Startup health insurers spent 2022 scaling back their businesses as investors are no longer willing to contribute the billions of dollars necessary for subsidizing them. Insurtechs Oscar Health, Clover Health and Bright Health Group’s failure to thrive at a time when most health insurers are making more money than ever has left some wondering what their future holds.
While Oscar Health, Clover Health and Bright Health all have different core businesses, their origins are largely the same. Founders who generally lacked healthcare experience started health insurance companies around the time the Affordable Care Act's exchanges went live in 2014, promising to disrupt coverage available in the new marketplaces and to capitalize on the growing Medicare Advantage program.
The companies pitched using technology to modernize a big, unloved industry dominated by legacy players. Of the $4.3 trillion in the U.S. spent on healthcare in 2021, approximately two-thirds flowed through health insurers, according to the most recent federal data. “Now is a unique moment to create a company that is relentlessly focused on serving members. We had to disrupt one of the largest industries in our country,” Oscar Health co-founder Josh Kushner said during its investor roadshow in February 2021.
Oscar Health, Clover Health and Bright Health Group declined to comment for this story.
Despite attracting billions in investments, these healthcare startups also attracted skepticism. “They're not forcing anyone to innovate because there's nothing to innovate on,” said Ari Gottlieb, an independent healthcare consultant at A2 Strategy. “Their legacy will not be that they changed how UnitedHealthcare, Elevance, Humana think about the world. That's ridiculous.”
Yet big names such as Google Ventures, Tiger Global Management, the Blackstone Group poured billions into growing these young companies. The infusion of investor capital came with pressure to grow quickly. The insurers assumed a growth-at-all-costs mentality, announcing plans to significantly expand their offerings and geographic reaches.
The insurtechs also priced their policies to capture market share and enrolled a lot of customers, which shouldn't be overlooked, said Kaenan Hertz, managing partner at Insurtech Advisors, a consultancy. "People spoke with their feet by joining these plans,” Hertz said. “Whether it was because they underpriced it or because they actually marketed it in a more modern, impactful way, I think those were the reasons that they were able to attract millions of policyholders.”
In 2021, the hype came to a head. Oscar Health, Clover Health and Bright Health entered the public markets as the COVID-19 pandemic disrupted how care was delivered. Investors interest in digital health tools was as high as it had ever been. The startups achieved huge valuations, none larger than Bright Health. The company raised $924 million through its June 2021 initial public offering, bringing its market cap to $12 billion.
“We feel really good about the opportunities in 2022 and beyond,” CEO Mike Mikan said during the company’s first earnings call as a public company that month.
Critics at the time said the high valuations Bright Health and its rivals achieved were the product of investors unfamiliar with the health insurance business.
Some startups banked on amateur investors to support their growing operations. Clover Health, for example, capitalized on social media investor Chamath Palihapitiya’s involvement in the business by inviting his fans on Reddit to ask questions during an earnings calls and hosting meetups. “Who wins if we succeed? The impact is not just incredibly positive, but it’s really wide,” outgoing CEO Vivek Garipalli said during an “Ask Me Anything” session on Reddit in August 2021. Garipalli will become the executive chair effective Sunday.
Now, these companies are ending 2022 in worse financial condition than they began.
Oscar Health, Clover Health and Bright Health’s downfall has dragged down valuations across the insurtech industry, said Alignment Healthcare CEO John Kao. Alignment Healthcare is an insurtech that focuses on the Medicare Advantage market and, like the other young carriers, went public with a high valuation in 2021 that has since fallen.
Challenging macroeconomic conditions and other insurtechs’ diving stock prices have made investors cautious about the sector, Kao said. But because his company has maintained more of its value than the other startups have, it should not be grouped in the same category, Kao said. Legacy Medicare Advantage insurers such as UnitedHealth Group and Humana are its peers, Kao said.
“A lot of investors are finding big companies with slower growth but very reliable earnings, like United and Humana,” Kao said. “I contrast that with companies like ours, which have good solid growth—two times that of the sector and good margins—and are still small but growing. Once we kind of get to that next inflection point, I think the stock will begin to reflect the fundamentals in the company.”
Oscar Health, Clover Health and Bright Health’s decline did not stop entrepreneurs from launching health insurance startups this year. And investors continued injecting capital into young insurers, although not in the hundreds of millions of dollars range that the insurtechs once enjoyed.
“One of the risks of being in the first generation of pioneers is that the main thing you might produce is a blueprint for later companies to avoid,” said Erik Gordon, a professor at the University of Michigan Ross School of Business.