New health insurer thinks an ounce of prevention will mean a pound of profit

That health insurers don't like it when you actually use your insurance is an open secret. In fact, industry veteran Martin Watson freely admits that avoiding member phone calls and insurance claims is standard industry practice. The former executive with Aetna (AET) and United HealthCare (UNH) says traditional insurer thinking goes something like this: "I really hope you don't call and you don't go see the doctor and I will make lots of money off of you in the first year." Of course, by the time the year is up, there's a good chance that you'll have already switched to another insurance plan, becoming someone else's problem.

So why is Watson bashing the very industry that has signed his paycheck for the last 17 years? (There are surely plenty of people willing to do that for him, including doctors, patients, consumer advocates, DailyFinance's own physician-columnist Russell Turk and most recently, the White House.) The truth is, Watson is starting up a new insurance company that, he says, actually wants you to call -- and to see a doctor. How will SeeChange Health make a profit like its bigger rivals? Watson says the trick is using financial incentives to encourage members to get treated for problems sooner rather than later. In theory, that means claims -- when they're filed -- would cost less.
San Francisco-based SeeChange Health, which is about to launch in select markets in California, will be the first new insurance company in the Golden State in at least 15 years, Watson reckons. The company received $40 million in initial funding from Psilos Group, a New York-based health care investment firm with $577 million under management.

Here's how SeeChange's plans work: Members who agree to follow the company's preventive care rules get a break on their insurance, with the annual out-of-pocket maximum on a deductible-only plan, for instance, decreasing to $2,200 from $3,200. For complying, members also receive at least $200 a year toward health care expenses.

To qualify, they have to agree to sign up for a personal health record that puts their health history and insurance information online. They must also get annual screening tests, including blood work. Lastly, they have to agree to go see their general practitioner once a year and follow any advice their doctor gives them as best they can.

"Let's try to identify people's conditions sooner rather than later," says Watson, SeeChange Health's chief executive officer. "We're going to give you the tools and services to manage those better. We're hoping we can change behavior through benefits design."

Treat early, save money -- it could work. For example: It costs about $5,000 a year to treat someone with early-stage (stage I) type II diabetes, says Watson. But when the disease, in which cells fail to use insulin properly, progresses to a later stage (stage IV), treatment costs can more than triple to up to $16,000 a year, as there are now more complications to deal with.

Steering folks to treatment earlier all sounds well and good. But if it were easy, wouldn't all insurance companies be doing it? The problem, of course, is patients typically often don't heed what their doctors tell them. Only about 32 percent of all diabetics actually comply with their treatment plans, Watson says.

Watson maintains that increasing compliance by even a small amount will make SeeChange Health successful. "If we can change that by 5 percent or 10 percent, that's huge," he says.

Some members may not like the fact that the company -- with the help of its HealthInsight technology -- will be able to figure out if they are at risk of certain conditions and then suggest preventive measures. And Watson says that's just fine. They always have the choice to opt out of the prevention program. "You don't have to do anything," he says. "But if you do the things we ask, we'll move you into a richer benefits program."

The company is awaiting regulatory approval to begin writing policies. Before it begins selling insurance directly to individuals some time in late 2010, SeeChange Health will go after small businesses, focusing on companies with two to 50 employees, Watson says. The small-business insurance market is a good test case, he says, as it's heavily regulated and there's high churn, meaning employees change insurers frequently. "If you can make it work in small business, you've got a home run," says Watson.

With all the uncertainty about the future of health care, this would seem like a dicey time to launch a startup in the insurance industry, which has been fingered as one of the reasons for the health care mess that we're in. DailyFinance's Turk, a practicing physician, argued in a recent column "The Doctor Is In: How health insurers hinder health care reform" that the insurance industry is a big part of problem. Its practice of routinely denying claims, which are in turn repeatedly appealed by doctors and hospitals, contributes greatly to the administrative waste in the system, he writes.

But Watson argues that now is actually a great time to start a new insurance company. He likens his company to a startup airline launching in a market filled with legacy carriers. "We've got brand new infrastructure, easy-to-understand plan designs and we can price it effectively," he says. Health reform, he adds, will likely require mandatory insurance, making denial of coverage based on pre-existing conditions history -- a move Watson supports.

But despite his upstart attitude, Watson toes the industry's party line when it comes to the so-called public health insurance option -- a proposed government-run plan that would compete with private insurers -- which many health experts say would result in lower premiums. "If you throw a public plan in there, there will be no way you can get private insurers to compete," he says, repeating the industry's common argument.

For his part, he says SeeChange Health hopes to compete with other private insurers by lowering its costs through the measures it takes to keep its covered population healthier. That way, he argues, the company can offer small businesses competitive premiums that rise based on the consumer price index, instead of ones that increase in a more rapid -- and seemingly arbitrary -- fashion.

"We can have more stability associated with premiums," he says. Whether the company is ultimately successful or not may also depend on the extent to which it actually gets members to comply with its prevention initiatives. No doubt many -- including doctors and other insurers -- will be watching.
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