In Latest Health Play, Founders Fund Bets Software Can Lower Self-Insurance Costs

A new San Mateo, Calif., company wants to make it cheaper and easier for small firms to tap into the savings of self-funded health insurance.

Collective Health, founded in October and coming out of stealth mode on Tuesday, has raised an undisclosed amount in a Series A round led by Founders Fund. Formation 8, Social + Capital Partnership and individual investors including Max Levchin, Scott Banister, Jeff Weiner and Jeremy Stoppelman also contributed.

Under a self-insured plan, employers pay health costs directly, cutting out the middle layer of traditional insurance costs that, for reasons that baffle most minds, climb at rates far ahead of inflation year after year after year.

Given the skyrocketing expenses, more and more employers are turning to these alternative plans. But they’re far more popular with big companies that can spread the risks and administrative costs across a larger workforce. Among other hurdles, self-funded companies still have to hire benefits administrators and often several full-time employees to manage the programs.

Consequently, 94 percent of businesses with 5,000 or more workers are self-funded, compared to only 16 percent of firms with fewer than 199 employees, according to a 2013 report by the Kaiser Family Foundation.

Collective Health’s founders think they can make these programs practical and affordable for smaller businesses by using software to automate much of the work now handled by paper and people.

They also believe they can apply big data and statistical analysis to better measure and manage risk, lowering costs further. For example, the data may show that if employers pay the high upfront costs of standing desks, annual flu shots or gym memberships, they’ll still come out ahead over time due to reduced health care expenses.

“We’re using software to replace the insurance companies, [which] have benefited from and created the high cost of health care in this country,” said Collective Health Chief Health Officer Dr. Rajaie Batniji, a physician and political economist at Stanford University.

He co-founded the company with Chief Executive Ali Diab, who was previously on the founding team of AdMob, a mobile advertising firm acquired by Google.

Collective Health is targeting companies with as few as 100 and as many as several thousand employees. It’s operating on a per-seat model, charging $50 per employee. The company is in talks with an array of potential customers to enroll for the January 1 insurance start date, but they’re not naming names yet.

It’s at least the second insurance play this year for Founders Fund, which also led the $30 million round for New York’s Oscar in January, another bet that software and data can help get a handle on the nation’s intractable health costs.

“Fundamental reform is long overdue in the health insurance industry,” Founders partner Scott Nolan said in a statement. “Collective Health is challenging the status quo of the entire private health insurance industry, using technology to dramatically bring down costs for employers of all sizes while providing higher quality care to employees.”

This article originally appeared on Recode.net.