Investors, broker-advisors driving innovation in self-funded plans

An alignment of interests is gathering speed, with self-insured employer plans as the focus.

With the rise (and increasing sophistication) of the broker advisor–the most direct pipeline to a plan sponsor–suddenly the health care entrepreneurs have an attentive audience.

An alignment of interests is gathering speed, with self-insured employer plans as the focus.

After years of searching for ways to tap into the lucrative employer-sponsored market, health care product and service entrepreneurs may at last have found a smoother path forward. That path is still narrow and winding. But with investors now backing these entrepreneurs and broker advisors offering their ideas to their clients, more of these brave souls are finally tasting success.

Related: Cost reductions, improved care are driving health care M&A

The quick acceptance and spread of basic telehealth products and services during COVID-19 served to somewhat obscure the depth of this trend. Billions were being poured into startups that could immediately lay claim to being relevant. Major tech players–Amazon, Facebook, Microsoft, Apple, Google–invested heavily in their own offspring, most of them targeting health care providers.

The employer plan marketplace was considered less exciting, and more difficult to penetrate. To be accepted by those plan sponsors, new ideas had to deliver both lower cost and better health plan members. While products apart from telehealth and virtual health were emerging, they faced multiple barriers to adoption. Many failed.

But now, products and services like Quantuum, Virta Health, RxBenefits, Innovaccer, and others are being thoroughly tested by employers to see if they deliver on their promises of better health at a lower cost.

It is an exciting time for many of these upstarts. With the rise (and increasing sophistication) of the broker advisor–the most direct pipeline to a plan sponsor–suddenly the health care entrepreneurs have an attentive audience. These brokers are responding to client demands to hold down insurance costs while improving member health across the plan. They seek innovation, new ways to provide employee coverage, and new ways to differentiate themselves from traditional brokers. They are ready to test ideas that promise a quantum leap.

Meantime, investment firms, eager to capitalize on the burgeoning health care market, brought aboard experts in health care technology. These analysts understood that, if the employer plan market could be penetrated, rich rewards awaited all involved.

The innovator

Virta Health was launched in 2014 upon the premise that diabetes 2 could be reversed rather than simply managed. The fledgling company engaged in a series of in-depth studies to determine if patients with diabetes 2 could beat the disease with the help of strategic virtual intervention.

That focus on research and outcomes, rather than public relations and marketing, is what ultimately built Virta into an investment vehicle, says Paul Sytsma, Senior Director, Corporate Marketing, Virta Health. Once the company proved that its approach to diabetes 2 worked–that it could actually reverse diabetes–investors jumped on board.

Virta is no bot-driven solution. Rather, it employs a team of physicians and health coaches “empowered and supported by technology, interacting on a daily basis” with plan members who have type 2 diabetes, prediabetes, or obesity. This daily focus on the individual patient’s health is the key.

“Our solution isn’t driven by a bot,” Sytsma says. “The technology foundation is vital for care delivery, scale, and optimization, but the human element is what is so critical to helping patients reverse disease.”

The clinical trial results have been borne out by results among plan members.

“We help remove the need for medications like insulin, and we restore metabolic health,” he says. “We have a care model to deliver it, and we are scaling it.”

What Virta Health told investors, and later, broker advisors and plan sponsors, is:

The investment dollars flowed in. Palo Alto venture funders Venrock got there first in 2017, joined by Obvious Ventures among others. More recently, Virta raised a Series D round of funding led by Sequoia Capital Global Equities at a valuation of $1.1B.

Working through a combination of broker advisor and direct-to-employer channels, Virta is gaining traction among self-funded plans in particular.

“Why would employers choose us? The focus on the patient. We have something that works, and we can optimize treatment over time. That’s our big advantage,” says Sytsma. “We scale and learn.”

The investor

When Partner Rafael Cofiño joined Boston private equity firm Great Hill Partners in 2012, his role was clear: identify high-growth, disruptive health care ventures. Now, almost a decade later, his knowledge of health care, combined with the surging demand for innovative products and services, has made him a star in the field. Among his targets: Quantum Health, a navigation and coordination platform; RxBenefits, a pharmacy benefits optimizer; and, more recently, Pareto Health.

What they have in common–and what Cofiño looks for–is an appeal to small, medium, and large employers. Those first two are critical, he says, because unless a health care product or service can find a place in a smaller employer’s plan, the solution’s prospects will be limited. “At the core, you need to deliver solid savings for these employers,” he says. “Your product must address key stakeholders: Is it better for the employer, plan member, and provider? If so, that is the right spot.”

Pareto is of special interest to Great Hill and Cofiño because it offers the potential to bring the firm’s other investments, like Quantum and RxBenefits, to the smaller employer. If the strategy works, Great Hill will have a stake in companies that will deliver true synergy.

Here’s the plan: Most new health care products and services need broad adoption across employer sizes to first succeed, then scale (where the rewards are reaped). Pareto’s platform is designed to aggregate smaller employers into groups that negotiate for insurance as though they were a major employer. And, in so doing, they can include benefits like Quantum and RxBenefits in their plans.

“All three companies–Rx, Quantum, and Pareto–deliver benefits that are sticky and valuable long term,” he says. “These models only work when you get scale.”

Nice work if you can get it.

The broker advisor

Allison De Paoli has heard her fair share of new product pitches. Most of them, she says, are far off the mark. “There’s a lot of money being wasted on investments in startups that want to sell to employers…even though the product would be more suited to an independent TPA, or broker that helps employers contain costs. They haven’t done enough research and don’t understand what employers are willing or able to pay for,” says the founder of Altiqe Consulting in San Antonio.

De Paoli continues to listen, however, because her clients count on her to identify ways to contain insurance costs without gutting benefits. Most small-to-midsize companies can’t afford to have a benefits expert on staff. That’s her job. And when she picked up the phone the other day, she says, her patience paid off.

The company: Innovaccer. Its initial promise: “To save hospitals (and patients) time and money by breaking down information silos that prevent physicians from obtaining a holistic view of their patients.”

Innovaccer features a centralized information hub that crunches data from major health care providers, research centers, and insurance. The outcome: a better AI that would more accurately predict and prevent health problems before they become chronic.

The Innovaccer data can address a critical area in patient health: the social determinants of health, or SDoH. A 2017 article published by the National Academy of Medicine (Social Determinants of Health 101 for Health Care: Five Plus Five; Oct. 9, 2017) estimated that medical care addresses only 10% to 20% of overall patient health. The remainder is determined by health-related behaviors, socioeconomic factors, and environmental factors. This is the “holistic view” Innovaccer references.

The idea caught the attention of Microsoft and Amazon, and led to contracts with the likes of Banner Health, Dignity Health, MercyOne, and more. Funds have been provided by Tiger Global, B Capital Group, Steadview Capital, and M12 (Microsoft’s venture fund).The company reports having “unified records for more that 24 million people and [has] prevented $600 million in unnecessary expenditures.”

But the call to De Paoli signaled a new strategic direction: employer-sponsored plans. Innovaccer believes its latest product iteration, Health Cloud, has a clear application for self-funded plans. The company says Health Cloud will “allow customers and partners to easily develop interoperable applications that improve patient outcomes and lower costs.” Pretty much just what employers are looking for.

De Paoli was impressed not only with Health Cloud, but with how Innovaccer arrived at her door. Innovaccer targeted the big health care market initially. Its success there led to an inquiry from Walt Disney Co.–could its product enhance its employee plan?

“Now they have a consumer-facing product for midsize and large employers,” she says.

De Paoli says Health Cloud will likely appeal to employers because it provides HIPAA compliant data that employers can use to understand in real-time what is driving their costs.

“Employers like knowing what’s driving their claims. They want to know what their problems are. But they do not want to know who they are. And they do not have the bandwidth to manage it in-house. So Innovaccer provides HIPAA compliant data, aggregated by employer, so the employer can benchmark their own plan to all the data Innovaccer has. And then take action to address their specific challenges. That shows that this company understands what employers need.”

“Innovaccer can also be adopted by almost any self-funded plan, regardless of the number of lives covered, because of its affordability,” she says.

And, by contacting De Paoli, the company rep demonstrated that he knew who could get him in front of the end customer.

“Companies like that understand the employer does not have the knowledge or the time to evaluate their products. The broker has to help them. That’s why these folks need to come to the broker first,” she says.

Great Hill’s Cofiño readily concurs.

“The benefits broker as a trusted advisor plays an important role in bringing these innovative products to market,” he says. “We need to align ourselves with these brokers. And not every broker is created equally. Overall, the industry is waking up. We are seeing younger brokers who really understand their job is to deliver value, to make sure the employer has the best benefits package.”

In some ways, the health care investment patterns of 2020 were an aberration, focused as they were on telehealth and virtual care. But solid gains were made in the connection of the innovator to the plan sponsor, through the good offices of investment experts like Cofiño and advisors like De Paoli. As these alliances expand–and most insist they will–”better health at lower cost” may soon be more than a T-shirt slogan.

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