The self-insured employer channel isn't as lucrative as you think

May 18, 2015

It feels like half of the digital health start-up companies we see are focused on self-insured employers as their target customers. To be sure, this strategy can be successful. Castlight Health, one of the first digital health companies to IPO and a company that sells to self-insured employers, has a market capitalization of $500 million, built largely on a single product.[1] Yet, it’s been hard for me to see many others replicate this success in such a difficult, expensive, and dis-intermediated channel.

Popularity of Self-Insured Employers as Customers

The idea is rational: self-insured employers are a huge potential market and are uniquely motivated to reduce healthcare spending, since it directly hits their bottom line. Both are true. Roughly 100 million lives in the US are covered by self-insured health plans. At average pricing of $7 per-member-per-month (PMPM), this yields an annual potential market of $8.4 billion. That’s a large market, and still a drop in the bucket as compared to what self-insured companies spend on healthcare – an estimated $600 billion annually! So, if you can save them even 2%, it’s a good deal for them.

The Reality of the Channel

Before you jump on the bandwagon and create another company focused on this market, think about your customer. Companies are not organized to optimize their healthcare expense line item the way they are to optimize gross-margin, a marketing or a sales expense line item. Within a company, the “customer” is typically the vice president for benefits who has responsibility not only for healthcare but for all benefits; for example, retirement plans, workers compensation plans, employee stock purchase plans, and life insurance. “Aggregators” like benefits consultancies such as Towers Watson or Aon Hewitt have long sold through this channel and have products in all categories, justifying the cost of maintaining the channel. Traditionally, these consultancies help curate and design the list of benefits and the most appropriate benefit administrator.[2]

A new company that has identified its target customer base to be self-insured employers must decide whether to go to market directly or through channel partners like the benefits consultancies. Benefit consultancies will “rent” you their channel, but it can be expensive, either because they charge a healthy commission or because they are effectively competing with you.[3] Establishing your own direct channel to the VP benefits is expensive and involves long sales cycles (9-15 months on average), unlikely to be truncated. For example, assume you launch your product on August 1, that’s too late to be considered for the June sales cycle.[4] So, you have to wait until the following year’s sales cycle. You hear on June 30th of the second year that you have “won” a trial. That trial will go-live on January 1st and will last 3 months, after which you might get a long-term contract. So, you finally hear on March 30th of the third year, 20 months after you launched, whether you have a contract. Furthermore, while vendor companies are typically paid a PMPM fee, the vendors must also ensure that employees are “activated” and actually use the tool/benefit. For example, you launch your pilot on January 1, but that just allows employees to use your product, you still need to make them aware of your product, market to them, convince them to use it. If not, either you won’t get the initial contract or, once the contract comes up for renewal, typically after 3 years, the client will not renew. Compounding this difficulty, rarely is the vendor given direct and durable access to employees and surveys show that employees do not trust their employer has their best interests in mind when it comes to healthcare, so employer tools are under-utilized even if well marketed. So, it’s a Sisyphean task of constantly adding enough new customers to cover the inevitable churn. This model has all the expense and marketing challenges of traditional consumer technology, but adds an additional hurdle of a gatekeeper that typically adds 12-24mo of burn to your business.

So, what are the alternatives?

Intermediary aggregators, like Jiff or Limeade, are trying to establish the channel with the self-insured employers and then create a marketplace of curated solutions. The economics of these channel partnerships are not yet established, but the conflicts of interest are potentially more mitigated than with the benefits consultancies. Risk-bearing entities – like hospitals signing capitated contracts for patients or episodes of care – might be great partners, particularly for telehealth or behavior change applications that will reduce hospital visits or in-person care needs. Finally, going directly to the patient is an option. Pricing will be lower than an enterprise sales model, as consumers are still hesitant to pay out-of-pocket for many healthcare expenses, especially technology-mediated solutions. Still, consumers spend over $300 billion out-of-pocket each year on health expenses and 37 million Americans are currently enrolled in high deductible plans.[5] There is a market for paid consumer products, but they need to show a return on investment.

In a nutshell, companies directly targeting self-insured employers must spend a lot of money to get access to the top of the conversion funnel, and then are not in full control of that funnel as it narrows to fully engaged employee customer.

[1] Even Castlight Health has had to raise a extraordinary amount of equity capital, approximately $360 million, to finance this strategy. Approximately half of the equity capital was raised privately between 2008-2014 and half upon their IPO in March 2014. In the first half of 2015, Castlight had net losses of $40.9 million on revenues of $34.5 million. (To be fair, their revenue doubled from a year earlier and the company is working on additional offerings to move through the same channel.) Source: Crunchbase, SEC filings.

[2] Sometimes the benefits consultancy does the administration in-house.

[3] Benefit consultancies might try to duplicate core aspects of your offering under their brand. Furthermore, using the benefit consultancies as a channel could be extra problematic because many are building private exchange marketplaces that shift the purchase and administration of health benefits away from the self-insured employer and to commercial exchanges where employers pay negotiated fees.

[4] Most companies are on a Jan 1 “go live” calendar. This means decisions are made about the next year’s benefits in Q2. Negotiations are completed in Q3. Integrations in Q4. Go live in Q1. Assessments/decisions in Q2.

[5] David Goldhill and Paul Howard “An Obama-Care Inspired Rebellion: The law is driving people into high deductible plans, inadvertently seeding a consumer-driven market,” Wall Street Journal, 1 July 2015.

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