ACA Could Be Just What CieloStar Was Waiting For
Maybe the fourth time will be the charm for Minneapolis-based CieloStar.
The small, under-the-radar company has been around since 1988, starting as Corporate Healthcare Financing; its bread-and-butter business is the not so flashy world of health benefits administration. But now, OutsourceOne, doing business as CieloStar, the company is pivoting to try to cash in on the emergence of private health care exchanges for employers, a frothy, fast-growing market being driven by changes to the health care system under the federal Affordable Care Act.
“This is our fourth business model. So we’re very good at change here,” says Bill Mehus, the company’s founder, executive chairman, CEO and majority owner. “We really pride ourselves in staying ahead of the market.”
In its purest form, a private health care exchange offers an online menu where people can compare competing health plans to select the package of benefits that best suits their needs. While the new federal health care law created public exchanges such as MNsure for people without health insurance, the shifting landscape has driven a boomlet for private exchanges as employers look at ways to rein in rising costs.
The stakes are high. A mid-June report on private exchanges from Seattle-based Accenture tallied 3 million U.S. employees already enrolled in private exchanges for benefits in 2014. For now, that’s just a fraction of the estimated 170 million Americans who receive benefits through an employer. But by 2018, Accenture forecasts that 40 million will be enrolled in private exchanges. In the report, Rich Birhanzel, Minneapolis-based managing director of Accenture Health Administration Services, notes: “Private exchanges are experiencing hyper-growth.”
For CieloStar, it’s still early in the game. Mehus declines to disclose revenue for the privately held CieloStar, but confirms that it’s currently less than $10 million. But he sees big things down the road as the private exchange business takes off: projections call for hitting $117 million in revenue by the end of its fiscal year June 2017. The company currently has 55 employees; Mehus expects that to double in the next two years and triple within three to four years.
Mehus is no 20-something tech guru touting the latest gizmo, but a veteran entrepreneur. He exudes an old-school demeanor, but he’s clearly plugged in: He doesn’t believe in business cards, but he was steadily checking his smartphone during a recent meeting.
In January 2000, in an earlier shift in its business model, the company debuted a technology called BenefitReady, which allowed employees to manage their benefits through a web portal.
“Along comes the ACA, and we go, ‘We have that technology.’ We have the technology for employers and employees to go purchase benefits online,” says Mehus. “We’ve basically taken our technology and repurposed it for the ACA.”
CieloStar is now unrolling exchanges across the country, in many cases partnering with state chambers of commerce as exchange sponsors. CieloStar launched its first exchange in North Carolina in November 2013. They’ve since added exchanges in Oklahoma and Ohio. Exchanges in Virginia, Michigan and Georgia were launched in September. By the end of the year they expect to be in nine states, with the addition of Pennsylvania, New Hampshire and the company’s home state of Minnesota.
The Minnesota exchange will be sponsored by Southfield, Mich.-based Meadowbrook Insurance Services Inc., which has a Bloomington office.
“Every state has been a little different because the major medical players are regional,” says Paul Walther, vice president of business development for CieloStar. The company would not disclose the number of people enrolled in its exchanges so far.
Julie Wagner Feasel, vice president of communications for the Ohio Chamber of Commerce, says that CieloStar helped pilot a smooth launch of its “benefits marketplace” in June. “CieloStar was able to walk us through the process,” says Wagner Feasel. “It’s been really good. They had the resources to do it and do all the programming for the website. They had a lot of insurance contacts already.”
While the new offering has generated a lot of interest, as of mid-August, only one company was in the process of signing up for the Ohio exchange. But Wagner Feasel notes that the traditional time of year for enrolling in a new health plan is in the fall.
A crowded field
While the private exchange business is hot, there is no shortage of challenges—and competition. One of the larger players is Buffalo, N.Y.-based Liazon Corp., which was founded in 2007.
“We serve over 800 clients. The clients range in size from small companies, 10 employees, all the way up to companies as large as 10,000 [employees]. It really spans all geographies, all industry types and so on,” says Ashok Subramanian, Liazon’s CEO and co-founder.
In a signal of how heated the market has become, the global professional services company Towers Watson acquired Liazon for $215 million in November 2013. The market is increasingly crowded: “I like to joke sometimes: ‘All the cool kids have an exchange,’ ” says Subramanian.
He sees industry players shaking out into four different buckets: large brokers and consultants, health carriers, benefit administrators who have moved to the exchange business, and “pure play” exchanges like Liazon.
Subramanian acknowledges that some employers remain wary of signing up for a private exchange. “It’s a very emotional topic. And a lot of employers say, ‘Look, maybe I could save 5 percent, maybe I could save 10 percent, but you know I just don’t want to mess with this.’ ”
Another issue is the cloudy definition of the word “exchange,” which has created confusion in the marketplace and among employers trying to assess options.
“We think of ourselves as an online store, as an Amazon.com-like kind of place for buying things,” says Subramanian. “People think of the word ‘exchange,’ they think of soybeans. I don’t think there’s a good, clear definition of ‘exchange.’ And that’s why it’s a bit messy out there right now.”
Another big player is Aon Hewitt, which reported in March that more than 600,000 employees and their dependents were enrolled in the company’s private exchanges for 2014. One national competitor, Benefitfocus Inc., went public in a high-profile deal in September 2013. The Charleston, S.C.-based company lost $30.4 million on revenue of $104.8 million for 2013. In mid-January, the company’s market capitalization topped $1.8 billion, but has since declined to around $1 billion. According to the company’s most recent quarterly filing, it had 488 large employer customers and 43 insurance carrier customers at the end of June.
Minneapolis-based Bloom Health was founded in 2009. The company currently has more than 250 employers and more than 100,000 people enrolled in its private exchanges. Locally, the company runs the My Plan exchange for Medica. But Medica customers never see the Bloom Health name, which operates behind the scenes.
“Our primary objective right now is we go out and we work with health plans. We help support their private exchanges,” says Jim Priebe, chief operating officer for Bloom Health. In 2011, three large independent health insurers—Health Care Service Corp., WellPoint Inc. and Blue Cross Blue Shield of Michigan—acquired a majority stake in Bloom Health.
“They’re a competitor, but they come at it from a different perspective. They come at it from the carrier perspective, we come at it from the employer perspective,” Mehus says of Bloom Health.
Some employers are looking to shift from providing health insurance (a “defined benefit”) to providing a set amount of money (a “defined contribution” that would effectively work like a gift card), which employees can use to purchase a plan tailored to their own needs through an exchange. Employers see it as a way to help control costs, while offering greater choice to employees. Some skeptics worry that under such a system, some employees could ultimately find themselves underinsured.
David Martin, principal with Eden Prairie-based Ahmann-Martin risk and benefit consulting firm, says that many employers are weighing options, but so far it’s generating more talk than employers actually signing up for exchanges.
“Exchanges are getting a lot of lip service. … I think there has been a lot of confusion about what exchanges mean to different people,” says Martin. “An employer has to decide if an exchange fits their strategy or not.”
Martin says that CieloStar’s track record in the business will be a plus when it comes to dealing with the nuts and bolts of running exchanges: “One of the things that we would give them credit for is their roots in benefit administration.”
Like other observers, Martin notes that field has quickly become crowded: “There’s well over 100 [private exchanges] out there right now. It’s still a little bit of a gold rush,” Martin says. “I think over time there will be consolidation. It will be a game that will reward scale at some point in time. Who ends up getting scale, who knows?”
In contrast to the bigger players, CieloStar sees a niche catering to smaller companies with 250 employees or fewer. But while CieloStar is ramping up its business, one of the key players who positioned the company for its new direction has left the company.
In late May, then-CEO John Reynolds, a health care industry veteran with much larger companies, talked about his bullish outlook for the company: “If you look at the business today, this is a seven-figure business on its way to becoming an eight- and nine-figure business over the course of the next five years,” he said.
But in mid-July, Reynolds resigned after just two years at the helm to launch another company, health care consulting firm NaviSante. In the wake of his departure, no one was saying much about his exit. Reynolds says that he simply wanted to get into a different aspect of the health care market.
“I think his job was done here and he’s moved on to other things,” Mehus says.
Another player diving into the arena is Minneapolis-based startup Gravie Inc. Although the company is chasing the same shifting landscape created by the ACA, Gravie is not a private exchange, but a broker designed to help people shop for individual health plans. The company launched in August 2013 and by March 2014 had already raised $13.1 million in venture backing. Abir Sen, co-founder and CEO of Gravie, declines to disclose revenue for Gravie.
“We are experiencing really rapid growth,” Sen. The company’s goal is to be in all 50 states by the first quarter of 2015. Sen says that the federal law puts individual insurance on the same footing as group insurance. (Sen was also a co-founder of Bloom Health.)
The Gravie service is free to individuals. The company makes money through fees from insurers and other providers.
The private exchange boom is bringing a retail-like shopping experience to the business of health insurance.
“People are getting used to buying things online. Health insurance is a place where there’s still very low penetration,” Accenture’s Birhanzel says. “Private insurance exchanges deliver that.”
The new landscape also includes single-carrier exchanges such as Plan for Me, an offering by the Bloomington-based HealthPartners. The program, which typically offers three to five benefit plan options—all provided by HealthPartners—was launched in August 2013. (Similarly, My Plan by Medica is an exchange that only offers Medica plans.)
Scott Aebischer, senior vice president with HealthPartners, says that Plan for Me has been appealing to small and mid-sized employers: “Employers are looking for benefit plan options.”
While single-carrier exchanges offer a menu of choices, they only offer various combinations of benefits from a single provider such as Medica or HealthPartners. That’s another reason the definition of what is or what isn’t a private exchange has become muddled for many. Private exchange purists like Mehus believe that a true exchange offers choices between competing health plans. “When we think of exchange, we think choices and options and multiple carriers.”
In an effort to streamline its business, CieloStar sold off the COBRA and flexible spending account business that it handled for smaller customers in January to Madison, Wis.-based TASC. The company still handles benefits administration work for larger clients, such as the City of St. Paul.
Mehus declines to disclose the price of the deal: “We just said we wanted to create more focus in the organization and devote resources to our new business model.”
More than tech
The company now doing business as CieloStar has been through several names, including Corporate Benefit Resources. When it began in 1988, it was a distributor for self-insured health plans and reinsurance. In 1994, it switched gears to become a benefits administrator, handling billing, COBRA and flexible spending accounts. In 2000, it launched BenefitReady, the web portal for benefits management.
“We’re not just a technology company,” says Mehus. “We’re a technology, insurance and administrative company. We have a back room, we have a call center, we do the work. We support and run the exchange on behalf of a sponsor. Other companies will provide the technology but then the sponsor has to run the exchange.”
CieloStar gets a commission from health insurance companies. In its partnerships with state chamber groups, the chambers get a share of those commissions.
Mehus holds his cards close to his vest about long-term plans. He has an expansive vision for CieloStar, with a goal of having exchanges in 30 states. But the company has no venture capital backing, which raises the question of how quickly they can grow to that scale.
But Mehus says that the company has retained Morris Manning & Martin, an Atlanta law firm, to help evaluate whether or not the firm should look to raise venture backing.
“We’re looking at our options,” says Mehus. “It isn’t a foregone conclusion.” He has little interest in taking the company public.
The company is seeking $5 million in financing through debt and warrants for securities, according to a mid-August filing with the SEC.
In today’s feverish private exchange business climate, is the company for sale? “Not in the near future,” says Mehus, who then allows: “In five years I’ll be turning 65, so I’ll be looking to slow down a little bit.”
But Mehus has already proven that he’s a survivor with a knack for reinvention. “As an emerging market, we have high expectations for growth,” says Mehus. “We’re very bullish on the business.”
Burl Gilyard is senior writer at TCB.