US Health Insurance Industry
The US healthcare system is generally known to be rampant with inefficiencies and misaligned incentives across the entire ecosystem. Many companies have recently emerged to address these issues, whether through providing better healthcare, increasing access to healthcare services, or dismantling the notoriously expensive cost structure.
Sana Benefits is one such healthcare startup that is addressing the payor model historically adopted by workplace insurance plan pricing. Incumbent insurance providers typically price workplace health plans at the maximum amount per covered person allowed by federal regulations. This leads to higher than necessary costs for employers, insurance companies incented to avoid paying for healthcare costs incurred, and overall lower quality of healthcare for consumers. According to a new review of estimates published on the JAMA Network, an estimated $1 trillion in wasteful healthcare system costs occur in the US each year.
Sana provides small and medium sized businesses with affordable health plans that don’t limit participants to a given “network”. Sana is able to provide these plans at a much lower cost to competitors due to a number of digital innovations it employs.
One of the biggest cost drivers for insurance providers is administrative expenses. Sana utilizes software such as Amazon’s HIPAA-compliant cloud architecture, Rails, and React to develop a single web-based application. This software automates tasks that most insurance companies rely on manual labor for. The reduction in administrative overhead allows Sana to reduce the price of plans by 30% of market rates, on average.
Additionally, Sana uses rule-based systems for new plan underwriting and approximately 97% of adjudication of new claims, requiring little to no human labor for these historically burdensome processes. By developing software with high pattern recognition capabilities, the company doesn’t need to rely on individual review of each health claim payout. As new claims are processed, the pattern recognition algorithm will become even stronger, future reducing any need for manual review.
In order to develop these rule-based systems, Sana has decided to build all software from scratch, despite the industry norm of merging existing technology infrastructures. Most incumbent insurance companies today employ several legacy software platforms that are decades old, leading to a limited ability to update or automate certain processes. These older software platforms also don’t speak to one another as seamlessly, requiring more manual oversight and error checking. The upfront investment for Sana to build these software systems was significant and required substantial time with industry experts to ensure that edge cases required by regulatory bodies were properly accounted for. Ultimately, the benefits are worth the cost, as the resulting efficiencies and automation result in cost savings that are passed along to customers.
Lastly, Sana leverages data from outside vendors to better price plans going forward. Instead of merely relying on actuarial tables like most of its competitors, Sana uses healthcare utilization data to recommend more cost-effective healthcare options like telemedicine to its plan participants.
Value Creation & Value Capture
The value creation of Sana’s services is very compelling. Sana’s plan participants receive more affordable healthcare plans, better quality services, and the choice to be seen by any medical provider of his or her choosing. As healthcare costs continue to rise and health insurance is often an employer’s second or third largest expense, price competitiveness is increasingly important for customers.
With respect to value capture, Sana’s investment in technology will allow it to continue to scale more quickly and with a competitive price advantage to acquire customers easily. Sana’s focus on small to medium sized companies is a relatively less crowded market, allowing Sana to gain a competitive edge.
Challenges & Recommendations
Although Sana has cleverly identified white space in a crowded market, they are certainly not free from challenges and risks. The biggest challenge they face is the regulatory landscape for health insurance. Since health insurance is largely regulated on a state-by-state basis, there is a learning curve when expanding into each new geographic market. My recommendation to Sana for its expansion strategy is to identify states with the lowest marginal costs to enter paired with highest addressable market size.
Another challenge for Sana is the lack of brand recognition. Many small businesses do not want to spend time researching health insurance providers and would rather default to a well-known provider. My recommendation for Sana is to invest in very targeted marketing with companies that either employ younger people or are themselves in the technology sector. These firms are more likely to be adopters of newer offerings and receive the biggest cost savings in their health insurance plans.