This article first appeared on Fortune.org. It is co-authored with Bryan Roberts.
An interesting trend is emerging in the health care world: Startups are starting to target insurers, or payers, as their first choice of partners. This was unthinkable eight years ago, when a wave of startups formed after the passage of the Affordable Care Act (ACA). But today, startups providing end-to-end health services to insurers are becoming an essential component of our care delivery system.
These startups were ambitious when they emerged, planning to use apps and other IT to help patients manage chronic diseases, improve diet and fitness, and save on health care costs. But they had no reliable way to reach consumers.
Payers should have been a natural choice given their massive and guaranteed customer base, but historically, they were slow to make decisions, risk-averse, and demanding of evidence that supportive services provided value. As a result, a generation of these health care startups instead focused on offering their services to large employers.
At the time, innovators didn’t expect that large employers would accept the risks of working with a startup. But with health care costs growing faster than wages and a perception that the ACA was unlikely to fix this, employers felt a need to take action. When numerous large companies did decide to become early adopters of these new technologies, health point solution companies experienced rapid growth, promising employers healthier workers and cost savings. This has led to a veritable Turkish bazaar of supplemental health benefits, with employees being offered a dozen or more apps in addition to, and accessed separately from, their health plans.
But in many cases, employees have been unaware, uncertain, and confused about how and when to access these services, how they relate to their traditional health care benefits, and how much they cost. Complicating the problem, employers have refused to make usage of these offerings a requirement in order to drive adoption—a practice they have used in many other dimensions of the employer-employee relationship, such as procurement, travel, and sales account management. As a result, most health care startups working with employers have struggled to attain the usage necessary to justify their prices.
By the middle of the decade, HR departments had tired of having so many individual, unintegrated product features that they decided to seek a unified solution, whether through a health plan or a separate navigation platform company, which helps users understand and use their health care benefits. This shift in thinking has driven innovators to reconsider their choice of direct employer sales as their primary commercialization channel.
That’s where insurers have come in. Recent payer interest in startups, which started around the time employers began losing interest, reflects insurers’ existential need to differentiate in a stagnant commercial market and compete with Medicare Advantage and Medicaid. These pressures are intensified by Amazon, Berkshire Hathaway, and JPMorgan Chase’s project to create an employer alternative to traditional payers, the risk of navigation companies taking over claims processing capabilities, and the success of new insurer entrants like Bright, Clover, Collective, Devoted, and Oscar.
In addition, the shift is driven by inveterately poor customer satisfaction—payers duke it out with cable companies and airlines. Conversely, virtually every startup manages to delight its early users. Payers also have the lowest profit margins in health care, which makes them voracious for ways to lower costs.
Startups are excited about payers as partners because of insurers’ willingness to insist upon usage of their products and services. Payers are highly motivated if they believe a product or service can deliver on satisfaction, margin, growth, or differentiation. These benefits only accrue if the products and services are used. Fortunately for payers, they can control demand, using reductions in cost-sharing and copays as incentives for patients to use a product or service.
We are beginning to see this happen. Startups like Iora and Livongo have pivoted from employers to payers and are taking off, both completing large financing rounds in 2018. Telemedicine is booming, driven primarily by payers coming to the realization that it saves money. And an entire category of promising payer partner-oriented startups is emerging, like Aledade, Aspire, Cricket, Landmark, Ooda, and Virta.
Startups should prioritize insurers focusing on individuals, small businesses, and government-insured people. Payers assume more cost risks with these segments than insurers do with larger employers. These groups also bring more profits to insurers than do larger companies.
Since payers generally have little care delivery acumen, we favor startups like Virta and Landmark, which deliver end-to-end services. Virta has developed an approach for treating patients with type 2 diabetes that generates rapid medication cost savings, and Landmark’s approach for treating patients at high risk of medical incidents in their homes saves money by averting ER visits. Because payers cover many more type 2 diabetics and high-risk patients than any single employer does, insurers are much more efficient partners than employers are in these categories.
Insurers are willing to pilot less-proven ideas, help startups define success criteria, share data to help inform product development, and use their balance sheets to inject cash to support early-stage startups. So, while there will continue to be a handful of large employers who are early adopters of new products and services, we think payers will soon become a partner of choice for many health care startups.