As new marketplaces change health insurance, tech startups seize opportunity

The past few weeks have been crunch time for Obama administration officials rushing to get the new health insurance marketplaces up and running for today’s deadline. But they’re not the only ones looking at Oct. 1 as a red-letter day.

The launch of the new exchanges marks a big shift in how consumers and small businesses purchase health insurance. And for tech startups across the country, that means new opportunities for all kinds of services — from those that help consumers and small business choose health plans and navigate the new landscape to those interested in totally changing what it means to be an insurer.

In New York, for example, the founders of Oscar have been counting down the hours to the launch of their new technology-driven health insurer. Launched by venture capitalist Joshua Kushner, Kevin Nazemi and Mario Schlosser, the startup will join bigger insurance companies on New York’s health insurance exchange starting Tuesday.

Co-founder Mario Schlosser said Oscar provides consumers with more transparency, data-driven guidance and user-friendly information on what they’re paying. But it also offers different kinds of healthcare experiences, from free video-enabled “televisits” with doctors to 24/7 phone calls with physicians to $0 copays for generic drugs.

Insurance exchanges level the playing field

The initial idea for the startup came after Kushner took a look at one of his medical bills and couldn’t make heads or tails of it, Schlosser said. But he emphasized that the Affordable Care Act (ACA) and its new health exchanges are “gigantic catalysts” for Oscar-style innovation.

“It levels the playing field between smaller insurers like us and the biggest health insurers,” he said. “It’s a huge window of opportunity for people like us to disrupt the broker chain.”

Not only does the new law create an overnight market of uninsured people, Schlosser said, the exchanges and new ACA provisions create a direct link between the individual and the insurance company for the first time.

Prior to the ACA, Oscar estimates that just 50,000 people in New York were individually insured. Now, however, 1.7 million in downstate New York alone will be able to shop for their health insurance. Big insurers are largely unfamiliar with how to operate in a consumer-driven marketplace. But smaller startups, like Oscar, can build on consumer tech and data and analytics chops to try to beat the big guys at their own game.

Ushering in era of consumer-driven healthcare

The marketplaces open up new opportunities for other kinds of consumer-focused health companies, too. Since 2010, online insurance broker GoHealth has given consumers a web destination for discovering and comparing health plans. But Obamacare is giving the company, as well as other online brokers, an extra leg up.

Ahead of the Oct. 1 deadline, the company announced an integration with H&R Block that will enable the tax preparer to sell health insurance online. And, after raising a whopping $50 million round of financing last summer, GoHealth reportedly hired 650 new employees to keep up with demand.

Startups ZocDoc, EveryMove and NerdWallet aren’t directly involved in the insurance business. But seeing new opportunities to build relationships with potential and current customers, over the past few weeks the companies have all launched new tools and online guides aimed at helping consumers understand the new insurance landscape. For example, ZocDoc created an online explainer to the new marketplaces and EveryMove launched an index ranking the most consumer-friendly health plans. Later this fall, electronic health records startup Practice Fusion, which launched a patient-facing website for booking appointments with doctors earlier this year, plans to roll out a resource that helps consumers understand the impact the marketplaces are having in their states.

Online marketplaces short change small businesses

The marketplaces also create opportunities for startups serving small businesses. Vivek Shah, co-founder and CEO of Y Combinator-backed SimplyInsured, said that while the exchanges will help businesses with less than 50 employees select health insurance, they won’t help small companies administer health plans. Another drawback of the marketplaces: they don’t show the full range of health plans because states establish a floor on the low end of coverage.

“Exchanges are going to offer small business some of what’s offered by current brokers … but they leave small businesses short-changed,” he said.

SimplyInsured, which only operates in California, lets small businesses find and purchase a broader range of health insurance, as well as provides administrative support on top of it. Zenefits, another recent graduate of Y Combinator, offers similar health insurance services to small businesses, although it also offers other kinds of human resources support.

What kind of innovation will exchanges encourage?

Interestingly, even though the marketplaces are indeed inspiring innovation, some analysts believe that the insurance exchanges are actually among the ACA provisions that are least supportive of disruptive innovation.

In a recent report, the Christensen Institute (the think tank backed by disruptive economics guru Clayton Christensen) analyzed the components of the ACA to determine which were the most encouraging — and discouraging — of disruptive innovation. The institute acknowledged that exchanges increase transparency for consumers, but found that they actually hinder disruptive innovation when it comes to insurance.

Ben Wanamaker, the institute’s executive director for health care, said that because the regulations set a floor on the low end of coverage and hold companies to other benefit requirements, they narrow the scope of what insurers can offer and make it more difficult for newer, smaller entrants to compete. Disruptive innovation tends to happen at the lower end of the market, he continued, and that part of the market isn’t encouraged on the exchanges.

While Oscar is taking a new approach to health insurance, Wanamaker said it sounds more like a sustaining innovation, not necessarily a disruptive innovation. And, he added, to get it off the ground, it had to raise a hefty amount of financing early on (it raised a $40 million round this summer), which is something startups not co-founded by a venture capitalist might have difficulty doing.

“Sustaining innovations that improve on what we have are needed, they’re just not disruptive – they serve a different purpose,” said Wanamaker. He also added that even though the marketplaces may not encourage disruptive innovation in core insurance products, there are still opportunities for disruption around the edges.

“There’s tremendous opportunity in the ancillary services to support employers and individuals in navigating and using the insurance products,” he said.