Startups are banking on small businesses’ desire to ditch insurers

Startups are banking on small businesses’ desire to ditch insurers


Digital startups that help small- and medium-sized businesses pay for their employees benefits are cashing in on companies’ desire to drop their insurers.

On Monday, Firefly Health raised a $40 million Series B round, bringing total venture investment in the Watertown, Massachusetts startup to $52 million. The company will use the cash to launch a virtual health plan for small- to medium-sized companies January 1. Firefly is targeting businesses with up to 2,500 employees that aim to transition to self-insured operations, as opposed to contracting with a health insurer to pay for their benefits. The startup is focused on employers in Maine, Massachusetts and Ohio, but plans to eventually expand its “virtual Kaiser” model nationwide, co-founder Dr. Andy Ellner said.

Through its new plan for self-insured customers, Firefly aims to triple its membership over the next year to 15,000, he said.

“What’s really hard for a business to decide to do is to go the self-insured route and offer something that is very bare bones. They don’t have confidence that it’s going to be at the same level of quality and experience,” Ellner said. “I do think there’s just an issue of, ‘is there a meaningful alternative for those folks?’ We think that we’re uniquely able to offer that.”

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Firefly’s pivot from virtual-first care into helping small- to medium-size businesses go self-insured hits on a new but growing category of digital health startups.

In September, New York-based Centivo raised $51 million, bringing total investment in the health plan to $121 million. Flume Health raised $10 million in May for its digital third-party administrator service—the New York-based company will partner with Firefly Health to help businesses design and navigate their benefits. Austin-based Sana Benefits has also raised about $27 million to help small- and medium-sized businesses go the self-insured route.

During the first half of 2021, startups focused on employers’ benefits raised $541 million, more than six times the $82 million companies focused on this area raised during the first two quarters last year, according to data from market research firm Mercom Capital Group.

The largest deal during the second quarter was the $280 million Series F round raised by Collective Health, a startup that uses predictive analytics to help self-insured employers design and manage their employees’ coverage. In addition to the investment, San Francisco-based Collective Health inked a deal with insurer Health Care Service Corp. to offer its customers the ability to transition from fully to self-insured come 2022. Through the partnership, HCSC, one of the largest commercial insurers in the U.S. that operates Blue Cross and Blue Shield plans in five states, aims to recruit more employers to its network.

Still, Collective Health primarily focuses on helping large employers design their benefits. Startups focused on helping small- to medium-sized businesses generally have received Series B rounds or less, which speaks to the recent but growing interest on the part of companies with fewer than 5,000 employees to pay for their workers’ medical care. Traditionally, businesses with fewer than 5,000 workers were fully insured. By paying in full for their workers medical use, small businesses could be seeking greater transparency, flexibility and control over their healthcare costs.

“There’s frustration that the insurers actually have generally done pretty well during COVID, but [employers are] still seeing really significant premium increases,” Ellner said. “At some point, you hit a breaking point where you’re ready to try to be innovative.”

Over the past decade, the average annual premium employers paid for a family of four’s health benefits rose nearly 55% to $21,342 in 2020, according to the Kaiser Family Foundation. In 2020, the average annual premiums paid for single and family coverage rose 4% year-over-year. Some analysts believe self-insured companies profited from their employees’ lack of healthcare use during the pandemic.

Two-thirds of covered workers were enrolled in plans self-funded by their employer in 2020, up from 61% in 2019. Among covered workers in small firms, 31% were enrolled in a plan that is either self-funded or level-funded—meaning, a portion of the risk is passed on to stoploss insurers—an increase from 24% the year before, KFF said.

“Small businesses have seen year-over-year double-digit increases in their premiums, and they’re starting to have to make really hard decisions about, can they stay in business and still afford to offer some kind of coverage to their employees?” Ellner said. “I think that there’s a lot of hunger in that market for newer solutions.”


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