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 $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 a contributing editor at Xconomy. Follow @wroush

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