Payers

Four investment opportunities in the brave new world of private insurance exchanges

Psilos seems to have the investment philosophy that it is better to be smart than hip. You won’t find any mobile apps or corporate wellness programs in the company’s portfolio. They have made lots of money on new approaches to providing health insurance–long before Obamacare started making everyone mad. The company’s annual outlook shares four […]

Psilos seems to have the investment philosophy that it is better to be smart than hip. You won’t find any mobile apps or corporate wellness programs in the company’s portfolio. They have made lots of money on new approaches to providing health insurance–long before Obamacare started making everyone mad.

The company’s annual outlook shares four ways that the rest of the venture capital world can make money from the wave of consumers headed toward the exchange marketplace. Innovation in health insurance doesn’t make for a lot of flash at a demo day, but companies working in this space can offer rewarding exits.

Private exchanges are the place to be

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Most of the conversation today is about public exchanges. Psilos predicts that large and small employers will take advantage of private exchanges to get out of the health insurance business completely. They will give employees subsidies and put workers in exchanges so that individuals can make their own healthcare spending decisions. Psilos sees this as the tipping point for the true consumerization of health:

…there will be millions of Americans armed with money who, for the first time, will shop for healthcare insurance the same way they shop for homes or car insurance–or any important financial investment. They will look for the best deals possible and shop for features and service. By the very nature of this phenomenon, innovation will start to occur in healthcare insurance that was not previously possible.

Insurers competing for those dollars will be forced to provide the lowest cost, highest value products to individuals for the very first time in the history of the healthcare market.

Here are four recommendations from the Psilos report about how investors can take advantage of the exchange revolution. Download the full report to get the details about what Psilos has learned from experience and success with several startups in this space, including SeeChange Health, Definity and Extend Health.

Building a brand

With the growth of exchanges, health insurance will change from “whatever my company offers” to “the best deal I can find for my needs.” Maybe insurers will have a mascot, like T-Mobile’s pink motorcycle woman.

Insurers who can create a strong consumer brand will win. Accordingly, a promising investment area is products and services that carriers can adopt to build brand loyalty. We are seeing insurers build and buy products that add to their brand appeal. For instance, large insurers like Aetna and United are already trying to burnish their brand equity by introducing more consumer-friendly interfaces and tools.

Making exchanges user-friendly

Consumers now have many great examples of how to search and buy services on the Web: Amazon, Netflix, Spotify, and even a few banks. To attract and retain customers, insurers will have to create similar experiences.

There are exciting opportunities to invest in software and services that will power the exchanges, such as shopping transparency programs and call-center technologies. In particular, Psilos envisions massive opportunities for technologies that enable operators of both public and private exchanges to build high-functioning platforms, including the shopping software and back-end administrative technology and service products needed to serve tens of millions of people efficiently.

Creating decision support for consumers

As they make more decisions about providers and services, consumers will need help deciding how much and what kind of care they need.

A companion investment area is consumer-facing engagement technologies and services that help people make better purchasing and self-triage decisions about care and when to use their benefits. For instance, if you don’t need to see the doctor in person, can you instead use a nursing hotline for self-triage In a post-reform environment, there will be an even greater need for educational tools and “plain English” translation of medical and insurance information to help consumers make good choices and manage their newfound clinical and financial accountability.

Aligning everyone’s financial incentives

Value-driven plans are the next frontier in consumer-driven health plans. If anything can improve patient engagement and medication adherence, it is plans like this that reward both the payer and the customer when a person takes better care of herself.

For chronic patients, a value-based plan engages them in wellness and care plan compliance such as ensuring that they continue to take prescribed medications and see their specialists regularly to monitor their conditions. The reward for the member is not only better health, but also reduced out-of-pocket expenditures; in short, chronically ill members who are compliant get a better financial deal. The insurer’s costs are also reduced.

From an investor’s standpoint, these next-generation healthcare plans represent an important new investment opportunity. They are exactly the kinds of programs that are necessary for healthcare reform–as designed in the Affordable Care Act–to have any chance of long-term financial success. Value-based plans are designed to support incentives to encourage wellness, thereby aligning the financial incentives of consumers and healthcare insurers in a system wherein they are so often misaligned.