Startup health insurers have spent 2022 downsizing their businesses as investors are no longer willing to contribute the billions of dollars needed to subsidize them. The failure of Insurtechs Oscar Health, Clover Health and Bright Health Group at a time when most health insurers are making more money than ever has left some wondering what their future holds. .
Although Oscar Health, Clover Health, and Bright Health all have different core businesses, their origins are largely the same. Founders who often lacked healthcare experience founded health insurance companies around the time of the Affordable Care Act’s exchange that went into effect in 2014, promising to break the law. coverage available in new markets and take advantage of the growing Medicare Advantage plan.
Companies have used technology to modernize a large, unloved industry dominated by established players. Of the $4.3 trillion spent on health care in 2021, about two-thirds will go through health insurers, according to the most recent federal data. “Now is a unique time to start a company that is relentlessly focused on serving its members. We had to disrupt one of the biggest industries in our country,” Oscar Health co-founder Josh Kushner said during an investor pitch in February 2021.
Oscar Health, Clover Health and Bright Health Group declined to comment for this story.
Despite attracting billions of dollars in investments, these healthcare startups also attract skepticism. “They don’t force anyone to innovate because there is nothing to innovate,” said Ari Gottlieb, independent healthcare consultant at A2 Strategy. “Their legacy will not be that they changed the way UnitedHealthcare, Elevance, Humana thought about the world. That is ridiculous.”
However, big names like Google Ventures, Tiger Global Management, Blackstone Group have poured billions of dollars into the development of these fledgling companies. The inflow of capital from investors is accompanied by rapid growth pressure. Insurers assumed a growth-at-all-costs sentiment, announcing plans to significantly expand their services and geographic reach.
“Insurance tech companies also price their policies to capture market share and attract more customers, which should not be overlooked,” said Kaenan Hertz, managing partner at Insurtech Advisors, a consulting firm. via.” “Whether it’s because they undervalue it or because they’re actually marketing it in a more modern, impactful way, I think those are the reasons they’ve been able to attract millions of policyholders. .”
In 2021, the hype has peaked. Oscar Health, Clover Health and Bright Health entered the mass market as the COVID-19 pandemic disrupted the way care was delivered. Investor interest in digital health tools remains unprecedented. Startups have reached huge valuations, no bigger than Bright Health. The company raised $924 million through an initial public offering in June 2021, bringing its market cap to $12 billion.
“We are really excited about the opportunities in 2022 and beyond,” said CEO Mike Mikan during the company’s first earnings call as a public company on Thursday. that month.
Critics at the time argued that the high valuations achieved by Bright Health and its rivals were the product of investors unfamiliar with the health insurance business.
Some startups rely on amateur investors to support their growing operations. For example, Clover Health capitalized on social media investor Chamath Palihapitiya’s involvement in the business by inviting his fans on Reddit to ask questions during earnings calls and hosting sessions. meeting. “Who wins if we succeed? The impact is not only hugely positive, but really vast,” outgoing CEO Vivek Garipalli said during a “Ask Me Anything” session on Reddit in August 2021. Garipalli will become the host. Executive Chairman effective from Sunday.
Now, these companies are ending 2022 in worse financial shape than they started.
John Kao, CEO of Alignment Healthcare, said the collapse of Oscar Health, Clover Health and Bright Health has led to the valuation of the insurance technology industry as a whole. Alignment Healthcare is an insurance technology company focused on the Medicare Advantage market and, like other nascent carriers, went public at a high valuation in 2021 and has now declined since. there.
Challenging macroeconomic conditions and plunging share prices of other insurance technology companies have made investors wary of the sector, Kao said. But because his company has maintained more value than other startups, it shouldn’t fall into the same category, Kao said. Kao said legacy Medicare Advantage insurers such as UnitedHealth Group and Humana are in the same industry as them.
“A lot of investors are looking for big companies that have slower growth but very reliable earnings, like United and Humana,” Kao said. “I contrast that with companies like ours, which have good steady growth—twice the industry growth rate and good margins—although still small but growing. growth. Once we get to that next inflection point, I think the stock will start to reflect the company’s fundamentals.”
The declines of Oscar Health, Clover Health and Bright Health didn’t stop entrepreneurs from starting health insurance startups this year. And investors continue to pour capital into nascent insurance companies, though not at the hundreds of millions of dollars that insurance tech companies once enjoyed.
“One of the risks of being in the first generation of pioneers is that the main thing you can create is a blueprint,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. which companies will later avoid.
