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Analysis

Alphabet Investment in Oscar Seeks to 'Break the Cost Curve'

By Gregory A. Freeman  
   August 28, 2018

Google's parent company is following the path of Amazon and others with a large investment in the technology-oriented insurer.

Big money players in disparate fields continue making inroads into the healthcare arena, with Alphabet, Google's parent company, sinking millions into the technology-focused insurer Oscar.  

Alphabet's move falls right in line with the game-changing investments by Walmart, Amazon, Berkshire Hathaway, and JPMorgan Chase to enter the healthcare market, and the consolidation efforts of big names in the field such as the CVS Health effort to acquire Aetna.

Like the retail giants that decided to expand into the healthcare market, and CVS Health's acquisition of a large insurer, Alphabet is the latest nontraditional healthcare company to find the market potential of healthcare companies irresistible.

Despite all the uncertainty about healthcare legislation and costs, the sheer size of the healthcare market is tempting for these big players, and companies like Oscar are courting their deep pockets, says Sean Hartzell, associate principal for ECG Management Consultants.

The entry of such influential and well-funded companies into the healthcare market has the potential to drive significant change, he says.

A good fit?

Alphabet's Google experience could be a good fit with Oscar because the insurer was built on data analytics, which continue to drive its strategy.

Wired described it this way: "Yes, technically Oscar is in the insurance business. But it's really a technology company. Its CEO, Mario Schlosser, is a Stanford-trained data scientist who has built Oscar’s core business by extracting insights from the flood of existing health care data—insurance claims and doctor directories and electronic medical records."

There is a parallel with the Amazon deal because both are looking to upend traditional modes of business in the healthcare arena by leveraging their experience in analyzing the vast amounts of data available to them, Hartzell says.

Alphabet's investment in Oscar is similar in strategy and spirit to the Amazon-Berkshire Hathaway-JPMorgan Chase health plan announced earlier.

In both deals, "you have a company with ubiquitous technology and distribution, and you have a company that has inroads into the insurance business," Hartzell says.

He continues, "Alphabet is taking a position that it is just an investor, but even that signifies to the market that this is a company that could be going places. Being an investor gives Oscar a little bit more cachet and it keeps Alphabet in the game, moving in the same direction" as Amazon, Berkshire Hathaway, and JPMorgan Chase.

Alphabet May Own 10%

It's not Alphabet's first investment in Oscar, having committed money through its venture capital fund Capital G and its health services spinoff, Verily, when Oscar was still an upstart company.

In mid-August, they announced a much larger, and more strategic, investment of roughly $375 million. The companies are not disclosing details, but Wired estimates Alphabet will own about 10% of Oscar.

Google's current market cap is $850 billion and they probably have a lot of ready cash, Hartzell notes, so a $375 million investment won't be a stretch. That sum could have a significant impact on Oscar, though.

Oscar had raised $165 million earlier this year in a round led by Founders Fund, which probably helped secure the Alphabet funding, Hartzell says. After all, the best time to raise capital is when you don't need it, he says.

"They'd raised a fairly sizable chunk of money right before Alphabet came in, and if Alphabet will own 10% of the company, that's a pretty healthy evaluation for an insurance company that only has a few markets," Hartzell says. "This gives Oscar a lot more cash than they had, a much bigger war chest for investing in that real-time technology and going after new markets."

Seeking a Cut of Healthcare

The pace of healthcare spending has been increasing rapidly, and companies are looking for ways to get in on that flow of money, Hartzell says.

Disruptive moves like Alphabet's investment in Oscar indicate that CEOs from outside the traditional healthcare arena are looking for new ways to change the profit equations in this industry, he says.

"Healthcare CEOs and CFOs are always talking about bending the cost curve, finding ways to slow the long-term growth of medical costs and benefit from those savings," Hartzell says. "These guys are coming in and saying that they can change that overall value chain and value equation.

 "They're attempting to break the cost curve, not just bend it. They're reconfiguring the value chain so that the value flows more between the provider and the patient or customer, which is similar to what you get in other industries," he says.

The goal of many of these new company configurations is to get the provider and the customer closer together, often through the use of apps and other technology, he notes.

Oscar's attraction probably lies more in Alphabet's deep pockets rather than any particular technology alignment, Hartzell says, but access to the Alphabet and Google resources could be a real bonus.

"The ability to get closer to the scientists at Alphabet and Google is certainly going to get Oscar's attention. That probably opens up some doors that may not have been available to them in the past," Hartzell says. "It will allow for some new creativity between the two organizations, but more in a collaboration than a scenario in which one company owns the other."

Gregory A. Freeman is a contributing writer for HealthLeaders.


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