Collective Health exits stealth, helps employers become their own health insurer

The cost of health insurance has grown far faster than the cost of medical services in the U.S. Meanwhile, many of the biggest health insurers are seeing hefty profits, even as the number of people they cover has gone down.

San Mateo, Calif.-based Collective Health believes that answer to the problem starts with employers. Collective Health wants to help employers cut out the insurance company middleman and create their own insurance plans for employees. “We’re building a complete solution to replace your employer health insurance,” Collective Health founder Ali Diab writes in a blog at the company’s website.

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“Patients are often left to advocate for themselves in a health care system where all of the economic incentives are misaligned, and trying to get a clear answer from your health insurance company about what’s driving costs is impossible,” Diab writes.

“The result: one-fifth of our country’s GDP goes toward paying for something where there is no clarity on why things cost what they do, and the customer experience of interacting with your health insurer feels like entering a time warp back to 1980.”

The company says it talks to employers about which health services they want to cover for employees, then it sets up an easy-to-use interface where employees can select what they need.

Right now, Collective Health has paid for access to physicians in a large California PPO network, which connects it with 95 percent of the doctors in California and 90 percent of the doctors in the U.S. So employees can usually go to their own doctor for treatment.

The company, which has just come out of stealth, is currently working with five employers to help set up insurance programs for their employees. The employer takes on all of the risk and covers catastrophic losses with its own stop-loss insurance.

Collective Health isn’t disclosing the size of the employers it’s working with now, but Diab and co-cofounder Dr. Rajaie Batniji hope to target employers of 100 to 1,000 employees.

Founders Fund has led a funding round to seed Collective Health, although the amount of the investment is undisclosed. Formation 8, The Social+Capital Partnership, and some angels including (PayPal investor, board member) Scott Banister and (PayPal co-founder) Max Levchin, also participated.

Diab and Batniji hope to add health service and procedure cost comparisons to the sites they provide for employers and their employees. A plan to add mobile payments like PayPal or Square is also in the works.

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Collective Health is indeed addressing a huge problem.

Health care costs have been rising more than three times as fast as wages, says the Health Care Cost Institute. “Official estimates project that U.S. health spending will reach $4.7 trillion by the end of the decade — an 80 percent increase from $2.6 trillion in 2010 — underlining the need to better understand the prices of health care services to help make decisions and choices about purchasing care.”

The question is whether or not a 25-person company like Collective Health can scale up fast enough to make a difference, while not becoming just another middleman itself.