The Disruptors, Part 1: DTC Insurance

The large incumbent players (e.g. United, Humana) are largely built for a fee for service environment, and they’re best positioned to succeed in fee for service.

For a startup focused on customer experience, the employer market will be hard to crack at first—companies are doing the purchasing, and are focused on getting the best terms for themselves, rather than the best experience for their customers.

Bright, Devoted, and Oscar have all structured their plans to financially align themselves with providers: when providers provide cost-effective care, both parties gain.

The bearish case is that these businesses are very capital intensive to build, as shown by the large and repeated capital raises, and they’ll need to show a large return to justify that capital. That means operating at scale, and also escaping from the DTC markets into the large employer-driven insurance markets, where the incumbents will remain in... See more

Two fascinating points here:

For now, the venture-backed insurers are consumer-facing insurers, which is important to note because consumer is a much smaller market than selling plans through employers.

The bullish story here is that a new opportunity has emerged, especially in the Medicare Advantage market, for a new business model that serves patients better. It uses an integrated approach with value-based incentives in order to enable a better customer experience, and to save on costs by preventing hospitalizations.

Under value-based care, payers win financially when their members are engaged and receiving the right care, because that’s how they both drive membership AND limit costs. Patients are the winners.

In the value-based scenario, scale is not nearly as important as in fee for service. While it still helps in some ways (e.g. for investing in tech platforms), it’s no longer the primary basis of competition. So in shifting to a value-based arrangement, much of the incumbents’ advantage is reduced.

Consumer markets are attractive when the customer experience is the thing that matters. As we’ll see, customer experience is a major focus these companies.