Before he was diagnosed with testicular cancer, Parker Conrad never really thought about health insurance. In his early 20s, he had a good job with health benefits, but without the job he probably wouldn’t have even bothered with insurance, he says. He hardly ever went to the doctor.
Then, when he was 24, he got the news. What followed was tough – six months of treatment, surgery, radiation – but one of the unforeseen side effects was that all of a sudden his health history really mattered to his life in startups. (Conrad is now cleared of the cancer, but he has to visit the doctor for a check-up twice a year.) When it came time to start his last business, the investment management software company SigFig, the entrepreneur found that his choices for where to base the headquarters were limited in the extreme.
“Because I had cancer, when I started my last company there was really only one state that I could have started a company in, and that was California,” says Conrad. There was no way he could have started it in New York, his home state, because his cancer history meant that no insurance company would insure his startup. In their eyes, the risks to do so would be too high, and there is no government mandate obliging them to do any different. California, on the other hand, is one of the few states in the US that has guaranteed issuance for health insurance.
Because of that experience, Conrad became a big believer in the Patient Protection and Affordable Care Act – otherwise known as Obamacare. He is one of the few in Silicon Valley who seem to be paying close attention to Obamacare, which is opening up opportunities for innovators in an industry that has never before seen such rapid change. Put off by what looks like a regulatory quagmire and the deeply unappealing field of insurance, investors and entrepreneurs alike are standing well clear of Obamacare. In fact, you’ll be lucky to find some who even understand it, let alone its implications.
Not so with Conrad, who learned his lesson the first time. As soon as the Act was released, he read it cover to cover – all 750 pages. His conclusion? “It’s not the best solution out there,” he says, “but it is so much better than the fucked up solution that’s out there today.”
The most significant features of the Act, which President Obama signed into law in 2010, will start to take effect on January 1, 2014. Among them is a provision that prohibits insurers from discriminating against or charging higher rates for people based on pre-existing medical conditions, and a dictum that will establish health insurance exchanges in every state, which allows individuals to buy insurance that is subsidized by the government. Had Obamacare been in effect when it came time to start SigFig, Conrad could have set up shop in any state he wanted.
Conrad, a 32-year-old Harvard grad who also co-founded investment research portal Wikinvest, says his personal experience showed him the unfairness and arbitrariness of the whole system. That spurred him to build a new company, Zenefits, that helps advance, and benefits from, Obamacare. “I wanted to do something related to this law because personally I want it to work.”
Zenefits offers an automated way for companies to research, buy, and manage their health insurances policies, stripping away the pain of dealing with paper forms or PDFs. It stores a company’s insurance data digitally and effectively takes the place of a human broker.
That’s important, because as of January 1, 2014, there may not be many human brokers around who are willing to take on health insurance work for small companies. That’s because the new law mandates that insurance companies direct 80 percent of their fees towards actual medical costs for their customers. That leaves them with just 20 percent for operational and marketing costs. Health insurance brokers, meanwhile, typically work for a 7 percent commission – which would account for more than a third of the insurance companies’ operations budgets. In all likelihood, insurance companies will thus slash their commissions, meaning brokers will have less incentive to go after small-change businesses.
“Because of Obamacare, insurance brokers are going to abandon the small group market in 2014,” says Conrad. Zenefits, however, can afford to work off lower commissions, because it doesn’t have to pay human brokers. Even if commissions dropped to 4 percent, Zenefits could still turn a handy profit.
Zenefits is one of a handful of startups looking to take advantage of the changes in the healthcare industry wrought by Obamacare. Companies such as Castlight Health, SeaChange Health, Practice Fusion, CakeHealth, and Simplee also stand to benefit from the new healthcare environment, which is opening up opportunities in ways to deliver care, how healthcare payments are processed, how insurance is sold, and in data and analytics (also fueled by the 2009 HITECH Act). Also, Obamacare has led large employers to think creatively about how to manage their healthcare benefits, which means they might be more willing to try new technologies from startups.
“Obamacare’s one of these shocks to the system in the insurance industry that is of the scale of the iPhone being launched and the effect it had on consumer software,” says Conrad. Despite the tectonic shift, however, Silicon Valley is not as hip to the Obamacare innovation opportunities as one might think.
Conrad says there’s “close to zero” understanding of Obamacare in the startup ecosystem – “even in the investment community.” If you talk to people in the insurance industry, it’s like the whole world is changing, he says. “In the tech industry,” on the other hand, “most people are totally unaware of this.” Part of the problem is that insurance is not a sexy field. There aren’t many 24-year-old hackers who dream of an insurance startup as their planet-denting contribution to history.
Among investors, it’s likely that the prospect of stepping into a heavily regulated industry around which there is a perceived degree of uncertainty is equally unsexy. From the sunny vales of Silicon where startups thrive in nimble and lean environments, Obamacare must look like a bloated, imposing list of rules that are subject to change. But that’s not quite the case, at least according to one of the men who worked on the policy while a member of the National Economic Council.
Bob Kocher, an MD who’s now a venture capitalist at Venrock, helped write the HITECH Act and was an adviser to President Obama during the crafting of the healthcare reform legislation. He is also a co-chair of the Administration’s Health Data Initiative. Kocher says “healthcare is changing faster than it ever has,” and that Obamacare will add tens of millions of people to health insurance rolls who hadn’t been there before. “We spend $2.8 trillion on healthcare in the US,” he says. “This makes it a huge market and opportunity for startups that can improve value for patients or reduce costs for providers.”
Since arriving in Silicon Valley in 2011, Kocher has detected a reluctance in the startup community to take advantage of that opportunity. “I’ve been surprised at how much confusion people have about what is the Affordable Care Act and what happens and when it’s going to work,” he says.
However, he says the risk of the unexpected happening – the law being overturned, perhaps, or regulations shifting soon after they’re implemented – is a lot lower than people think. “You can plan for the future more than people might have first thought,” he says.
The ultimate goal of Obamacare, Kocher says, is to create better-functioning healthcare markets, and while the list of regulations is long, it is easy to decipher. “The regulations, while important, are manageable and understandable, and perfectly able to be navigated by businesses and will not undermine their strategies in any material way,” says Kocher.
To many in Silicon Valley, that might still sound unsexy – but perhaps that pot of $2.8 trillion can help offset the pain of the paperwork.
[Illustration by Hallie Bateman]