ForHealthInsuranceStartupOscar,

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Oscarhashundredsofmillionsinfunding.Nowitneedscustomers
ZacharyTracer

AdamSatariano

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satariano
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September4,20154:10AMSGT

CourtesyOscar

HealthinsurancehasntattractedmuchmoneyfromSiliconValleyinvestors.Theindustryis
highlyregulatedandfiercelycompetitive,andturningaprofitdependsonsigninguphealthy
customersandgettingfavorablepricesfromhospitalsanddoctors.Still,investors,including
someFacebookbackers,puthundredsofmillionsofdollarsintohealthinsurancestartupOscar.
Insuranceisaconfusingsystem,confusingashell,saysMarioSchlosser,acomputerscientist
andformerMcKinseyconsultant,whoisOscarschiefexecutiveofficer.Hecofoundedthe
companytwoyearsagowithfellowbusinessschoolalumsJoshuaKushnerofventurecapital
firmThriveCapital,andKevinNazemi,aveteranofMicrosoftshealthcaredivision.They
hopetocapitalizeontheyoung,techsavvycustomersbuyinghealthinsurancethroughthenew
marketscreatedbytheAffordableCareAct.OscaroperatesinNewYorkandNewJerseyand
willstartsellingcoverageinCaliforniaandTexasinNovember.
Thefounderssayaslickappquicklyconnectscustomersanddoctors,addressingacommon
complaintabouthealthinsurers,thatfindingtherightdoctorwithinanetworktakestoolong.
Twoyearsin,Oscarhas40,000customersinNewYorkandNewJersey,exceedingthe
foundersexpectations.Andauserfriendlywebsiteallowssubscriberstotrackandmanage
medicalbills.ThetechnologybehindthesetoolsiswhatseparatesOscarfrombigger,more

establishedcompetitors,Schlossersays.Oscarcollectsdatafromcustomersvisitswithdoctors
andanalyzeshowmuchtheycostandtheresults.Itusesthatinformationtofindsavings.
Schlossersaysdatacollectedonhowmembersfareafterdoctorvisitswillhelppointthemtothe
bestdoctorsnexttime.

AllthatmakesforgoodmarketingopportunitiesOscarhasplasteredmessagesabouthowits
insurancelooksliketherestoftheinternetthroughoutNewYorkCityssubwaysystem.But
asthefirstnewinvestorbackedhealthinsurancecompanyinNewYorkinmorethanadecade
othernewcomersincludeaplancreatedwithfederalfundingandonestartedbyahospital
Oscarhashadaroughcoupleofyears.
Thestartuplost$37millionlastyear,whichSchlosserattributestoexpansioncosts,including
newhires.Ittookin$56.9millioninpremiumsinNewYorkamidlevelplancostsabout
$5,000peryearbutspent$66.3millionondoctors,hospitals,anddrugs,plus$24.3millionon
administrativeexpenses.About200veryillmembersaccountedforroughlyhalfthecompanys
payoutsformedicalchargesinitsfirstyear.
Thecompanyexpectsthelossestocontinueintonextyear,accordingtofilingswithstate
insuranceregulators,givenhighadministrativecostsandlowenrollment.Evenso,Schlosser
saysOscarhastheresourcestokeepgoing:Itwasvaluedbyinvestorsat$1.5billioninJune,
andithasmorethan$230millioninthebank.Thecompanyaimstosignup1million
customerswithinfiveyearsandtooperateinupto30markets.
Oscarisaverylongterminvestment,saysBrianSingerman,apartneratFoundersFund,a
VCfirmandthestartupsbiggestinvestor.OtherinvestorsincludeHorizonVentures,
WellingtonManagement,andGoldmanSachs.
About10fulltimenurseshelpmanagethecareofOscarscostliestmembersthosediagnosed
withdiseasessuchascanceranddiabetesorrecentlyreleasedfromahospital.Thenurses
ensurepatientstaketheirmedicationandkeepfollowupappointments.

Oscardoesntsellinthebiggestmarketsforhealthinsurance:employerplans,privatepolicies
fortheelderly,andMedicaidprogramsforthepoor.ThatsinpartbecausetheAffordableCare
Actmadetheindividualmarkettheeasiesttoenter.TheinsurancemarketplacescreatewhatJeff
Goldsmith,presidentofhealthcareconsultingfirmHealthFutures,callsanaccesspointfor
Oscartotakeadvantageof.Yournameandproductareuptherealongwiththecompetition,
saysPaulGinsburg,aprofessorattheUniversityofSouthernCaliforniasSchaefferCenterfor
HealthPolicyandEconomics.Itsmuchlessexpensiveandfasterthanbuildingasales
network.
Oscarplanstoselltoemployerseventuallybutwillneedtobuildrelationshipswithbrokersand
abroadernetworkofdoctorsandhospitals.MedicareandMedicaidwouldrequireittohandle
customerswhoareoftensickerorpoorer.Scalemattersinthosemarkets.UnitedHealth,the
largestcarrierintheU.S.,hasabout1,000timesasmanymembersasOscarintheU.S.
Consolidationintheindustrywillmakeitharderforthestartup.InJuly,Anthemagreedtobuy
Cignafor$48billionAetnastrucka$35billiondealforHumanaandCentenesaiditwill
acquireHealthNetfor$6.3billion.Thebiggerinsurersareabletousetheirscaletogetbetter
pricesfromhospitalsanddoctors,whichisthebiggestpartofthepremium,saysBobKocher,
aventurecapitalistatVenrock,whohelpeddrafttheAffordableCareActasaspecialassistant
toPresidentObama.
AsOscarpreparestoexpandintoCaliforniaandTexas,ithasstruckdealswithselecthospitals
andphysiciangroupstosharetherisksoftreatingpatients.Schlosserdeclinestocommenton
thedetailsofthearrangements.Insuchdeals,hospitalsandinsurerstypicallyestimatethecosts

oftakingcareoftheirmembersinayear.Ifthecostsarelower,thehospitalkeepssomeofthe
savings.Iftheyrehigher,thehospitalfootssomeofthebill.Thearrangementsprovidecost
advantagesbutlimitthesizeofOscarsnetwork.
ThedealsareprobablyOscarsbestchanceat
success,butitstillfacestoughcompetitionin

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marketslikeLosAngeles,withatleasthalfadozen

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wellestablishedrivalsincludingKaiser
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Ginsburgsaysthebestoutcomewouldbefora
competitortobuyOscar.Worstcase,itgoesoutof
business,hesays.ThathappenedtoSeeChange
Health,aventurethatstartedin2008andsold
coverageviaemployersinCaliforniaand

Colorado.Afterraisingabout$35million,itstruggledtoattractenoughcustomersandhas
stoppedsellinginsurance.SchlossersaysOscarhasenoughfundingtosurviveforyearsandthat
sellingisabsolutelythelastthingonourminds.
OscarhasyettoproveitcantakeadvantageoftheopportunitiescreatedbyObamacare.Weve
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gottoshowovertimewecanreducehealthcarecosts,Schlossersays.Wevegottoshowwe
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canimprovequalityofoutcomes.

Thebottomline:Asthehealthinsuranceindustryconsolidates,Oscarwhichlost$37million
in2014isexpanding.

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