Startup insurer hopes high-tech, service will trump incumbents

An upstart insurance company offering health plans on New York's new exchange is promising potential customers they can consult a doctor about medical concerns any time of day or night. If their toddler wakes up after midnight with an earache, a doctor will be available to diagnose the problem. If an elderly relative feels chest pains on New Year's Eve, a doctor will be accessible.

But there's a catch: The consultation with a doctor will be a “televisit,” conducted through video chat. The hope at Oscar Inc., a venture capital-funded insurer start-up based in Manhattan, is that convenient access to medical advice will drive down the cost of care by heading off unnecessary visits to the emergency room that trigger significant medical bills.

“If you put more financial responsibility in the hands of the consumer, you also need to give them the tools to make smart decisions,” said Mario Schlosser, a co-founder of Oscar, which is selling health plans in nine counties in downstate New York. “We just never saw that happening.”

The Patient Protection and Affordable Care Act provided an unprecedented opportunity for new companies with new ideas to enter the insurance marketplace. The creation of exchanges in all 50 states and the District of Columbia—and the potential availability of tens of millions of dollars in federal subsidies for the nearly 50 million individuals who currently lack insurance to purchase plans—is enticing dozens of new insurers to compete for customers. The federal healthcare reform law also establishes specific guidelines in terms of benefits that will bring coherence to the market.

Among these new entrants, Oscar is being closely watched by industry officials as a potentially dynamic player in what's traditionally been a hidebound industry. That's in part because of the fledgling company's emphasis on new technology to provide innovative services and drive down costs. Oscar also is among the most aggressive startups in targeting younger customers whose willingness to purchase coverage will be crucial to the viability of the federal healthcare reform law.

However, there remain significant barriers to success for Oscar and other upstart insurance companies. They'll be competing against established carriers that often bring decades of actuarial experience and a high level of consumer loyalty and brand awareness.

The new entrants also face the tricky task of pricing their products at levels that are competitive but still provide sufficient financial protections in a marketplace that is shifting dramatically. And thinly capitalized startup insurers are the most financially vulnerable to the chaotic rollout of the state and federal exchanges, which has significantly slowed the pace of enrollments compared with what was anticipated in the first year.

To hit the ground running, Oscar had to solve the difficult problem of building a provider network from scratch. It solved that dilemma by leasing a network from MagnaCare, a company that manages plans for self-insured entities in New York and New Jersey. The network has roughly 40,000 providers and 80 hospitals, including acute-care facilities such as Memorial Sloan-Kettering Cancer Center and New York-Presbyterian Hospital, according to the company.

Oscar's founders—Josh Kushner, Kevin Nazemi and Schlosser—bring formidable technology backgrounds. Kushner is the founder of the tech investment firm Thrive Capital, which is among the firms that put up $55 million in venture capital financing for Oscar. Nazemi is a former Microsoft Corp. executive. Schlosser helped start the South American social gaming company Vostu.

Part of the founders' impetus for starting the company came from their own experiences in the healthcare marketplace. Kushner was bewildered when he sifted through the options for providing coverage for Thrive Capital's employees. Schlosser grew frustrated while handling the finances of the birth of his two young children. Even basic information—like how much an ultrasound procedure cost—was nearly impossible to find.

“One thing that dawned on us was the insurance company, theoretically, could be in a great spot to answer those questions,” Schlosser said during an interview at Oscar's offices. “But it almost never does.”

Prior to the launch of the exchanges, shopping for individual insurance plans was difficult, according to Peter Newell, director of United Hospital Fund's Health Insurance Project, which analyzes the insurance industry in New York state. That's in large part because the marketplace was oriented toward businesses seeking to provide coverage for their employees. “The individual market was sort of in disarray,” Newell said. “There was no easy way for consumers to shop and compare.”

The exchanges also provided an opening for innovative approaches to delivering care—such as Oscar's televisit program. “Many of the large insurance companies are now having to think about going after a different customer,” said Ceci Connolly, managing director of PwC's Health Research Institute. “It's the old story of sometimes incumbents may not be as nimble.”

Oscar hopes to be among the first companies to take advantage of that shakeup in the marketplace.

“For the first time you can conceivably say I can compete with some of the big carriers,” Schlosser said. “Because everybody starts with zero relationships in this new marketplace.”

While Oscar so far refuses to release enrollment figures, it's operating on one of the nation's most vibrant playing fields. Business on the New York exchange has been among the most brisk in the country. Nearly 200,000 individuals had chosen coverage as of Dec. 22.

But New York also is among the most competitive markets in the country. At least seven companies are selling products through New York State of Health in each of the nine counties where Oscar participates. That competition includes a couple of other startups.

Northshore-LIJ, a major provider in the New York metropolitan area, entered the insurance business for the first time last year. Health Republic Insurance of New York—one of the nation's 23 new not-for-profit plans in the Consumer Operated and Oriented Plans Program (CO-OP)—has also gotten government loans to begin operating in N.Y.

Nationwide, there are about 80 new competitors in the individual and small-group markets, according to a report by McKinsey & Co. But roughly three-quarters of these new entrants fall into two categories: CO-OPs and companies that previously had only Medicaid enrollees. In terms of the number of plans sold through the exchanges, CO-OPs and Medicaid providers are offering 85% of the products available from new entrants.

The startups face well-financed, entrenched incumbents in most markets, and there is some preliminary evidence that they are struggling to gain traction. An analysis of October enrollments in the California exchange found that 96% of individuals selected plans from four carriers that already sold products in the individual and small-group markets.

“The established plans have important brands,” Newell pointed out. “If you say Blue Cross, people know what that means.”

Connolly points to another advantage that legacy carriers have: experience setting actuarially sound premiums. “They know how to package risk and sell insurance,” she said.

Oscar is trying to overcome those hurdles with creative marketing efforts. The company is running ads on sites such as Pandora, the Internet radio station, and Facebook. Its irreverent videos, which include one with a grizzly bear that escapes from the zoo, have attracted about 200,000 views on YouTube.

But there is also an old-fashioned, shoe-leather element to Oscar's marketing efforts. Company staffers are attending outreach events at churches in the Bronx, meeting with immigrant taxicab and limousine drivers and attending gatherings of students at General Assembly, a technology-focused educational institution.

Oscar's key staffing hires show it is clearly focused on technology and social media to give it a competitive edge. In addition to the three founders, they have brought on board Fredrik Nylander, a former executive at Tumblr, to serve as chief technology officer, and Naveen Selvadurai, a co-founder of Foursquare, to lead the company's mobile operations.

But what those individuals lack is any experience in the healthcare or insurance industries. Starting an insurance company requires setting premiums that will allow the firm to compete in the marketplace without taking on excessive financial risk and assembling a viable network of care providers. Those are skills that no amount of social-media savvy can provide.

Oscar has sought to address that with some other key hires. Dave Henderson, who has more than two decades of experience working for a variety of insurance companies, including Cigna Corp. and EmblemHealth, is Oscar's president of insurance. Steven Kessler came over from EmblemHealth to serve as chief financial officer. Oscar's board includes Charlie Baker, former CEO of Harvard Pilgrim Health Care, Wellesley, Mass.

Henderson said he was frustrated by the inability of large, legacy insurers to create innovative products and adjust quickly to the marketplace. “You pull out a string at one point and it has a massive effect across everything in the corporation,” Henderson said. “There's way too much risk in pulling a little string.”

Henderson was attracted by the opportunity to be involved with a startup that wouldn't suffer from that institutional inertia. “This is probably the biggest opportunity in healthcare in 30 years,” he said.

In addition to offering video chats with doctors at any time of the day or night, Oscar is providing some other unique benefits. Customers will have access to free generic drugs and a complete medical history—doctor's visits, X-ray results, prescriptions—that they can look up online.

Benefit packages are designed to be similar to cellphone plans. For instance, every family member enrolled in a silver plan is entitled to three physician visits a year without incurring additional cost.

Follow Paul Demko on Twitter: @MHPDemko