Mario Schlosser isn't a guy who likes to fly blind.
But when he and his wife were expecting a baby in 2012, that's what he had to do. The computer scientist and Harvard Business School graduate found it nearly impossible to learn which hospitals in New York were the best or which obstetrician they should use.
He had two options: He could either complain, or he and some colleagues could launch a health insurance company organized to fuse data and health care forever.
"About 20 percent of your income goes to health care, and no one was really there to explain how any of this works," said Schlosser, CEO and co-founder of health-care start-up Oscar. "It's an excellent system in pockets, but the coordination isn't there.''
Four years later Schlosser's other baby, Oscar, is a health insurer that's net insurance-premium revenue remains well below its valuation, but it is among the best-known and largest start-ups attempting to prove that the employer health-care plan model and delivery is unsustainable.
The New York City–based company, No. 17 on the 2016 CNBC Disruptor 50 list, has raised $738.9 million in venture capital at a valuation of $2.7 billion, according to PitchBook.
The biggest change is one that Oscar itself didn't set in motion: Its chances rely heavily on whether President Obama's Affordable Care Act gradually breaks the link between where people work and where they get health insurance, prompting an ever-rising percentage of people to buy coverage themselves. Since Oscar isn't targeting the group insurance market dominated by giants like UnitedHealth Group, Humana, Cigna and Aetna, the ACA is the mega-disruption on which its own ambitions ultimately depend.
"ACA was a catalyst, but it wasn't the motivation," Schlosser said. "Everyone has come to the conclusion that the system is too expensive, and the best mechanism to change it has to be the consumer. People have to be able to vote with their feet."
Oscar, not surprising for a Silicon Valley-backed company, touts technology as a key advantage. It lets clients use technology to evaluate the best doctors for them, or even get minor illnesses treated by providers they communicate with over the internet. The same data tools can boost quality of care by letting Oscar and doctors coordinate treatment, either within a single complex patient case or spreading the best methods quickly across networks of doctors.
But a deeper change on which Oscar relies is in practice patterns called narrow networks: The health-care start-up is trying to hold down the cost of insurance by channeling business to a relatively small number of hospitals and doctors in each city where it does business, in exchange for what Schlosser said are "double-digit discounts.''
The road Oscar faces is long and pocked with challenges. It loses a ton of money — more than $100 million in 2015, and compared to trailing net premium revenue of $127.3 million (that's from plan members on the books in 2015 and added during the 2014-15 open enrollment seasons). Still, Schlosser projects that the company will be cash-flow positive between 2017 and 2018. Its current total of roughly 140,000 members implies an annual revenue run rate of around $675 million, but the business is still a tiny fraction of what giants boast. UnitedHealth, by contrast, claims 27.5 million members. Oscar must hope it can preserve its competitive advantage — the big carriers are pushing to implement many of the narrow-network and tech innovations Oscar would like to claim as its own. But Oscar can't succeed as the king of current ACA exchanges, either, where it's competing for about 15 million people. It needs the exchanges' slice of health insurance to widen, too.
"They want to turn a traditional weakness, a narrow network, into a brand and into a strength," said Katherine Hempstead, senior advisor at the Robert Wood Johnson Foundation, the nation's largest health care–focused philanthropic organization. "Everything now is about integration between the carrier and the provider."
Oscar is not alone among start-ups in on this action, some taking Oscar's idea further than Oscar itself does: Companies like Zoom Healthcare and Harken Health even run ambulatory-care facilities themselves, partly breaking down the barrier between the companies that provide health care and those that pay for it, Hempstead said.
"Oscar is kind of in a 2.0 mode now" as it figures out how completely to integrate caregiving, technology and payment systems, Hempstead said. "They started out trying to [leverage] telecommunications, but the way they provided health care wasn't especially novel."
Josh Matheus is pretty much exactly the patient Oscar wants, and the 27-year-old restaurant manager from suburban Dallas chose the company for exactly the virtues Oscar is selling.
Matheus moved to Oscar from a Blue Cross plan in February 2016: He says his $268 monthly premium (before an Obamacare tax credit for a medium-tier "silver" plan) is about the same as he was paying, but Oscar is cheaper overall because of its lower deductibles and co-payments.
The reason that happened was that Oscar has a narrow network in Dallas, but the Matheus case suggests that consumers won't mind less choice as long as they can get to many of the best doctors in their town. In Dallas, one of Oscar's key partners is the Baylor Health System, which is the home base of Matheus' family doctor. Shortly after joining Oscar, he had a stress fracture and was able to pick a Baylor-affiliated orthopedist, too.
"I hopped on the app and found one of the best orthopedists in town," Matheus said.
That narrow network, like it or lump it, is the key to Oscar's plans to turn profitable. Oscar's regulatory filings indicate that it lost $92 million in its home market of New York in 2015 and almost $13 million in New Jersey.
In New York, Oscar's biggest market, and New Jersey, Schlosser said Oscar doesn't have a narrow network and has had trouble making deals with hospitals and doctors for less than it charges in premiums. An announcement about changes to Oscar's New York operation to reduce losses there is coming within a few weeks, he said.
For providers, jumping on a narrow-network strategy like Oscar's can be a path to greater market share, and help provide better care at the same time, said P.K. Khurana, strategic services officer at Oscar's chief Los Angeles partner, Providence Health & Services California.
Washington State-based Providence organized a specific network of doctors just to handle Oscar's patients in Southern California. The network includes six hospitals in Los Angeles County, and St. Joseph Health, a leading player in adjacent Orange County, which is merging with Providence.
The key to the network's success is its ability to use Oscar's data tools, which capture information from patients' visits to any health-care provider, to avoid complications in specific patients and, over time, identify the most-effective doctors and cost-effective treatments, Khurana said. That will be integral to Oscar's model all over the country, Schlosser said, because as patients move from doctor to doctor and in and out of hospitals, the one player with all their information is the insurance carrier.
"It breaks down a barrier between the insurer and the delivery system," said Khurana, who said the network's goal is to be able to stabilize local insurance premiums. "It improves collaboration across the network."
The Providence-St. Joseph alliance will grow as Oscar gains market share and consumers learn to like narrower networks, Khurana said. In Texas, Oscar landed 40,000 customers during its first full open-enrollment season, and the partners think it can duplicate that growth rate in California, he said.
"The goal is to triple or quadruple [local customers] very rapidly," Khurana said. "L.A.'s market is very fragmented."
Hempstead said the business is moving toward tighter relationships between health-care payers and providers, similar to the way Kaiser Permanente has unified insurance and providing care on the way to more than 40 percent of California's individually purchased health insurance market, or the way Salt Lake City-based Intermountain Health Care commands a similar share of Utah's market.
But these examples imply the question is still open about how much of Oscar's mission is truly new, and how much shareholder value it can really generate over time, said Les Funtleyder, a portfolio manager at E Squared Asset Management in New York and former Wall Street health-care analyst who has written extensively about the Affordable Care Act.
UnitedHealth has had a Centers of Excellence program for more than a decade that, like narrow networks, channels patients to preferred high-quality providers who play ball on price, Funtleyder said. Blue Cross Blue Shield plans and other incumbents are experimenting with different flavors of narrow networks, and United has led the incumbents in rolling up a series of small health-data companies into Optum, to make itself at least as tech savvy as Oscar, Funtleyder said. "Everybody has a baby and thinks theirs is the cutest," he said.
Even if Oscar overcomes these barriers, it's still hard to see how recent investors like Fidelity Investments will get hefty, venture capital–like returns on the $2.7 billion valuation of the company's January 2016 financing round, Funtleyder argued. Fidelity led the deal at a time of mounting losses for Oscar — the losses of over $100 million in 2015 versus $27.5 million the previous year.
The valuation — which increased by $1 billion based on the Fidelity-led deal — works out to almost 20 times Oscar's sales in a relatively mature, low-margin business where the ACA requires insurers to spend at least 80 percent or 85 percent of premiums on health services, even before including marketing expenses and corporate overhead.
And the Big Five of United, Aetna, Cigna, Humana and Anthem trade at less than one time sales, suggesting that Oscar would have to grow fivefold, and achieve profit margins akin to the majors', before more-recent investors could expect to make a cent, Funtleyder said.
"I'm not convinced from the insurance filings that they have a handle yet on how to control health care costs, and that's true of a lot of people in that business,'' Funtleyder said. "There's no reason to think it will be easier for the Oscars of the world.''
Aetna's CEO said earlier this year it has serious concerns about whether ACA markets are sustainable. UnitedHealth said it would lose roughly $1 billion on ACA plans in 2015/16 combined. United said it would have waited longer to get into the ACA market, and may yet decide to exit it entirely in 2017.
A recent Blue Cross and Blue Shield report, which analyzed health insurance for 4.7 million Americans in all 50 states, showed that new ACA customers were sicker and costlier than people in the old, individual insurance market.
Schlosser certainly understands all of these challenges. Some questions will be answered simply by Oscar's increasing size, he said, which should boost its negotiating leverage with providers and give the company economies of scale in marketing and operations. Another key to profitability is figuring out the right way to price for the Obamacare market, based on the new market's medical-loss ratio. That's a process he said the company knew all along would take years to understand, and there was never an expectation there would be a quick path to profitability.
Some of the most popular types of Obamacare health insurance plans want to raise their prices by an average of 10 percent or more in 14 major metropolitan areas next year, an analysis released Wednesday reveals. The proposed prices for the two lowest-cost silver plans would increase by a steeper rate than Obamacare plans have risen in past years — with double-digit hikes being common, the Kaiser Family Foundation analysis found.
In Oscar's largest market, New York, where it has roughly one-quarter of the individual-plan market, Kaiser estimates a 16 percent rate hike for ACA plans next year.
Accounting aside, Schlosser is counting on the weapons start-ups always do: A culture that is laser-focused on providing health care in the new way, with a big dose of technology, specifically where technology is a means to the end of better coordinating care and providing better service than a giant can. Plus, it would help a lot if the market shifts away from the giants' strength in group insurance and pushes more toward asking individuals to buy their own coverage and marshal data — like the kind Oscar uses — to command their own care.
"The single biggest thing that's different is the relentless passion for the member," Schlosser said. "The difference is that we build systems and teams whose DNA is that individuals be taken care of. That's not how it works in the group business, where the insurance company's primary customer is the human resources department.''
— By Tim Mullaney, special to CNBC.com