Silicon Valley is coming for the employer sponsored health insurance business, trying to raise the bar on group health benefits and "democratize" self-funding.
Collective Health, a new startup developing a technology platform for self-funded health benefits, has raised $38 million in Series B financing led by New Enterprise Associates and the Founder's Fund. The latest round of funding values the company at $107 million, as Fortune noted.
Among employers with less than 200 workers, fewer than 20 percent are using self-insured health plans, although many could as a cost-control strategy. Large and small insurers and benefits consultants have been rushing to sell third party administrative services and stop-loss insurance to small and mid-size companies considering self-insuring. Collective Health has also gotten into that game with what its leaders pitch as a platform to "optimize employee health benefit programs" by "harnessing the power of data science and technology in ways that have simply not been possible to-date."
Collective Health's co-founders, Ali Diab and Rajaie Batniji, MD, argue that their web-based platform uniquely enables organizations to customize benefits, give employees choice, manage out-of-pocket spending and find a good stop-loss policy--all at a cost of $50 per member per month.
Diab, a computer scientist who led a mobile advertising firm acquired by Google, co-founded Collective Health with Batniji, a friend and Stanford-trained internist, after receiving abdominal surgery for a tangled intestine--and suffering some of worst pains from the billing and paperwork.
"My insurer claimed some of my surgical and hospital charges were experimental or the result of physician error, leaving me holding the bag for a shockingly large portion of the bill," Diab recounts on the Collective Health website.
Diab and Batniji then contemplated creating their own health insurance service after wondering, "Why hasn't anyone taken full advantage of software technology to streamline how companies pay for healthcare?" The modern "customer experience of interacting with your health insurer feels like entering a time warp back to 1980," they write. "Since employers pay for most private health insurance, we believe the opportunity to fix private healthcare must start with forward-looking companies and their people."
Based in San Mateo, Collective Health is pitching a self-funding portfolio similar to other insurer's self-funding and TPA services, with claims and network management, analysis and benefits customization. The difference, argue Diab and Batniji, is a platform that is more user-friendly, more insightful and just as affordable.
Although Collective Health currently has only 10 clients with an employee base numbering in the thousands, the company believes it could attract plenty of other businesses who either aren't yet self-insuring or might currently be using TPA services from a Blue Cross, Cigna or UnitedHealthcare.
The "fixed costs and logistical challenges of switching to self-insurance have kept many American employers unnecessarily locked into fully insured health plans," Collective Health argues. "By leveraging the latest in cloud-based software technology and data science, Collective Health is democratizing access to self-insurance for the majority of American companies."
The backing of New Enterprise Associates and the Founder's Fund is a bet that these West Coast tech ideas can gain traction and challenge the status quo.
"NEA lived through this transition to becoming self-insured. It was a huge hassle," Mohamad Makhzoumi, a partner at the VC firm led the latest round of funding told Fortune. "As more companies move to self insure, and having lived through the nightmare, I've been looking for a better way to do this; a tech-forward company or product that could help employers navigate the murky waters."
Along with Collective Health, Founder's Fund has invested in such vaunted new companies as Airbnb and Lyft, as well as Oscar Health Insurance--the self-styled "better kind of insurance company" selling individual and group health plans with free generic drugs, no copays or coinsurance in New York, New Jersey and potentially soon California.
And Collective Health is among a number of startups looking to capitalize on deep consumer frustration with high healthcare costs and the health plan experience. Other entrepreneurs, including some not based in Silicon Valley, are also setting their sights on the self-insured market traditionally dominated by insurers.