Have Insurtechs Truly Disrupted the Mainstream Health Insurance Industry?

Hype rarely achieves expectations. And that seems to be the case with the tech-enabled, new-kids-on-the-block insurtech companies who came to being in the 2010s. They were armed with huge funding rounds but ultimately encountered an even bigger brick wall of size and scale, and entrenched ways of doing business.

When insurtechs and startup health plans like Bright Health Group, Clover Health and Oscar Health started out, they came from a “spot of sincerity,” declared one industry observer. They wanted to disrupt the large health insurers out there, and do so by leveraging technology to improve the inefficiencies of insurance. 

“You’ve got this broken health insurance industry, with a huge addressable market,” said Blake Madden, founder of industry newsletter Hospitalogy, in an interview. “People don’t really like their insurers. … Not only that, but a lot of insurers in healthcare in general are kind of backwards when it comes to workflow automation, the tech side of things. I think the attempt — especially with names like Oscar and a couple of others — was to build technical infrastructure to support better patient care, better care navigation and those sorts of things.”

The way insurtechs leveraged technology include using predictive analytics and AI and moving to digital documentation.

So the investment dollars poured in: Bright Health Group raised $2.4 billion (including from Cigna Ventures), Oscar Health raised $1.6 billion and Clover Health raised $1.3 billion. All three companies went public in 2021.

While they may have started out with good intentions, many insurtechs quickly came to realize they “were a little bit in over their heads,” Madden said. Bright Health Group had a net loss of $1.4 billion in 2022, up from a $1.2 billion loss in 2021. Oscar Health recorded a net loss of $610 million, up from a $571 million loss in the year prior. Clover Health had a $339 million net loss in 2022, though an improvement from a net loss of $588 million in 2021.

They’ve also exited certain markets. Take for instance, Bright Health Group —based in Minneapolis, Minnesota — that over time retreated step by step from providing insurance. Before announcing last week that it plans to sell its California Medicare Advantage business to Molina Healthcare for $600 million — effectively getting out of providing insurance altogether — it stopped offering individual and family plans in October. Then it exited its Medicare Advantage business outside of California in November.

Oscar Health announced in May that it will exit the California individual ACA insurance market in 2024, and mostly ditched its Medicare Advantage business in November, the exception being its plan in Broward County, Florida. The company now offers insurance coverage across 20 states.

Clover Health exited two of its smaller markets (the counties of El Paso, Texas, and Pima, Arizona) in 2022. It is currently running Medicare Advantage plans in Alabama, Georgia, Mississippi, New Jersey, Pennsylvania, South Carolina, Tennessee and Texas.

Neither Clover Health, nor Bright Health agreed to comment for this story but Oscar Health provided a statement.

What went wrong?

Why did insurtechs fail to take off? It appears they just didn’t understand the industry, one expert explained.

“I think fundamentally, they didn’t really understand the market well enough to be able to identify that a lot of the structural things that exist in the healthcare and health insurance industry exist for a reason,” said Wesley Sanders, a health plan consultant at Evensun Consulting. “It may not be a good reason, but if you can’t change the underlying market structure, you’re still not going to be able to change that incentive.”

Ari Gottlieb, principle of A2 Strategy Corp., agreed with Sanders. There are several “levers” startup health plans have to understand in order to be successful.

“Are your contracted rates competitive?” he said in an interview. “In Medicare Advantage or individual or small group, are you appropriately and accurately measuring risk adjustment codes? Can you manage brokers well? How do you actually leverage the provider channel to drive enrollment? Can you stay regulatorily compliant?”

And while insurtechs have put technology at the forefront of their businesses, they don’t have a good handle on operations like customer service and sales, said James Jun, director of sales and marketing at Reversus Insurance Solutions, an organization of insurance agents that sell Medicare products.

“Insurtechs say, ‘Oh, we have this technology.’ Is it revolutionary? Yeah, it’s an enabler. But it’s not a game changer because you still have to have the core business,” Jun declared. “Then you enable technology to do other things, not the other way around.”

Jun added that the major insurers are also leveraging technology and aren’t “on a typewriter” conducting their business, making it difficult for insurtechs to differentiate themselves. He also disagreed with the notion that somehow the entrance of insurtechs led legacy insurers to adopt technology more broadly.

A lack of understanding of the insurance industry led to a series financial troubles.

But why are they struggling so much financially when they raised so much money? They grew too fast and offered unsustainable prices in order to gain membership, Gottlieb said.

“In the individual market — Oscar, Friday, Bright — they grew really, really quickly,” he stated. “The way they fueled growth was by underpricing and posting a lot of losses — really, really large losses.” (Denver-based Friday Health Plans launched in 2015 and announced last month it is shutting down).

For example, Bright Health Group posted a net loss of $169.5 million in the first quarter of 2023, Oscar recorded a $39.6 million loss and Clover had a $72.6 million net loss.

Sanders backed up Gottlieb’s comments about underpricing.  

“The challenge is that people are not particularly loyal to their insurance company. People are only loyal to you as long as you paid their last claim. … [Insurtechs] brought in all this membership, but it didn’t have the long-term value that I think they had hoped,” he said. “As soon as somebody else came into the market who was cheaper or as soon as somebody came in with a better network, their members were not on their plan long enough to get any sort of ongoing value out of it.”

Another challenge for insurtechs is that under the Affordable Care Act, funds from plans with lower-risk enrollees are transferred to plans with higher-risk enrollees. Generally, those who choose to be covered by startup health plans are on the healthier side, meaning that insurtechs often have to send funds to the larger insurers, said Nathan Ray, partner of healthcare and life sciences at West Monroe.

“The people who buy a plan online are often people who aren’t sick and don’t need to have an overly stable network,” Ray said. “Because of that, you can have these groups attract a very large population of members, but all of the cost to serve happens on the sicker members who choose plans that they’ve been on for a while.” 

And those plans would typically be the legacy insurance plans from the likes of Aetna, Cigna and UnitedHealthcare.

Insurtechs have caused disruption — just not the one you are thinking of

Insurtechs have caused disruption, just not in a positive way, Gottlieb declared.

“They created member disruption,” he said. “They created provider disruption. They created regulatory disruption. Did they disrupt the industry? No.”

For negative member disruption, Gottlieb used the example of Friday Health Plans which recently shut down. Its members now have to find coverage elsewhere and start all over with their deductibles, he said. 

When it comes to negatively affecting providers, these insurtechs shutting down or exiting markets means providers often have had to deal with patients changing insurers. Not to mention having to manage to get payment for their services. Regulators, meanwhile, have had challenges with “ensuring sufficient capital is in the entities, dealing with insolvencies and also having to spend a lot of extra time regulating these capital challenged businesses,” Gottlieb said.

Sanders agreed with Gottlieb that the disruption has been mostly negative, and may hurt future players in the space. In other words, insurtechs caused disruption in the way it is understood using the traditional English meaning of the term, not in the way Clay Christensen intended it. Christensen is the architect of the disruptive innovation theory. 

“I don’t think any of the disruption has been particularly positive,” he said. “Maybe there are people out there who have good ideas and perhaps have health plans that are going to be in a more narrow, segmented market but are going to have a harder time raising capital because of the memory that’s left by some of these challenges.” 

Meanwhile, the industry that was supposed to be upended by these new entrants seem to be sailing smooth waters.

“Just look at how the big incumbents are operating,” Madden said. “They’re performing well. Medicare Advantage is a huge growth vehicle for them. But I will say a lot of the incumbents have responded to where venture dollars are going. If you look at where Optum Ventures is investing or the kind of folks that companies are acquiring, they’re definitely paying attention to what new entrants are doing. They’re not dumb. The problem is that they have so much more scale, and they’re so entrenched, they have so much regulatory capture that it’s hard for true disruption in the purest form to happen.”

There have been some insurtechs that have performed better, such as Alignment Healthcare, a provider of Medicare plans, Gottlieb added.

“They started with people who are really experienced healthcare operators and they’ve been much more methodical about growth. … I think they have a clear understanding of the levers that you have to pull to be successful, and they focused on those levers and not telling a story,” he stated. “I don’t think historically you could say the same thing about Oscar, Bright and Clover.”

That said, Oscar could be turning things around. The company recently hired Mark Bertolini as CEO and transitioned co-founder and former CEO Mario Schlosser to president of technology. Bertolini previously served as chair and CEO of Aetna.

“I think having an insider’s perspective to understand that sometimes the reason that the entire industry is doing something … there’s actually a very good reason for it,” Sanders said. “I think Oscar may have a chance because I think Bertolini will have a helpful perspective.”

Madden agreed that Oscar could turn things around.

“I think you’ve got a more experienced leader at the helm of Oscar,” he said. “You’ve got Mario [Schlosser] as chief technology officer, who obviously knows how to develop products. I definitely could see Oscar at least right-sizing the ship and leaning up and getting to profitability.” 

Of the big insurtech names mentioned, Oscar was the only company to comment for this story.

“Our past performance was driven by our investments to achieve growth and building out our technology stack. Today, the company is operating from a position of strength with profitability on the horizon, and we are optimistic about our future. We are confident that we have the right scale and roadmap in place to execute against our goals, and the right mix of tools and experience to win in the market,” Scott Blackley, Oscar’s Chief Transformation Officer, said in an email.

MedCity News also reached out to several large health insurers to ask if insurtechs affected their business. Blue Cross Blue Shield Association declined to comment and Aetna did not return a request for comment. Brandon Cuevas, chief growth officer of UnitedHealthcare replied in an email that the insurer “has long focused on using data, technology and innovation to modernize health benefits and provide members with quality and cost information, including developing novel plans that offer first-dollar coverage and make it easier for people to comparison shop for care.”

Do insurtechs have a future?

Ray of West Monroe believes that there could be a future for insurtechs, but with more of a focus on building technology to sell to existing companies rather than focusing on delivering coverage themselves.

Sanders noted that this is something Oscar is trying to do through its +Oscar product.

“They’re trying to really sell the tech back-end to existing carriers rather than being the one who’s holding the risk,” he said. “I think that’s where there’s more likely to be a meaningful space for them to play in.”

Madden believes that there could be a future for insurtechs although that future doesn’t hold disruption of incumbents in the way Airbnb disrupted the hotel industry or Uber the cab industry.

“There’s always the next person that thinks that they can do it better,” he said. “I think that’s in line with the American dream and the culture: ‘I can do this better. They messed up, but I can learn from their mistakes and figure out a way to make this work.’ I don’t know if there will ever be an ‘insurtech’ that will be big enough to compete with the United’s or the Humana’s of the world, but there is room for regional players.”

In the parable of David vs Goliath in the business world, sometimes the Goliath is actually a Hercules and the Davids have to settle for less.

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