Insurance companies are notoriously unloved. But few of us hold as much contempt for the industry as Ali Diab. For Diab, insurance companies aren’t just opaque and overpriced bureaucracies, they’re “profiteering, morally hazardous middlemen” who will do anything to avoid following through on what we pay them to do: insure our health.
Diab’s disdain is somewhat understandable. Last April, he was clinging to life in an intensive care unit after his small intestine became twisted on itself. When he was released after extensive surgery and a month in the hospital, including several weeks in the ICU, Diab was told that many of his surgical bills weren’t covered under his plan. A serial entrepreneur, Diab was part of the founding team for AdMob, an ad network that sold to Google for $750 million, so he wasn't one to skimp on insurance coverage. Yet his insurer claimed that the surgery Diab had undergone was experimental and that he should have reviewed his plan, talked to his surgeon, and pre-authorized the procedure before going forward with it.
“Meanwhile, I was on the operating table hours away from passing away,” he says.
Diab spent the next six months battling his insurance company. In the end, he got nowhere. “In that situation you feel lonely, vulnerable, and you’re not 100 percent fit and healthy,” he says. “To be taken to the cleaners by your insurer at that moment in time is abominable. It motivated me to want to do something to fix the system.”
In October 2013, he partnered with his friend Rajaie Batniji, a physician of internal medicine at Stanford, to come up with a solution. On Tuesday, they officially launched Collective Health, a new Silicon Valley startup that’s offering an alternative to the crummy insurance experience by turning employers themselves into insurance providers.
Backed by the venture capital firm Founders Fund and others, Collective Health is trying to make it easy for employers of any size to skip dealing with insurance companies altogether. Instead of signing up for a traditional managed care plan and paying an insurance company a monthly premium, employers pay for employees’ healthcare costs out of pocket. Employers still collect a monthly premium from their employees, but instead of passing that money on to an insurance company, they add it to their internal pool of cash to cover employees’ medical bills. These employers have the freedom to decide which types of procedures are covered. Plus, because they’re not paying for an insurer’s overhead and contributing to its profits, self-insured companies typically save money, too.
>The less their members understand about their coverage, insurers figure, the less likely they’ll be to fight for it.
It’s already a widespread model among larger companies. In fact, according to the Kaiser Family Foundation, 94 percent of employers with more than 5,000 employees are self-insured. And yet, only 16 percent of companies with less than 200 employees have similar arrangements, because the costs and administrative burden of establishing such a plan have traditionally dissuaded them.
Like Square, Uber, and so many other startups before it, Diab and Batniji want to alleviate a perceived burden for business through technology and dead simple design. Of course, they’ve got plenty of competition. Not only are there already massive incumbents in healthcare, but some of those incumbents, including the likes of UnitedHealth and Humana, are also beginning to administer self-insurance plans for smaller businesses. To win this space, Collective Health will not only have to teach employers about this new offering, but it will also have to beat these major players at their own game.
To use Collective Health, companies pay $50 per employee per month and can design their own plans using a drag and drop menu of options. For instance, they can opt to make doctor visits free or charge a $25 co-pay. They can set coverage rates for hospital visits and preventative care or opt to include free telemedicine services and Uber rides to and from the doctor. Employers can even get granular and opt to cover specific procedures that matter to their employees, like gender reassignment surgery.
“For a lot of employers, it’s important to make a statement about who they want to attract and what they stand for as a company,” says Batniji.
Collective Health’s own actuaries then work with employers to determine what their monthly costs will be, and from there, employers can opt to pass on any percentage of that to their employees or pay it all themselves. Collective Health also works with each employer to set up a catastrophic plan with an existing insurer and lets the company know when an employee might be at risk.
But just as important as streamlining the process for employers, Diab says, was making the plans completely transparent for employees. When he was sick, Diab says he got sixty-two explanation of benefits forms in the mail, which only scared him into thinking he owed more money than he did. Plus, he says, “My plan was really badly written and clearly written by lawyers, not people who wanted me to understand what was covered.” There’s good reason for that, of course. Insurance companies make money collecting premiums, but they lose money paying claims. The less their members understand about their coverage, insurers figure, the less likely they’ll be to fight for it.
On Collective Health, by contrast, employees get a complete breakdown of everything their plans cover, neatly organized in colorful little boxes. And instead of sending out those paper explanation of benefit forms, which Diab refers to as “asinine,” members can view their activity online month by month, in itemized lists and charts designed to resemble a credit card statement.
But the most valuable perk for employees, says Batniji, is that they're getting coverage from someone who actually wants to keep them healthy. "In Ali’s case, and in so many cases, the insurance company's incentives just aren’t aligned with the best interest of the individual or the employer," he says. "This allows us to align the incentives in a way that makes sense."
Today, Collective Health is only available in California, but the founders expect to be licensed in all fifty states by January. Still, the company has lots of work ahead of it convincing employers to give up their existing plans and put their faith into an untested startup. That will likely require a large sales and education process on Collective Health’s behalf, says Scott Nolan, a partner at Founder’s Fund. Still, he says Diab’s deep connections with the Silicon Valley set, who tend to be more trusting of other startups anyway, should help the company land some initial customers.
“The team has incredible networks with a lot of companies that would be a great fit, and they’re leveraging that to make the case,” Nolan says.
Diab says his pitch will be a simple one: “What we’re building here is a new system that sits outside the health insurance system, completely. This is not just a veneer.”
