Health Insurance Strategy Memo

Note: I’ve been doing some reading over the last 2 weeks about the state of American healthcare in preparation for my interview with Oscar Health. This is my current understanding of the space, and the strategy I believe we ought to take

Update: This was originally in preparation for my interview with Oscar Health. I believe this is generalizable to a raft of new startups attacking the Big 5 insurance companies (Anthem, Humana, Aetna, Cigna, and UHC). These include companies like Oscar, Decent, and Sana Benefits

There are large gaps in my knowledge, experience, and vocabulary—cut me some slack, I’ve only been at this for 2 weeks. The purpose of this memo is to surface diffs from people who know more about those gaps and help me learn

1. The current state of American Healthcare

In terms of world rankings, the US routinely comes up on the lower end. If not in terms of outcome, at least in terms of efficiency of spend.

It’s slow, it’s bureaucratic, and it is incredibly, remarkably resistant to change. The reason for this is that there are incredible amounts of money to lose. In software engineering terms, American healthcare is in deadlock. If you start attempting to cut down the costs of healthcare, here is what will happen:

Payers have created enough regulatory capture that it’s incredibly hard for anyone to break in. If you wanted to, here are some of your available entry points:

Finally, the thing to remember is that there’s a huge disconnect between payers and patients. For giant corporations like Blue Shield, Aetna, and UHC, it’s a game of margins. But for these multi-Billion dollar profit companies, the dollar value of a single basis point is enough to bankrupt the typical American household many times over.

2. Corporate DNA: Payers are billion dollar abacuses

I don’t say this to denigrate, but rather to point out strengths and weaknesses. Insurance (of any kind) comes down to actuarial science, which itself is just one giant statistics problem set.

Therefore, payers are:

Payers are NOT:

This mix of strengths and weaknesses in Payer Corporate DNA sets up a prime opportunity for another Payer who wants to take a different approach.

3. Oscar’s Opportunity—the stake through the heart of Payers—is taking and capturing Demand via a better Product experience

People hate health insurance companies, but are tied to them out of necessity. Even without the ACA’s individual mandate, you can’t not have insurance in this country: an emergency can bankrupt you—hell, even a routine procedure can bankrupt you.

It’s unclear whether people hate their insurance companies more or their cable company. People hate their insurance companies so much that simply creating a halfway decent experience should be enough to 1) earn retention and 2) get free referrals.

  1. High retention increases our LTV.
  2. Referrals help us lower CAC and also help us jumpstart new markets in the same way that people BEG Google Fiber to come to their neighborhoods

However, we’re not in the business of creating a halfway decent experience. We’re in the business of understanding, building, and delivering the best experience possible.

4. The Product Experience that Oscar needs to build and how that ties into the fundamentals of a payer

The math doesn’t change: a payer still covers a pool of individuals who have varying levels of risk when they face catastrophic situations. Because Oscar is a payer, it is subject to The First Law of Insurance: profit is predicated on Total Premiums and Total Claims Paid.

Thus, the 2 Key Questions for Oscar are:

  1. Via software and consumer products, can we meaningfully lower the median risk in the pool?
  2. Via software and consumer products, can we attract and retain more low-risk individuals so that we can shift those premiums to better care for high-risk individuals and still make enough profit to have a viable business for investors?

Focusing on user experience and core job stories helps us with (2): we want to capture low-risk patients, which, broadly, means younger and wealthier individuals. Here are some of the job stories for them:

Focusing on user experience helps us with (1): with highly retained, Weekly-Active patients, we can start to shift toward preventative care. We can:

5. The 2 Key Questions above have different flavorings in Oscar’s 3 markets

Oscar is interesting because we are focusing on 3 separate markets: Medicare Advantage (MA), Individual, and Employer.

The MA and Employer markets are new, and while my hypothesis is that the 2 Key Questions are the same, we will need to continue experimenting to see if the Product approach can stay the same. Here are some ways we already know it will have to be different:

MA patients are older. Their job stories include:

The reimbursement model for MA is also different:

Employer markets have the Principal-Agent problem: our daily user and our Buyer are not the same person. Buyer job stories include:

6. All of the other things Oscar needs to execute on

The five paragraphs above seem nice. They seem simple. As if, “oh, well why didn’t anyone try this before?” People have; the system, as I’ve mentioned before, is remarkably resistant and resilient to reform.

I believe that the above is the correct approach and the right questions for Product at Oscar to be asking.

But there are a host of other things that the company will have to do that is out of scope for this memo, but worth listing:

7. In summary

  1. The American healthcare industry sucks. It’s expensive, callous, and disastrous for many Americans who have the misfortune to touch it
  2. Reform is hard, bordering on impossible. The system is deadlocked, with nobody wanting to sacrifice their high salaries and profit margins first. Any attempt to do so is met with an army of lobbyists, senators, and fervid anti-Socialists. Being a payer is probably the best position from which to attempt any substantive changes, but requires a huge war chest and an appetite for lawsuits
  3. In their Corporate DNA, payers are not marketers. They are not particularly empathetic. They don’t put much stock in storytelling. They are, first and foremost (and preeminently!) statisticians. This results in highly profitable, highly efficient insurance companies that patients absolutely hate
  4. People hate their insurance companies, but are forced to stick with them. Providing a halfway decent experience should be enough to sway folks in the same way that I’m just waiting for Google Fiber to come to my neighborhood so I can send a big ol fuck you to Comcast
  5. Oscar is still an insurance company, which means that the First Law of Insurance still applies: profit is predicated on Total Premiums and Total Claims Paid
  6. For Oscar, the 2 questions we need to explore are:
    • Via software and consumer products, can we meaningfully lower the median risk in the pool?
    • Via software and consumer products, can we attract and retain more low-risk individuals so that we can shift those premiums to better care for high-risk individuals and still make enough profit to have a viable business for investors?
  7. I truly believe we can. There are many analogues in the consumer space that have historically been applied to bending customer habits toward addiction (what we in the consumer app biz call “retention” e.g. Instagram, TikTok, Twitter). I propose we use those for good: let’s apply gamification to building healthy habits; User Centered Design to the user journey of scheduling and paying for a doctor’s visit; and H.264 video compression to telemedicine
  8. Oscar is in an interesting spot because they’re crossing the streams between 3 markets: Medicare Advantage (MA), Individual, and Employer. These three markets have different user job stories, care models, and sales models. I think these can work synergistically, but tracking the profitability of each discrete market will be important
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