021, there were nearly 130 startups operating in the health tech startup space with a focus on health plan operations support (e.g., claims, billing, marketing) in addition to the coverage, comparison, and enrollment spaces. In the coverage arena and in addition to Oscar, this includes names like Bright HealthCare and Clover Health. Supporting operations are wefox, Cityblock Health, and League while GoHealth, eHealth, and Medbanks are among those contributing to marketplace and benefit platform innovation.

With the collective name "insurtech," these are certainly not the only startup areas. Technology is embedded in nearly every aspect of healthcare and is generating massive growth and investment for startups and corporations alike. Deloitte Insights reports that in 2020, health innovators received some $14 billion for solutions focused on well-being and care delivery, data and platforms, and care enablement.

Medicare Advantage (MA)–focused startups are increasingly joining the mix and for good reason: it’s a booming Boomer market. McKinsey & Co., citing CMS data, reports that MA "is the fastest-growing line of business for many health plans, with enrollment growth of around 8% per year." Growth is expected to be 11% annually through 2023 when a projected 34 million will be enrolled.

How to improve cost, quality, and access is just as much an issue for Medicare Advantage as healthcare’s other markets. Dave Francis, CEO of up-and-coming insurtech startup Healthpilot, notes: "There are a lot of single-point startup solutions out there that are contributing to fragmentation. The key is to solve problems in the marketplace for customers and carriers alike."

Potential downsides

Francis highlights a critical point: that there is a risk that a proliferation of startup solutions will increase silos and make healthcare even more fragmented as costs continue to grow. Consider two propositions: 

• Technology is helping to deliver more affordable, higher-quality, accessible healthcare, and the costs of innovation, where high, justify the means. 
   
• Technological innovation has done little to truly improve healthcare, and the costs to develop, implement, and maintain solutions—particularly novel ones—far outweigh the advantages.

Neither statement is wholly true or false. A June 2020 Health Affairs blog that asks why innovation isn’t playing a stronger role in healthcare cost reduction presents three conclusions:

1. Patchwork solutions perpetuate root problems.
    
2. Innovation may support current markets more than future [ones], which grows revenue rather than reducing costs.
    
3. The only truly cost-effective innovations are those that focus on process improvement and target "high productivity."

And what of the risks associated with venture capital and private equity’s (PE) growing role in health tech startups. In his recent article for HealthLeaders, Jack O’Brien asks: "When private equity firms invest in healthcare who benefits?" One of the article’s takeaways is that "[t]he alignment between healthcare's mission and economics is key. PE firms must find a way to build economic models that do not simply lead to near-term profits and cause damage to the healthcare ecosystem."

That ecosystem is increasingly driven on value, which is central not only to healthcare’s long-term financial sustainability but the startup ecosystem that strives to create useful products that customers want and will pay for. This dual-value focus helps ensure that insurtech and other entrepreneurial healthcare solutions are created efficiently—that human ingenuity is not wasted, and that the consumer continues to gain traction as the focal point of all industry innovation.