Castlight on a Quest to Create a “Travelocity for Healthcare”

6/16/10Follow @wroush

It’s a classic principle in economics: markets don’t work very well when there’s no price transparency. If the airlines refused to quote you a price for a transcontinental ticket and then sent you a bill for an unpredictable amount six months after your flight, you probably wouldn’t fly much. But this is exactly how most consumers experience the U.S. medical care payment system. Under the complex web of reimbursement rates negotiated in secret between providers and insurers, insured patients are usually charged directly only for their premiums, deductibles, and copayments, and have no way to compare the actual costs of treatments from different providers, even if they want to.

San Francisco startup Castlight Health, true to its name, wants to cast a light on the opaque, shadowy world of medical costs. If you give consumers the tools to make more informed decisions about where to get care, argues Castlight founder and CEO Giovanni Colella, they’ll end up saving themselves, their employers, and their employers’ health plans serious money.

“We are asking people to shop, but providing them with an experience where there is no price,” says Colella. “We figured that if we can figure out what the prices are, we can provide a portal, a Travelocity for healthcare, that allows us to display prices online and really create a shopping experience for medical care.”

Figuring out those prices is the tricky part. Since many healthcare providers and insurers won’t or can’t disclose their rates, Castlight has to reconstruct them through a laborious process of what Colella calls “reverse engineering”—analyzing data from millions of explanation-of-benefits forms sent by insurers to employees at the companies that use Castlight’s services. Exactly how that works is part of the startup’s secret sauce, but the result is a personalized portal where employees can gauge their true out-of-pocket medical costs, compare what they paid to averages for their region, and find opportunities to save.

At a time when health-insurance reforms are making everyone more price-sensitive—both by forcing consumers to share more of the costs of their care, and by capping the premiums insurers can charge—Castlight’s vision is one that seems to intrigue employers mightily, not to mention investors. Colella says that Castlight, which already serves big companies like Safeway, is meeting with eight new potential customers, mostly big employers around the U.S., every day.

And the two-year-old startup announced last week that it had closed a massive $60 million Series C venture financing round, from a group that included new investors Morgan Stanley, U.S. Venture Partners, the Wellcome Trust, and the Cleveland Clinic, as well as previous investors Maverick Capital, Oak Investment Partners, and Venrock. In two previous rounds of financing, the company had raised only $20 million; the huge up round was a signpost of the widespread investor interest in the company, as well as a “very high” valuation that left some investors “saying they wished they’d come in 6 months ago,” in Colella’s words.

Venrock was one of the firms that got in early. In fact, Colella says he considers Venrock partner Bryan Roberts (an Xconomist) to be one of the company’s co-founders, along with himself and Todd Park, the Athenahealth co-founder who was tapped last year to be chief technology officer at the Department of Health and Human Services.

Neither Colella nor Roberts claims that there’s anything original about Castlight’s vision. Indeed, healthcare analysts have been bemoaning the lack of price transparency for decades, and there is a minor movement underway in places like New Hampshire to take the wraps off the fees charged by providers for various procedures.

But no one before Castlight, formerly known as Ventana Health Services, has been ambitious (or foolhardy) enough to go after cost data on a massive scale, with the goal of exposing the huge variations in the prices that providers charge for common procedures. The company has discovered, for example, that some gastroenterologists in the San Francisco Bay Area charge as little as $1,500 for a colonoscopy, while others charge as much as … Next Page »

Wade Roush is Xconomy's chief correspondent and editor of Xconomy San Francisco. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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