On the surface, Ali Diab’s job doesn’t sound like the coolest one in tech.
Diab is the CEO and cofounder of Collective Health, a startup that works with employers to provide health insurance to their workers.
“It’s not glamorous,” Diab said. “I absolutely never thought I’d be getting into this business had I not had a first-hand experience that was pretty harrowing.”
Like many health startups with tech founders, the idea started out with a bad experience with the existing healthcare system. Diab was hospitalized in 2013 with an intestinal condition.
At the time, he thought he was good to go when he left the hospital, but then the bills started coming. Some of the claims had been denied for one reason or another, and Diab had to spend time working with his employer, the hospital, and the insurer, to figure out what was going on.
“It was just like, ‘Oh my God, I can’t believe the customer experience around health insurance is so crappy. How do you fix this?'” Diab told Business Insider at the CB Insights Future of Health conference in New York.
Disrupting health insurance has become a hot business. A crop of health insurance startups — Oscar Health, Devoted Health, Bright Health, and Clover Health — have raised a combined $3 billion to use technology to build new kinds of health-insurance plans.
Collective isn’t an insurer itself. It’s what’s known as a third-party administrator. That means it helps big companies manage the health insurance benefits that they give to their workers.
“It doesn’t sound like a sexy business on its surface, but neither does selling books if you’re Amazon on the surface,” Diab said.
Why Collective Health chose not to be an insurer
Collective Health works with companies that pay directly for their workers’ care, known as self-insured employers. In the US, more than half of the non-elderly population is covered by an employer-provided plan, and almost 80% of large companies are self-insured .
For those employers, Collective Health helps them manage their healthcare benefits, replacing traditional health insurers. It offers online tools for executives to monitor healthcare spending and an app for workers to find a doctor or check their coverage. The goal is to help companies reduce costs and provide a better experience for their workers using updated technology.
Collective Health doesn’t take on any of the financial risks of paying for workers’ healthcare. Instead, it relies on insurers or other companies to manage doctor networks and take on financial risks.
When it came to building the model, Diab wasn’t keen to become an insurer himself.
“In the US, health insurance companies just economically are not motivated to lower costs” Diab said.
Health insurers take in money from monthly premiums, and in turn pay out medical claims on behalf of members. Health insurers have rules around how much of their premiums have to go toward medical expenses, typically at least 80%. But when it comes to using those rules to lower healthcare costs, from where Diab sits, that doesn’t always pan out.
“It does, in our opinion, also engender some perverse disincentives to bringing the overall cost of care down,” Diab said. “Because if I can tell you you can keep 20% of something, and you’re a profit-growing company, you’re going to want to make that thing that the 20% is based on as big as you possibly can.”
Collective works with companies like Uber, Zendesk, and Palantir
Collective charges a per-member per-month amount to employers for its service.
Diab likened Collective’s role as a TPA to the spot where Amazon sat when it started selling books and other goods online.
“It gives you a picture of how the market looks and where there are inefficiencies, and then the ability to steer people to the places where there’s the most value in the market,” Diab said.
But at the same time, as a TPA, Collective is an integral part of an employers’ healthcare. It’s through Collective that employees and dependents file claims and check their benefits.
As a TPA, Collective Health covers about 200,000 members, mainly employees and their spouses and children from companies like Zendesk, Uber, Palantir, eBay, and Pinterest. To date, the company’s raised about $435 million from investors including SoftBank, Founders Fund, NEA, and GV.
“At the end of the day, employees and their dependents need to come to us,” Diab said. “Because we’re facilitating all the payments and coverage and everything else that relates to the plan.”