The Obamacare Start-Up Boom

Few issues divide the country more sharply than Obamacare, which will require millions of businesses to provide health insurance for their workers. Like it or not, the Affordable Care Act (ACA) will also shake up the industry’s business model. It will change the way health care is delivered and paid for, focusing on outcomes rather than fees for service, and it will reduce payments to providers that don’t measure up.

That’s why entrepreneurs and investors are all over Obamacare like a rash: there’s a buck to be made for start-ups that can adapt quickly to the new model. And many are doing so. Consider IntelligentM, a company that makes a smart bracelet that helps hospitals combat acquired infections, which cost the health care system $30 billion a year. Or AdhereTech, which monitors patients to make sure they’re taking their medications–too many don’t, which makes them require yet more care. Or Care at Hand, a medical-information mobile app for home-care workers that uses an algorithm to spot patients who may be headed for trouble.

“Obamacare has been a huge force for getting insurers, pharmaceutical companies and health care providers to seek out innovation,” says Dr. Brad Weinberg a founding partner of the health-care-business incubator Blueprint Health. “Partly it’s out of fear that the industry is changing and the status quo will no longer work, and some of it’s coming from very real changes in how these organizations are going to be compensated.” According to StartUp Health Insights, investors will pour more than $2.5 billion into digital health care start-ups in 2013, an increase of more than 200% since 2010.

One start-up getting investors’ attention is Zenefits, a payroll, benefits and HR outsourcing firm based in San Francisco, which has raised $2.1 million so far. Zenefits’ founder, Parker Conrad, was diagnosed with cancer nine years ago at the age of 24. That ordeal gave him firsthand experience with the eccentricities of the U.S. health care system and motivated him to pay special attention to the debate over reform in 2009. As a serial entrepreneur, Conrad recognized that the law would inevitably create opportunities for small businesses to take advantage of the new incentives being built into the system.

His interest was piqued by the stipulation that beginning in 2014, insurance companies would be required to spend 80% of their revenue on medical care for their customers. That leaves only 20% of revenue for profit, salaries and other expenses, like marketing. One significant expense for insurance companies is commissions to brokers. In California, for instance, brokers earn a 7% commission on average. But with the federal government cracking down on extraneous spending, it’s unlikely that brokers will be able to command those big fees.

Commissions are going to come down one way or another, argues Conrad, and that may cause brokers to shun small businesses as less profitable. “Almost every single insurance broker I talked to said that they were going to stop working with firms with less than 25 employees,” he says.

His idea is to change the model by becoming a small-business-services host rather than a plain vanilla broker. He plans to throw in HR and payroll outsourcing for his insurance customers.

Zenefits figures it can undercut insurance brokers because Obamacare is forcing insurance companies across the country to offer instant quotes online. Only three states–California, New York and Colorado–require insurance companies to give instant quotes. In other states, insurers collect information and analyze it off-line, returning often weeks later with a quote. Obamacare will override the old state-by-state regulations, making it possible for a company like Zenefits to go national cheaply using the Web.

Changes in the way insurance is priced will also create new opportunities. Obamacare allows insurers to compute a price to offer an individual in a small-business health care plan on the basis of age down to the year. Currently in New York, for instance, individuals on a small-group plan is charged the same rate whether they’re 23 or 63. In California, insurers can price by age, but only down to the decade. Younger workers generally need less medical care, so they could theoretically get a discount. Under the new regulations, insurers will be able to fine-tune rates down to the year, creating an accounting issue for small businesses. Zenefits and companies like it may find many small businesses that want this process automated for them.

Another part of Obamacare pushes hospitals to reduce readmissions, which the federal government says cost Medicare $26 billion annually. Under the new law, hospitals that readmit too many patients whom they’ve treated for pneumonia, heart failure or heart attack will have their reimbursement rates reduced.

To help health care providers tackle the readmissions problem, a start-up called Health Recovery Solutions has invented a tablet-based app that connects via wi-fi to a scale and pedometer, which hospitals are now sending home with patients to track their weight and activity. Patients also take surveys on the app to monitor their recovery, and the results are shared with their doctors and family members so that major problems can be spotted early.

Another start-up, Aidin, based in New York City, has raised nearly $1 million to create an online network that matches patients with post-acute-care facilities best suited to meet their needs. According to Aidin’s founder, Russ Graney, finding the right posthospital facility often makes the difference between a successful recovery and a return trip to the hospital.

Zenefits founder Conrad, a former Amgen product manager, says that when there’s a big shock to an industry, it’s often the smaller, nimbler players that adapt. He likens the ACA to the arrival of the iPhone, which opened the door for small app developers while leaving incumbent tech firms scratching their heads.

Significantly, the ACA demands that health care delivery be brought completely into the digital age. It’s a standard that is tailor-made for tech start-ups and reduces the advantage of scale the big companies once enjoyed in the health care industry. According to Weinberg of Blueprint Health, it’s encouraging that big players are now paying attention to small start-ups to find partners to solve new problems or as potential acquisitions. “It is in no way easy to start a company in any industry,” says Weinberg. “But for an industry that was nearly impossible to break into before, things have become a little less difficult.”

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