Oscar – New Face of Healthcare Insurance?

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Almost a year back, The Economist covered an article on Oscar, a health insurance start-up which recently secured $145 M in venture funding. Below is the snippet of how the article started:

MOST Americans view health insurers only slightly more favourably than they do thieves. But a new insurance company, Oscar, wants to be an ally. “We didn’t start this company because we love health insurance,” explains an advertisement on the New York subway. “Quite the opposite, in fact.”

It’s no secret that healthcare insurance has been an extremely complicated, opaque and not a very consumer savvy business. A quick look at Oscar’s website changes that perception, even if it is for a short while.Browsing the website almost feels as if you are not shopping for insurance but for an uber-cool hi-tech gadget. Free televisits, free generic drugs, rewarding healthy behavior are some of the other unique ways the company is differentiating itself in the market.

While things do seem attractive, Oscar has its share of hiccups. In a more recent article by Fortune, the company’s founder opines on the harder aspects of disrupting a highly regulated and complex industry:

Oscar’s growth has not been without its growing pains, a term that startups use to describe the messes they make while disrupting. Over the summer, an Oscar user complained to the press about pricey bills for care that was supposed to be covered. That sort of thing happens often with regular insurance companies, but Oscar’s entire proposition is that it offers a no-surprise experience. In its colourful subway ads, the company promises to deliver “Health insurance that won’t make your head explode.” (The twee punch line: “And if it does, you’re covered.”) Oops.

Schlosser admits Oscar failed to properly communicate how deductibles and healthcare plans work to its members. “The healthcare system is astoundingly complex,” he says. Oscar customers can avoid unexpected payments by keeping in close contact with the company while receiving care. “There are uncontrollable traps in the healthcare system,” he says. “The complexity of this system is astounding and the immediate thing we can do to make sure none of this happens is have you come through us.”

Disrupting ain’t easy—especially disrupting something as highly regulated, complex, and sensitive as the safety net for people’s health. After 18 months in business, Schlosser says he’s less surprised by the complexity of insurance policies than he is of the unethical pricing practices from conventional health care providers. In any other industry, the billing tricks used by care providers would be “obviously fraud,” he says. Price inflation worked when health care costs were covered by employers with little visibility into the costs; now that more individuals are buying their own healthcare through the Affordable Care Act, Schlosser says there is “a total disregard that the member has cost-sharing there.” He adds: “That audacity is totally shocking and mind-blowing.”

In an industry that has long focused only on maximizing revenues and profitability, it’s great to note that the new player has the end customers as their top priority.Currently valued at $1.5 Billion, the less than two year old start-up has a customer base of 40,000. Compared to insurance giants such as UnitedHealthcare, BlueCross BlueShield, Aetna that looks like a minuscule amount. But it would be definitely worth following how Oscar scales and maintains customer-centricity, the aspect that is sorely missing in the incumbents.

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Why Disruption is Leading to Collaboration

What is common in between these pairs of companies?

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Apart from being stellar companies in their respective fields, the above are pairs of disruptor-incumbent in the healthcare space. Apple launched its HealthKit and partnered with EMR giant Epic to revolutionize patient engagement. Theranos teamed up with Walgreens to bring its innovative lab diagnostics services to the masses. 23andMe announced collaboration with Pfizer to conduct genetic studies through its research platform. To me these partnerships highlight one interesting trend – disruption is leading to collaboration.

Businesses are often perceived as ‘dog eat dog’ establishments with little scope of interconnectedness. On the face of it collaboration seems to be counterintuitive. After all why would high potential disruptive company want to pool its intellectual capital with an incumbent? And from an incumbent’s perspective, why would it pool its resources with a disruptor?

Firstly, because they both share a common vision. Successful companies are driven by a vision and tend to work with those that share that vision with them. For example, Apple envisions HealthKit’s user generated data as a major game changer for patient-engagement. But it also realizes that to get a holistic view of a patient’s health, EMR data would be necessary. That’s where Epic comes into the picture which understands that the traditional EMR silo wouldn’t lead to patient-centred care – the new paradigm of healthcare.

Secondly, collaboration allows to share expertise. With its powerful genomic data 23andMe can make personalized medicine a reality. Since the company lacks industry knowledge in the area of drug research and development it gave Pfizer access to its repository. Pfizer has more than a century of expertise in drug development can tap this new information to study the associations between disease and genes.  This new partnership could lead to identify new targets to treat disease and to design clinical trials. It’s certainly a win-win for both the companies.

Finally, it allows them to leverage an established network. Theranos teamed up with Walgreens to deliver lab tests rather than opening its own retail clinics. Because it realized the importance of access to the right network at the right time. In an industry where having the first mover advantage can mean a difference between success and failure, Theranos tapped Walgreen’s well established retail networks to reach its targets.

It is an exciting time to be a player in the healthcare field today, both as a disruptor and as an incumbent. And in these exciting times the business model that is sustainable is the one that hinges on the spirit of collaboration.

Thoughts?

Theranos – A Case of Disruptive Innovation in Healthcare

“My own life’s work in building Theranos is to redefine the paradigm of diagnosis away from one in which people have to present with a symptom in order to get access to information about their bodies to one in which every person, no matter how much money they have or where they live, has access to actionable health information at the time it matters.”

Elizabeth Holmes, CEO, Theranos

Disruptive innovation by definition is an innovation that helps create a new market and value network, eventually disrupts an existing market and value network, displacing an earlier technology. Generally these innovations are cheaper, faster and more convenient compared to incumbents. Medical Diagnostics is an area where a lot of such opportunities exist and one company (valued at around $9 Billion) that has made big news in 2014 in this arena is Theranos.

According to Clayton Christensen, three things characterize disruptive innovations – simplifying technology, business model innovation, and a disruptive value network. Let’s examine how this maps to Theranos’ offering:

Simplifying Technology

Until now blood was drawn out of veins, stored in vials and transported to labs for testing.  Theranos has completely transformed the process with its patented technology. The technology utilizes microfluidic chips to conduct minimally-invasive tests with a drop of blood to deliver results within a few hours. Moreover, by automating most of the processes the company claims their results are more accurate and specific than traditional tests.

Business Model Innovation

By being able to provide personalized lab test data anytime, anywhere at a fraction of cost Theranos enables patients to be more engaged and participative in their own health. While higher prices, drawing blood out of veins dissuaded patients from getting tests done, Theranos’ innovative business model allows them to overcome these pitfalls.

Comparison of Theranos with Traditional Lab Tests

  Traditional Lab Tests Theranos
Average Costs $100 <$50
Time Days – Weeks Few hours
Quantity of Blood Required 3 oz. Single Drop
 

Value Network

Traditional blood-tests require patients to visit labs. They are essentially centralized systems. To address the problem of accessibility Theranos has adopted a retail framework to decentralize blood-testing process. It has partnered with Walgreens and a few hospital groups to administer its tests. Further, the company aims at building a pathologist-centred model and is therefore focusing on establishing relationships with pathologist groups.

In most aspects, things look very promising for the healthcare start-up. But there are a few caveats. In his article A Disruptive Solution for Healthcare, Christensen points out that disruptive innovation rarely happens in a piecemeal fashion. The new value network needs to be merged with the existing reimbursement, regulatory, insurance and provider systems. It requires disruption and remodelling from these players in the market as well. From the standpoint of Theranos, integration with payers, hospitals poses a huge challenge. If it decides to go purely via patient self-ordered tests route, educating the patient community would be crucial to its success. Whatever route it chooses, it’s certain that Theranos is here to stay and as the CEO of the company puts it, it’s here to “redefine the paradigm of diagnosis”.