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

6/16/10Follow @wroush

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$7,000. According to Colella, such differences mask overcharging by the most powerful medical providers.

“The bigger and the more famous they are, they more market power they have, and the higher the rates they can negotiate with payers,” Colella says. And protecting their big profits is the major reason many providers conceal the rates they’ve negotiated, he says. “Without any doubt, the only real losers on price transparency are providers. The consumer wins, the payer wins, the provider loses.”

So what made Castlight’s founders think they could take on a system that seems broken by design? “Transparency is a very grand vision, but there seemed to us to be ways to bite it off in chunks,” says Roberts. “There also seemed to be a reasonably strong constituency who would be interested in seeing something like this happen, which would help us overcome the set of people who might not want it to happen.”

The notion of aggregating and data-mining employees’ explanation-of-benefits forms helped Castlight bite off one big chunk. Roberts says startups with such “big data plays” are especially attractive to Venrock. As an example he points to a previous Venrock investment, Watertown, MA-based health claims processing company Athenahealth (NASDAQ: ATHN), co-founded by Park and Jonathan Bush.

“Athena is about helping doctors get paid, and the special sauce, the big data play, is that the more data Athenahealth has on different insurance providers in different regions, the better its rule set is with regard to knowing what payers will pay for or not pay for,” says Roberts. “At Castlight, the big data play is getting prices. If you take millions of claims and run them through big algorithms, you come out of it with the various out-of-pocket prices. The more claims you have, the better your data set.”

The better Castlight’s data set, the more information its customers, typically big employers, will be able to give to their employees when it comes time to choose a medical provider. And, in theory at least, the more provider data employees have, the more money they’ll choose to save, both for themselves and their employers. (Read on for more on the cost sharing between employers and employees that Roberts says is coming.)

“If there are 30 places you can get a colonoscopy in San Francisco and there is a 5x price difference in price for the same procedure, you could save 30 percent on your overall costs just by moving everybody to the median-priced provider,” says Roberts. “That still would give you a choice of 10 to 15 doctors, so there is not a quality problem—you’ve just taken out the really high-end ones in terms of cost.”

Of course, anything that smacks of limiting choice or access to medical care has the potential to reignite the passions (read: hysteria and fearmongering) that marked the great national healthcare debate of 2009. But Roberts and Colella say it’s only a matter of time before most insured people are bearing such high deductibles or copayments that they’ll have no choice but to shop around for medical care. And part of the appeal of Castlight’s service to employers, they say, is that it gives them a way to phase in more cost-sharing without completely emptying their employees’ pocketbooks.

“I think transparency will actually enable a lot of employers to make changes to their plans to provide incentive structures to their employees,” says Roberts. “There are lots of people who haven’t done it because they couldn’t provide their employees with any tools” for comparison shopping.

Colella says Castlight will use its venture windfall to add heft to its software engineering team, including “people who understand consumer behavior, and economists, and trained physicians, and a very high-end, all-PhD analytics team.” Oh, and it needs a few salespeople to deal with those eight new customers every day.

Colella declined to provide details, but says that the company will soon offer certain kinds of quality measures alongside its cost data, so that consumers can gauge whether they’re likely to get their money’s worth for that $5,000 colonoscopy. And while the company’s current customers are all big companies, Roberts says it would make sense at some point in the future—once consumers are more accustomed to the notion of shopping for healthcare—for Castlight to offer subscriptions to its service to individual consumers.

The biggest questions in Castlight’s future, Roberts says, are whether the impulse to shop around will really take hold, and whether the startup can scale up its data and its systems fast enough to meet demand. But Colella, for his part, seems sanguine, and says he’s not worried about the high investor expectations that go along with the company’s newly sky-high valuation. It’s not outrageous, Colella says, to think about a $1 billion exit for the company. “We are talking about a $1.6 trillion market,” he says. “If you look at the savings we can push with our application, you will understand why I think so.”

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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