Mention the words "health insurance" to small-business owners and the complaints usually fly: It's too costly, too complex, and too time-consuming. So a few years ago, the idea of putting the whole process online seemed a surefire win. By providing side-by-side comparisons of costs and benefits, startup Web sites hoped to take the mystery out of buying health insurance -- and draw small-biz customers in droves.
But like so many Internet ventures, something got lost in the translation. Early efforts ran into a host of problems: Marketing and technology costs were high, state regulations were cumbersome, and insurance carriers -- on which the Web sites relied for quotes and policies -- were hardly moving at Net speed.
As a result, industry experts estimate that less than 1% of all policies sold to small businesses and individuals in 2000 originated online. "It has taken off slower than almost everybody anticipated," says Tom Usilton, CEO of Atlanta-based Digital Insurance, a relative newcomer in the field.
Nonetheless, signs of progress in the fledgling industry are beginning to emerge. Drawing on lessons of the dot-com debacle, Digital Insurance and others are spending their marketing dollars more wisely these days, and they're putting a premium on customer service. The companies are also slowly overcoming regulatory hurdles and persuading carriers to update technology and sell more policies online. Clearly, no one is expecting the online sellers to rival bricks-and-mortar brokers. But the evolution of the Web sites sets the stage for future growth -- even if it takes awhile.
"It's hard to think it won't work," says Michael Ashker, chairman of HealthAxis, which abandoned the consumer market last year, selling those assets to Digital Insurance in favor of marketing a technology platform to carriers and other brokers. "But it's very complex, and it'll happen at a glacial pace."
What's propelling Digital Insurance and others is the sheer size of the $440 billion insurance market. Self-employed and other individuals make up about 10% of the market, while small businesses with 2 to 50 employees account for about 25%. At the same time, there's widespread dissatisfaction with the current system among small-business owners. Roughly 40% offer no health insurance to employees -- a pool of potential customers that's enormously appealing to the online sellers. It's far easier to sign up a first-time customer than to lure one away from another broker. While some businesses simply can't afford the premiums, the Web sites hope that many just need help sorting through what's available and finding a plan that's affordable.
To catch the attention of those customers, the insurance Web sites first poured money into banner ads and mass-market campaigns. Now, they're embracing a savvier strategy: linking up with big companies in order to reach smaller ones. On Feb. 8, Digital Insurance announced a partnership with DaimlerChrysler, which has agreed to promote the company to its 4,500 dealers and thousands of small suppliers. "We think it'll help take some of the headaches out of choosing a health-care package," says Jodi Tinson, a spokeswoman for the carmaker.
And eHealthInsurance, the biggest of the online insurance marketplaces, recently struck a similar deal with GE Financial Network, which provides an array of services. The company has pursued banks and small-business associations as well, linking its site to Comerica Bank, Bank One, and the National Federation of Independent Business, among others.
Digital Insurance and eHealthInsurance know, however, that marketing through the Internet alone won't sell a product as complex as health insurance. A personal touch is needed, as well. So they've assigned staff to field phone calls and e-mail -- something the earliest sites didn't always do.
"Price is very important for small businesses," says eHealthInsurance CEO Gary Lauer, who has assigned 100 of his 181-person staff to help potential customers decipher terms such as HMO, PPO, and POS. "But of equal importance is support because they don't have human-resource managers." Indeed, the company's own figures show that support is critical. Seventy percent of all business owners call for additional information before buying a policy online, compared to just 30% of individuals.
The choice of carriers and policies offered online is also expanding. For instance, eHealthInsurance now has contracts with 54 carriers. Digital Insurance has 25 carriers under contract. Of course, not every policy offered by every carrier is available online. And in some states, small businesses will find just one or two choices. But carriers are gradually updating their own technology to provide real-time quotes through the Web sites.
One major hurdle, however, remains: The Web sites cannot yet offer policies at a discount. Ultimately, they hope to pass along savings to customers by providing more efficient systems and reducing paperwork. But for that to happen, carriers must first submit new, online-only rates and policies to state regulators for their approval. Thus far, they've been reluctant to take that step -- a hesitation Ashker attributes to fears of "cannibalizing existing business" from offline brokers.
To be sure, online vendors remain bit players in the overall health-insurance market. eHealthInsurance resembles a "medium-sized health plan" with 40,000 to 200,000 members and a monthly growth rate of 15% to 20%, says Lauer who declines to give exact sales figures. Small biz is the fastest growing segment, he adds, though only about 25% of policies sold to date were to business owners. Digital Insurance has about 5,900 individuals as customers, many of whom it inherited through its acquisition of HealthAxis's consumer division. The company introduced a revamped site for small business just a month ago and hopes to sign up 7,000 DaimlerChrysler dealers and suppliers over the next two years.
ACHIEVING CRITICAL MASS.
The key question is whether the Web sites can sign up a critical mass of customers before running out of capital. eHealthInsurance is best situated for the moment, having raised $86 million from investors, including Credit Suisse First Boston, Goldman Sachs, and Kleiner Perkins Caufield & Byers. Digital Insurance faces a bigger challenge.
Ultimately, the company needs to have about 130,000 individuals insured to achieve positive cash flow, says Usilton. The company still has about $13 million of the $20 million in cash it has raised. But it will need more some time next year. "The good news is, we don't need capital today," Usilton says. The primary sources of revenue for both companies are commissions on new policies and a percentage of the premiums on existing ones. Another smaller source is referral fees from Web sites that advertise health-insurance policies or provide quotes, but don't employ licensed agents to sell them.
On the optimistic side, Jennifer Blackmore, an analyst with technology consultant IDC, expects online health insurance to "take off" in the next few years. If sales were charted on a graph, she says, the adoption curve would look something like a hockey stick -- a flat line followed by a sudden steep rise. Others doubt the shift will be so dramatic. But given the pent-up demand for affordable health plans tailored to small-biz needs -- and the discontent over what's out there now -- Web sites hawking health plans might some day supply just the cure entrepreneurs need.
By Julie Fields in New York
Edited by Robin J. Phillips