A Google-backed health insurer wants to disrupt insurance by ... limiting patient choice?

The health insurer Oscar launched in 2014 with $40 million in venture capital and a plan to disrupt America’s $1.8 trillion health care industry.

Oscar positioned itself as a "simple, smart" alternative to stodgy industry giants — a health plan meant to live on smartphones and deliver virtual doctor visits. The timing seemed perfect, too: The new Obamacare marketplaces created an easy way to pitch consumers directly on a better experience.

But the Obamacare marketplaces proved a difficult business landscape. Two-thirds of the plans that participated lost money in 2014.

Oscar itself lost $92.4 million in New York last year. The people who signed up for coverage were sicker than the company had expected, and Oscar, like many other insurers, is asking for double-digit rate increases to break even next year.

So two years after launch — as the company attempts to shore up its finances — Oscar is making a second, arguably more ambitious, attempt at disruption. Its plan is borrowed from the tech world but anathema to the insurance sector.

Oscar's largest market is New York. There, it will cut the number of doctors and hospitals it contracts with in New York by more than half in order to gain more control over the pricing and patient experience.

So this, then, is Oscar’s coming pitch: less choice of where to get care but a much better, more seamless experience once you’re getting care. It’s a theory familiar to anyone who uses Apple products or shops with Instacart. But is buying health care really like buying a computer or groceries?

Scheduling doctor appointments is tough. Oscar wants to woo customers by making it easy.

Oscar launched in 2014 and has attracted 61,000 members in New York.

Oscar will dramatically shrink its provider network in New York. This year it covered 40,000 doctors in the New York City area. Next year it will only cover visits to 20,000 providers. Its hospital network will decrease from 77 facilities to just 31. Nearly all of these hospitals are part of three major systems: Montefiore, Mount Sinai, and the Long Island Health Network.

Oscar plans to work especially closely with doctors in these systems to eliminate the frequent hassles of obtaining care. Patients with Oscar will be able to see doctors’ schedules, for example, and make appointments on the insurance plan’s website and app.

Direct scheduling might not sound that innovative; it isn’t hard to build software that lets users book anything from yoga classes to plane flights.

But it is far, far from the industry standard in health care right now. Usually patients have to go to their insurer to look up who is in the network and then start calling doctors to see who has a slot available.

This experience is lousy. One recent study of California health plans found that 20 percent of doctors listed in insurance directories are unreachable. They either listed the wrong number or don’t pick up their phone.

Doctors, meanwhile, will get more information about patients. Oscar is developing a new software called Oscar Ping, which will alert primary care doctors when their patient goes to the emergency room — and will pay them more to follow up and find out what happened.

Again, this is about improving the patient experience. Most doctors never find out a patient had an emergency, unless that patient happens to tell them.

"We’ve essentially left it to the patient to organize the supply chain and navigate everything themselves," says Niyum Gandhi, chief population health officer at Mount Sinai Health System, one of Oscar’s partners. "That wouldn’t be tolerated in any other industry."

Mount Sinai was already in the Oscar network but began working on this intensive new partnership late last year. The hospital system has had to build new technologies that allow the health insurance plan to tap directly into its scheduling software, and has regular meetings with Oscar staff.

Mario Schlosser, Oscar’s co-founder and chief executive, believes expanding that approach will ultimately prove to be a win for Oscar — if its patients decide to stick with it.

"We’re telling members watch it, see the doctors we recommend, let us make appointments for you and see how this works," Schlosser says. "And if you don’t like it, we’ll help you switch out. But we’re going to be offering something very different from our competitors."

"Our beds are full anyway": how Oscar decided to ditch half its hospitals

To launch a health plan in 2014, Oscar needed a network and doctors. But the startup was short on time and couldn’t run around New York negotiating prices. Instead, it leased a network from a third-party provider that already had deals in place.

At the start of 2016, the company began meeting with hospitals in New York to set up its own network. The hospitals immediately drove a hard bargain. Executives assumed that Oscar would want to give its customers a wide range of choice when it came to providers.

One hospital that Oscar approached asked for a contract where its prices would automatically increase 10 percent each year, Schlosser recalled. Others tried to imply they’d be fine without Oscar’s business, no sweat.

"The classic line I would hear, where I knew we weren’t going to work with the hospital, was they would say, ‘Our beds are full anyway,’" Schlosser says. "They were basically implying that we’d have to pay a lot to let our patients in. That’s absurd."

Insurers typically cave in these situations. One 2012 study in the journal Health Affairs talked to dozens of health insurance executives and found they were generally resigned to letting hospitals — particularly those with well-known brand names — name their prices.

"Hospitals have power," one insurance executive said flatly. Another told the researchers, "There is a dynamic in the market that makes it impossible for a private payer to change anything."

But this isn’t Oscar’s view. When hospitals demanded high prices, Oscar said no. And said no again. And again — until it had slashed its hospital network in half. Now it's left with three hospital networks and two months to convince its customers to stick around.

Why Oscar wants to be more like Warby Parker

Photo by Michael Buckner/Getty Images for Warby Parker

Oscar has an unusual history for an insurance company, sitting at the intersection of health care and technology. The firm has raised $727 million in capital since its 2014 launch, attracting prominent venture capital firms including Google Capital, Khosla Ventures, and Peter Thiel’s Founder Fund.

Oscar’s playbook likely looks familiar to Silicon Valley types. Startups have increasingly come to limit their partnerships — sometimes taking over their supply chain completely — to deliver a better user experience.

Warby Parker moved the production of its glasses in house, which meant shoppers got a much smaller choice of eyewear but a hugely improved shopping experience. Instacart only allows you to order from groceries that contract with its service, so you can choose items directly in the app.

The big question Oscar poses is this: Can health care work the same way? Can Oscar pull patients into its smaller ecosystem?

The conventional wisdom has been that that choice is paramount in health care. Insurers tried to restrict options and increase care management in the 1990s, with health maintenance organizations that offered lower premiums but limited patients to a smaller number of doctors. Patients revolted and insurers learned that their customers were willing to pay more for choice.

It's unclear whether that's still true, though. Health prices have continued to rise since then, eating up bigger and bigger chunks of workers’ paychecks. And more people are now shopping for their own coverage on the Obamacare marketplaces, making the individual experience a more important part of the business transaction.

And that has Oscar betting that the health care market is ready for a new approach.

The health exchanges: narrow networks but relatively happy customers

Oscar’s strategy is a more extreme version of the approach most health insurers have already taken to selling on the Obamacare exchanges.

One 2015 study found that health plans on the marketplaces typically have 34 percent fewer doctors and hospitals than those offered by employees. That’s important to keep prices low and attracting marketplace shoppers.

This can also infuriate patients who want to see a specific provider but learn that he or she isn’t covered by their health plan. There is no shortage of headlines about Obamacare limiting doctor choice and frustrated consumers.

But most research on the health law paints a different picture. The Kaiser Family Foundation recently surveyed 786 marketplace enrollees about their experience. The nonprofit found that three-quarters were satisfied with their choice of doctors and hospital.

Another 2015 study in the journal Health Affairs looked specifically at the California marketplace. It found that those plans, on average, have 17 percent fewer providers than employer plans in the state. But the hospitals the marketplace plans did include actually scored slightly better on quality metrics, like how rarely patients got infections and how often patients had to be readmitted after something went wrong on their first visit.

It seemed that in California, marketplace plans decided to bypass some of the brand-name hospitals that didn’t actually have the best outcomes. Instead, they worked with lesser-known facilities that could deliver caret hat was just as good, or even slightly better.

Oscar’s hope is that it can take narrow networks to the next level; rather than simply cutting costs, Oscar wants to use a narrow network to improve patient experience by deeply integrating with the hospitals and doctors it works with.

This wouldn’t surprise health care experts. Some of the best-performing health care systems in the country, like Kaiser Permanente in California and Intermountain Health in Colorado, are those where the hospital acts as its own health insurer — integration on a level deeper than even Oscar dreams of. Patients buy coverage at just one health system and expect doctors there to work easily with each other.

"There can be a benefit to a narrow network if it's selecting higher-quality providers and leaving out the higher-priced one," says Simon Haeder, an assistant professor at the University of West Virginia who has studied the health marketplaces’ networks. "That might not be a bad thing for customers."

Oscar will pitch higher premiums and fewer doctors. Will patients say yes?

The sales pitch Oscar will make this fall is brutal. It will tell its 61,000 consumers that their choice of hospitals will fall by half — and that their premiums will go up by at least 13 percent. It will promise improvements that patients will need to wait for.

Schlosser says he’s confident that consumers are, at this point, fed up enough with a broken health care system to take that deal — that they’re willing to sacrifice choice for the ability to easily book appointments and have doctors who coordinate with one another.

In other words, Schlosser thinks patients are ready for a new kind of health insurer, and that Oscar can actually become that health insurer. But so far, it’s just a hope.

"The features and benefits we can build will more than make up for the fact that there is a doctor disappearing from the directory," Schlosser says. "But frankly, we’re going to have to demonstrate that."

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