Can Selling Insurance to Patients Transform Health Care?

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Credit Illustration by Justin Renteria

This is the second essay in a three-part series looking at problems and solutions in the health-care marketplace. Read part one, on the main problems with the existing insurance system, here.

On the sixth floor of the historic Puck Building, in SoHo, are the headquarters of Oscar, a two-year-old startup that sells health insurance to individuals. The office, like the building’s Shakespearean namesake, has a certain playfulness: the walls double as chalkboards, kegs of beer round out the kitchen, and the names of the conference rooms refer to famous Oscars, including one called Bluth, after the “Arrested Development” character.

“We want to introduce people to the idea of great health insurance,” announces a credo printed on one wall. “By being simple. By being thoughtful. By being friendly.” Oscar is one of several health-insurance companies to emerge in the past few years with the ambition of reinventing the industry. The Affordable Care Act, which was signed into law in 2010, created an unprecedented opportunity to change how Americans purchase and consume health care. The A.C.A. has made health insurance mandatory, creating a captive market. It has introduced the health-insurance exchanges, giving people who were previously uninsured an easier way to get coverage. It has accompanied a rise in the popularity of high-deductible plans, which charge lower annual fees but require greater out-of-pocket contributions, prompting consumers to be more judicious about how they seek care. And it has initiated a shift in reimbursement to health-care providers from rewarding volume to rewarding value, creating financial incentives for providers to reduce unnecessary spending.

The question now, five years after the A.C.A. was passed, is how the health-insurance industry should evolve. In the past few years, two noteworthy approaches have emerged, addressing different aspects of the insurer-provider-patient triad. The first focusses on building a relationship between insurers and patients, capitalizing on the opportunity offered by the exchanges. The second attempts to forge financial alliances between insurers and providers. While both seek to improve the system, they reflect different strategic bets on where it is most amenable to innovation, and how insurers can have the greatest impact in the short-term.

Oscar, which sells insurance on the individual exchanges, is one of the most visible examples of the direct-to-consumer approach. In September, Google’s growth-equity fund announced a $32.5-million investment in the company, bringing its total valuation to $1.75 billion. From Oscar’s sleek Web design to its colorful cartoon advertisements to its homepage U.R.L. (hioscar.com), the company’s clear hope is to attract customers by making something that is ordinarily unpleasant seem more palatable. It has amassed some forty thousand members in New York and New Jersey, where it currently operates, and plans to expand to Texas and California this November.

Some critics have questioned whether Oscar’s clever marketing is simply a veneer for a traditional health-insurance plan. But Mario Schlosser, the C.E.O. of Oscar, told me that he sees the marketing as key to creating a different kind of insurance. “We have an asset, which is a membership base that is very engaged,” Schlosser said. That engagement allows the company to offer creative incentives to influence patient behavior in positive ways. Last year, for instance, Oscar began giving some members a monetary reward for getting a flu shot. Twice as many patients in that group signed up for the vaccine, as compared to Oscar patients who were not offered a reward.

Oscar was also the first health-insurance company to offer members free unlimited access to telemedicine, a move Schlosser told me has minimized unnecessary office and emergency-room visits. An evaluation for abdominal pain would traditionally cost the company more than a thousand dollars; using telemedicine, it costs fifty-seven. And patients, who pay nothing at all, avoid considerable out-of-pocket costs. “It’s really being utilized by our members,” Schlosser told me. “Even though we pay for these visits, they over-all appear to be saving costs for the entire system, as opposed to costing more.”

The direct-to-consumer strategy has its challenges, though. For one, prices have to be competitive for a company to win over market share—a strategy that can be difficult to sustain, particularly for startups that lack sufficient capital to buffer their losses. In hopes of promoting healthy competition, the government has sponsored a number of “consumer operated and oriented plans” (CO-OPs), non-profit organizations that, like Oscar, sell insurance on the exchanges. In September, regulators announced that they were shutting down Health Republic Insurance of New York, the largest of the CO-OPs. The company had lost more than fifty million dollars in the first half of this year. So far, eight CO-OPs across the country have closed their doors, and many more are dealing with financial losses and lower-than-expected enrollment.

Another limitation of the direct-to-consumer approach is the size of the market. Last year, only seven million individuals bought coverage through an exchange, and the Congressional Budget Office projects that, over the next five years, enrollment will plateau below twenty-five million. By contrast, a hundred and fifty million people were insured through their workplace last year. It’s possible that this imbalance could shift—for example, if more employers were to adopt “private” employee-dedicated exchanges and give workers a fixed allowance to spend on a plan of their choice. A Kaiser Family Foundation report published this year indicated that while only two per cent of workers are currently enrolled in a private exchange, one in five employers are considering the model. By creating demand “from the ground up” among employees, Schlosser told me, Oscar hopes that eventually it, too, can expand into the employer market.

While customer choice is typically considered a good thing, the direct-to-consumer market’s reliance on autonomy can also be a problem. When I became a doctor, I struggled to choose between just two plans that my employer had pre-selected for me, and research suggests that, in general, consumers make worse decisions when they are given too many options. “Throwing your employees to an exchange is not consumerism. That’s abdication,” Ali Diab, the co-founder of a company called Collective Health, which helps employers design and implement custom health plans, told me. “These are employees who you’re expecting to be engaged and productive at work, not benefits experts.”

Perhaps the most serious criticism of the consumer-focussed strategy is that, no matter how well executed or widely adopted it is, it will do little to address the larger issue of rising health-care expenses. That’s because complex and chronic diseases drive the greatest share of costs, and providers still control most spending decisions where these illnesses are concerned. A 2013 survey on medical expenditures conducted by the Agency for Healthcare Research and Quality found that five per cent of the population accounted for nearly half of all health-care spending. Improving outcomes and decreasing costs for the sickest patients will take more than slick technology and a friendly interface—it will take close coördination with providers, adjustments to how they are compensated, and system-wide changes in clinical practice.

Part three, on new approaches to the relationship between providers and insurers, will be published on Friday.

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