Like most of us, Sarah Doody dreaded interacting with her health insurance provider. So the New York-based product designer decided to take a chance in 2014 on a startup called Oscar Health, which bills itself as "revolutionizing health insurance."
That messaging appealed to Doody, who works in the tech industry, as she could easily peruse information on Oscar's mobile app and website, and call anytime to speak to the customer experience team. Her monthly premiums for a bronze plan set her back a modest $350 per month, which is only slightly above average in New York.
But about a year after Doody joined, Oscar dropped her primary provider, New York-Presbyterian Hospital, from its network, prompting her to switch her insurance yet again. She says she would still recommend Oscar to a friend, but with a caveat: "At a fundamental level of providing insurance and being able to get medical care, there's nothing super different about them yet."
Oscar Health, which was founded by venture capitalist Josh Kushner, serial entrepreneur Mario Schlosser, and former Microsoft employee Kevin Nazemi, is a rare example of a health insurance company with the valuation of a hot Internet startup. It has 125,000 members in four states, and is valued at a massive $1.75 billion (a report from Fortune last week speculates that the valuation is closer to $3 billion). By contrast, much larger rival insurer Health Net, with 6 million members, was valued at its sale at $6.8 billion.
With that eye-popping valuation in mind, I set out to uncover whether Oscar Health's insurance model is breaking the mold. And can it win in a competitive insurance market that is rapidly consolidating?
When I asked Mario Schlosser, Oscar Health's CEO, about how the company stands out from the pack, he directed me to a demo of the product. He’s got a point. The website is easy to navigate, the mobile app is slick, and it’s easy enough to get an actual human on the phone. Another standout feature: Members who log in can see a snapshot of their medical history, including the pharmaceuticals they’ve been prescribed, and the providers they’ve seen.
Schlosser seems to takes pride in the fact that the provider directory isn't as broad as some of its rivals, which his critics see as a weakness. "It’s a better experience than an insurer with a broader network," he says. "Haven't you had the experience where you see a huge provider list, but you try to call—and get a pizza shop rather than a physician practice?"
In its first three years in business, Schlosser says the company has taken some steps in preventative health by rewarding members who keep fit. Some would argue that those rewards are primarily geared to the young, healthy, and tech-savvy.
In December 2014, the company offered to send its members a free activity tracker from Misfit, which connects to Oscar's mobile app. Once set up, Oscar pays members who meet their step target each day. Oscar also offers some reimbursement on its members’ pricey gym memberships, and it offers a free telemedicine service for those who feel unwell.
(If these offerings sound unique, then I’d suggest double-checking your plan. Many of the big insurers offer "wellness discount programs," which may sound like jargon, but actually includes cash back to those who join a select exercise facility. Meanwhile, 29 states require that private insurers cover tele-health in the same way that they cover in-person services.)
Many health experts agree that where Oscar excels isn't in its plan benefit design, but in the way that it markets these offerings to its members.
"Oscar is primarily a consumer experience company," says Noah Lang, the CEO of a startup called Stride Health, which helps its users find health insurance. "They also do a much better job at marketing ancillary benefits like gym discounts, while other carriers with similar benefits have failed so hard at this."
Oscar Health entered the market in 2013, a time of great turmoil and change for the health sector. The Affordable Care Act created a marketplace, or exchange, for consumers to shop for and purchase subsidized and federally regulated insurance—and that provided new opportunities for health insurance startups. It also set in place provisions to ensure that insurers spend a higher share of their income on medical claims and quality improvement, and less on administrative expenses.
In the early days, Schlosser says the founders considered breaking into the health industry by developing software for the existing crop of insurance companies. That would have been a far easier and less resource-intensive route, but they ultimately decided against it.
"We went away from that thinking, because we realized that we'd be building on legacy systems and legacy relationships," he says. Schlosser wanted more. He had a vision to fundamentally disrupt health insurance, which he saw as corrupt and wasteful.
"Health systems are increasing their rates as high as 8% each year, regardless of whether they improved their quality," he says. "At some point, society is going to revolt." Schlosser saw an opportunity to build a more user-friendly insurance company that jointly participated in the risk with the most progressive health systems.
Oscar initially rolled out in New York, and quickly grew to 40,000 members, thanks to a compelling concept and some smart marketing. (Most New Yorkers see Oscar's quirky ads on the subway at least a few times a week.) But Schlosser did make at least one major compromise at the outset. Rather than going door-to-door to build a network of doctors and hospitals, his team rented part of a network from an established insurance company, MagnaCare, and whittled it down from there. The company replicated that model in New Jersey by renting a network from a company called QualCare.
"Frankly, with zero members, no track record, and no license, it would have been a challenge [to build a network]," Schlosser says.
Skeptics say that Oscar will face that challenge for the foreseeable future, despite its recent growth. 125,000 members may seem substantial, but it's a drop in the bucket compared to a giant like UnitedHealthcare or Anthem.
"Health insurance is a business where scale matters," says Bob Kocher, a venture capitalist at Venrock and a key shaper of the Affordable Care Act. "For smaller insurers, the cost margin can put you in the same bracket as a newspaper."
For insurance companies, it has become more challenging than ever to make money on the individual market. UnitedHealth recently announced that it would scale back its efforts to attract new customers on the exchange, given the "higher risks and more difficulties" in doing so in a way that is profitable.
Moreover, consolidation in the industry is making it even more challenging for a smaller health plan. The biggest insurers can leverage their size to get better prices from the health systems and doctors.
As Kocher explains, scale is important to health insurers for two reasons: The giants can leverage their size to negotiate better prices from hospitals and doctors, which makes up a big part of the patients' monthly premium. And the largest insurers with millions of patients can be more proactive about offsetting their costs. For instance, they can approach a doctor, who might be treating more than a handful of their sickest patients, and push for better-care coordination tools to reduce the risk of an expensive emergency room visit. It's often a different story if a doctor receives a call from one of two dozen small insurers, which likely only foot the bill for just one or two of their patients.
In 2015, Oscar lost $27.5 million. It lost an additional $11.4 million in the first quarter of 2016. A significant chunk of those losses can be chalked up to a small number of chronically ill patients, with diseases like cancer and diabetes. Oscar increased its premiums in New York in line with other health insurers on the exchange.
Oscar is taking a different approach as it continues its expansion westward. In Texas and California, where it received approval from the highly selective health exchange Covered California, the company is not leasing a network as it does in New York or New Jersey.
Instead, it is looking to partner with a couple of large and progressive-thinking health systems. The downside to this "narrower network," as Schlosser calls it, is that many customers will find that their current provider isn’t included in Oscar’s network. Schlosser is hoping that patients will shift to an in-network provider, particularly a higher-quality one, but he admits that it might be an "issue." Research has shown a high degree of patient loyalty to doctors they’ve seen in the past, even if a health insurer has rated their doctor in a lower performance tier.
Schlosser says the team has been successful at winning over large hospitals by showing off a product demo, and offering to lend its technology chops to build better tools for the hospital or provider group, like appointment scheduling and physician profiles. It will also offer to help the health system manage its costs.
Schlosser says his team deliberately approached the health systems that are looking to move into a new model of care delivery—"fee for value" rather than "fee for service." Broadly speaking, that means that the provider makes money keeping patients healthy, rather than for expensive tests and procedures. In San Antonio, Texas, Oscar is working with the Baptist Health System; in Los Angeles, it’s Providence Health & Services.
Schlosser is convinced that the old "fee-for-service" model is not sustainable for much longer. "Somehow, someway, we will drive down costs," he says. "Will it be the regulators [that step in]? Will it be the FTC that finally wakes up the antitrust violations that are under way? In no other industry do you have a guaranteed price increase each year for not doing anything differently."
The company has no immediate plans to build its own physician networks on the East Coast.
That brings us to another challenge: How is Oscar managing its seriously ill patients who incur the majority of its costs?
In 2015, about 65% of Oscar Health’s members were under 45. With its expansion to California, New Jersey, and Texas, the company has brought on a higher number of low-income and chronically ill patients.
Schlosser says the company has a "real-time" insight into these members. Oscar employs a care management team, primarily comprised of nurses, who care for the costliest members. The nurses remind these patients to take their medication and schedule a follow-up appointment. Schlosser says this team has made a "huge difference" to overall health outcomes. He also points to the telemedicine offering, which might keep some patients out of the emergency room.
While this is a positive first step, many health experts say that Oscar doesn’t yet come close to the care-management offerings of some of the large insurers. "The reason that most insurance companies are successful is scale, and the things they’re doing to manage chronic patients," says Stephanie Tilenius, who runs a startup called Vida Health, which is working with large insurers to offer health-coaching programs to patients with chronic conditions.
Tilenius is seeing some positive signs from Oscar's innovation, but it’s still a far cry from the "billions of dollars" that many of the large insurers spend each year to manage their patients who are the most ill. "Managing chronic conditions goes beyond giving people a Misfit or telemedicine access. Going forward, insurers will be successful by managing chronic disease patients well."