Every Company is a Healthcare Company: why employers are leading a trillion-dollar disruption
Employer-sponsored benefits have evolved from a mandated, cost reduction initiative to a proactive source of healthcare innovation.
I was raised by two physician parents, a cardiologist and a general surgeon, and it’s one of the things I feel most grateful for in my whole life. When I got Covid, I called my dad; when I fell off my mountain bike, I hobbled to my mom and she stitched my knee. Personal health is such an intimate, delicate, and at times scary thing and I’ve had the privilege of navigating my healthcare with two experts who care more about me than anyone in the world.
But that’s not how most people experience healthcare. Later in life, after I moved across the country from my parents and left their health insurance for standard employer coverage, I experienced the US healthcare system and its many delights — unexpected medical bills, contradicting treatment recommendations, unsympathetic providers, and never-ending phone calls with insurers. A few years ago I took time off between jobs and was offered COBRA at almost the same cost as my monthly apartment rent, which didn’t work for me financially so I instead opted for a catastrophic care plan that left me minimally covered. On or off standard healthcare, I generally avoid going in for even routine physicals or dental checkups because it feels like a roulette game of what bill will arrive in the mail.
Now I work as a venture capitalist directing investment dollars toward disruptive entrepreneurs hacking at large sectors that are broken or flawed, and a space I spend a lot of time in is healthtech.
As we fluctuate in & out of Covid restrictions and close out the year, it feels like an appropriate time to reflect on the macro-trends that accelerated the past 18 months to shape US healthcare.
Enterprises invest further in employer benefits
In America, healthcare is universally mandated but not free, a very unique setup when considered against the rest of the world. US companies with 50+ full-time employees are required to offer healthcare coverage, and so for 49% of us (or 60% of us not employed by the federal government), we receive health insurance via employer sponsorship.
This unique healthcare financing model means that US enterprises are uniquely incentivized to use healthcare benefits as a recruitment and retention tool for top talent, setting the global standard for workplace perks. Especially when hiring markets heat up, employers compete with increasingly more appealing benefits packages to match or one-up each other and the generous benefits packages which once made Google and Apple such cool places to work have permeated and become “essential” (HBR).
While this trend pre-dates the past 18 months — e.g. in 2017, 72% of organizations had increased their benefits offerings to retain employees (SHRM)—the current labor shortage due to an unprecedented quits rate is especially driving employer competition and putting employees in the rare sweet spot of being primed to push for more pay and perks. On top of that, in the tech sector, the volatile rise in venture funding is fueling a widening gap between talent demand and supply.
Employees are commanding improvements to the workplace environment and in response enterprises are increasing benefits budgets: the average cost of an employer health plan was up 4% YoY in 2021 (WSJ).
That increase in spending is fueling a growing market opportunity for companies that cater to US employers, and healthtech companies that sell B2B2C or B2B via employers will continue to see their market expand and accelerate.
Northzone has witnessed this first-hand via the growth of our Series A portfolio companies since the start of the pandemic. In Europe, Personio (Munich-based HR software suite for small businesses) grew 12x in valuation to $6 billion and Wagestream (London-based earned wage access platform) grew ~6x in contracted revenues. In the US, Spring Health (NYC-based mental health benefits platform) saw hockey stick revenue growth and founder April Koh became the youngest female CEO of a unicorn company (Forbes).
Amidst the market expansion there are certain segments that we at Northzone find particularly interesting:
Diving in a bit…
B2B2C Healthtech
Employers seek benefits partners who deliver engagement ROI
The employer benefits sales process is a noisy combination of inbound pitches, guidance from broker & consultant partners, recommendations from peers, asks from employees, feedback from hiring managers, offerings from payers, and even suggestions from VCs (😬). HR Benefits teams must cut through the noise and make decisions about which benefits to adopt. For an offering to go from a nice-to-have to a must-have, there needs to be quantifiable ROI.
Investing in employee health has downside protection and upside potential. Most employers are self-insured or self-funded (Kaiser) meaning that the employer, not an external insurance carrier, directly bears the financial risk for the cost of employee healthcare and is therefore incentivized to improve the health of their employee population (healthier population = fewer healthcare claims costs). A happier, healthier employee base is also generally considered to be more productive, taking fewer sick days and being less likely to exit the workforce or churn to another job.
“Employers are increasingly looking for health benefits partners that can prove high engagement and at the right cost for it; the higher the ROI, the more differienated and compelling.” — Ben Freeberg, Director of Payer Operations at Thyme Care
In some areas, this ROI equation is well-documented — e.g. lifestyle wellness approaches that encourage employees to quit smoking, maintain a healthy weight, and keep cholesterol in check could save the US healthcare system hundreds of billions of dollars (HealthcareFinance). But for areas of health where the cost-benefit analysis is still unproven like mental health and fertility, these benefits are commonly characterized as ‘perks’.
Just as perks like flexible work hours, geographic mobility, and 20% projects were spearheaded by well-funded tech companies, the same is true for early employer adopters of emerging healthtech benefits. While these traditionally less acute segments will take more large-scale and longitudinal data to measure a true ROI — something that employer-benefits companies like Spring Health (with data-driven triage and provider matching) are working on — if there is buy-in that a benefit perk has outsized value then the best proxy for measuring utility is employee engagement, meaning the % of a covered population that engages with the benefit.
Health benefits with higher engagement are considered to be more effective because employers pay a fixed PEPM (per employee per month) fee for coverage regardless of what % actually use the benefit. Achieving 100% engagement is unrealistic and anyway irrelevant because the goal is to get usage from those who need the health support, but many legacy health solutions are operating at single-digit utilization so the bar is not high.
Areas with the best ROI will get the most widespread adoption, and an early proxy for ROI is high engagement.
Mental healthcare is becoming table-stakes
The area with the most engagement momentum is mental health benefits. As mental healthcare becomes destigmatized and mental health crises become more alarming (e.g. suicide rates increased 35% over the past two decades, per CDC), employers are increasingly recognizing the tangible impact that employee mental wellbeing has on engagement, performance, and retention.
“HR teams’ #1 priority post-Covid is employee mental health, followed by concerns about making sure employees feel engaged, physical health like ergonomics, DE&I, and resolving global compensation benchmarking.” — Joseph Ifiegbu, cofounder/CEO at eqtble and former Director of HR Tech at Snap
However, current industry-standard solutions are archaic EAPs (employee assistance programs) that essentially act as crisis hotlines for when employees face acute issues like suicidal thoughts. But these solutions are not proactive and only reach less than 1% of covered lives.
Fortunately, a new generation of digital EAPs offers much higher quality and more accessible preventative mental healthcare. Companies like Spring Health, Lyra, Ginger, and Modern Health have established themselves as leaders in the mental healthcare space and have seen huge adoption for their services, especially in the post-lockdowns and work-from-home era.
“[Growth] really has been explosive. From our first year entering the market, we were 4x, and then we were 6x. We’re going to 6x again this year, at least. So that’s super exciting. It’s also funny, because every year we expect our growth rate to slow down and every year, we grow even faster.” — April Koh, cofounder/CEO of Spring Health
And in an industry worth $240B+ with only two of the top-27 employers having chosen a digital EAP, we expect the land-grab between and massive growth of the top players to continue.
The next horizon will be ‘care’, particularly childcare and eldercare
In my opinion, what’s next on the horizon is “care” benefits, particularly childcare and eldercare. On the former, women (including all three of my sisters) are dropping out of the workforce en masse because it always was a financial tradeoff for both parents to work full-time but now with work-from-home the assumptions in the equation have changed and traditional childcare systems might not make logistical sense. On the latter, Boomers are aging in place at a higher rate than older generations which increases the proportion of middle-aged workers who find themselves acting as part-time caregivers.
And fueling this is the increasing regulatory mandates for paid family leave, including expansions to the Family and Medical Leave Act (FMLA) and new legislation during Covid (which I wrote about here).
Springbank Collective produced a great report that highlights trends in workplace care, including 5x year-over-year growth in employers purchasing care benefits for their employees in 2020. Willis Towers Watson (a leading benefits consulting firm) also produced great findings on how employers will invest in childcare:
In the same way that non-mandatory insurance benefits like dental and vision coverage have become commonplace (Guardian) and mental health is closely behind, I expect the next wave to be about care.
B2C health apps: coming soon to employer benefits plans near you
Entrepreneurs building consumer-facing health apps will undoubtedly face the question of whether to explore B2B2C as a distribution channel. We saw this evolution play out with Spring Health, and many other companies I’ve engaged with are considering the same.
The upside is the rapid user growth from concentrated marketing efforts, while the downside is the whale-hunting effort of chasing chunky RFPs (request for proposals) that can sink a lot of CAC (customer acquisition cost) with potentially zero payout. The main questions I would want to evaluate would be:
- Can the product tell an impact story with quantifiable ROI?
- Is the product benefit something that end-users would expect their employer to support them on?
- Does a typical employee population have a high proportion of target users?
- Would a person potentially make an employment decision based on whether or not they could access this support?
- Can the product successfully onboard large cohorts of users intermittently?
Ideally, you should be able to answer ‘yes’ to all those questions.
B2B Healthtech
Every company is a healthcare company
As corporate HR benefits teams produce increasingly beefy benefits packages, the administrative burden grows exponentially. Many non-health companies were already beginning to add Chief Medical Officers to their executive rank pre-Covid, a trend “thrust into the limelight” such that employers like Tyson Foods and Royal Caribbean now have CMOs.
“Every company is now in the business of health.” — CMO of Salesforce (Stat)
Similar to the article I wrote on the rise of Legal Operations teams and Chief Legal Officer roles bringing corporate legal counsel in-house, the rise of CMOs and HR benefits budgets is creating a larger opportunity for B2B healthtechs to cater to employers.
Healthtech players that traditionally sell to payers and health carriers will continue to see their employer go-to-market grow.
The growing importance of tech administrators
Digital plan administrators like Flume Health and Nayya are helping employers build healthcare benefits packages and are guiding employees through enrollment to ‘choose & use’ those benefits. Perks platforms like Benepass and Compt are helping employees take advantage of flexible perk programs like pre-tax commuting or free meals.
These platforms both simplify the frontend experience for employees but also reduce enormous backend work by managing the tax and labor law compliance and associated payroll processing.
Improving adjacencies
Payment integrity processors like Alaffia Health work with self-insured employers to audit healthcare claims and recover fraudulent payouts to keep healthcare costs in check. Provider network builders like Zaya Care help employers bolster their access to in-network providers with relevant specialties located geographically close to their employee populations.
As self-insured employers look increasingly similar to large health payers and carriers, the desire to optimize along the supply chain becomes more immediate. These program-associated technologies will become increasingly essential as employer-sponsored healthcare plans become more robust.
On the horizon: healthtech players bearing risk
Large employers become self-insured because their covered population of employees is large enough to absorb risk anomalies and therefore they can take on the role of an insurance carrier.
Besides that, it’s difficult for anyone other than a carrier to cover enough lives to verticalize into that piece of the supply chain. But the appeal to bear risk is enormous: in 2020, total private health insurance direct premiums written totaled $1.1 trillion (trillion with a ‘T’) and profits were so large that the federal government advised insurers to pay back rebates to consumers and reduce policy premiums to comply with Obamacare rules on profit caps (NYT).
What’s new with the rise of healthtechs is that many newcomers are ballooning to a scale that makes competing with carriers from an adjacent space more realistic and an attractive way to capture more of the economics. Companies like Flume Health are enabling healthtech players across the supply chain to bear risk “out-of-the-box”:
“We built Flume as a TPA (third-party administer) for self-insured employers who want help with the operational aspects of being their own carrier. What we’re finding is that this suite of infrastructure tools is striking a chord with many challenger health plans, benefits brokers, health systems, and incumbent payers who want to launch digitally native healthcare plans, which we can help with.” — Cedric Kovacs-Johnson, founder/CEO of Flume Health
US healthcare en masse is such a complex, staunch beast of an industry and it is unclear whether any single piece of it provides the linchpin to industry overhaul, however, if you were to “follow the money” then seeing players start to chisel away at the core function of bearing risk (which has traditionally been the most defensible for incumbents) is a pretty thrilling prospect.
Q.E.D.
America’s idiosyncratic healthcare model has been an opportunity for employers to differentiate themselves with attractive benefits packages, a strategy that has heated up as hiring markets, particularly in tech, get tighter. This creates and opens up a huge market for B2B2C and B2B healthtech platforms to build and facilitate employer-sponsored benefits programs, which we’ve seen accelerate with mental health and expect to expand to other health categories. This momentum will drive innovation across the healthcare supply chain.
If you’re building, operating, or investing at the intersection of healthcare and employer benefits, please reach out: michelle@northzone.com
