The most valuable startup in Minnesota sits on the fourth floor of a vintage brick-and-timber building in the bustling North Loop. The offices have a modern feel: big open spaces, a collaborative spirit, and exposed air ducts. The company’s trio of leaders are dressed casually in blue jeans. It does not look like an insurance office.

Except that’s exactly what it is. Bright Health’s concept is audacious and ambitious: starting a brand-new national health insurance plan from scratch. While many new companies struggle to find investors willing to bankroll the dream, that has not been a problem for Bright Health.

The fledgling company is not yet three years old, but has already raised $240 million in two rounds of financing. Bright Health posted revenue of $45 million for 2017, its first year of operations. As of early July, the company had 182 employees and approximately 40 posted job openings.

It’s already drawing national attention. Bright Health was one of 25 companies that landed on Forbes’ Next Billion-Dollar Startups list for 2017. According to Forbes, the selected startups are “companies with a strong shot at reaching a valuation of $1 billion or more.” PitchBook, a financial data company that tracks private equity, ranked it as the most valuable startup in Minnesota.

Bright Health’s business model is to partner with a single comprehensive health care provider in each market it enters. The move is part of an industry trend to create so-called “narrow networks,” on the theory that the combination of payer and provider can translate into lower premiums and better health care for consumers. The trade-off is that subscribers have a smaller range of doctors and clinics within the network.

It’s not a new idea—the concept dates back to the dawn of the HMO era in the 1970s. Those plans faded as companies increasingly demanded plans with wide provider networks for employees. Narrow networks are resurfacing as one strategy to rein in costs. In a narrow network plan, insurers have more leverage to negotiate lower prices for services; providers make those deals in hopes of drawing more patients to the plan.

Bright Health is anchored by a trio of founders/leaders with deep experience in the business of health care benefits. Co-founder and CEO Bob Sheehy spent more than two decades with Minnetonka-based UnitedHealth Group where he was CEO of UnitedHealthcare, the company’s health benefits arm, from 2000 to 2007. UnitedHealth is one of the dominant national insurers and now ranks fifth on the Fortune 500—larger than Amazon.com—after posting revenue of $201.2 billion in 2017. Sheehy’s involvement alone has put Bright Health on the industry radar nationally.

“Health care is a $3.3 trillion industry—and nobody’s really happy with it,” Sheehy says. “The long-term issues that we have in health care are basically caused by the status quo.”

The company currently sells health plans in Colorado, Alabama, and Arizona—but not in Minnesota. For the last four decades, Minnesota law barred for-profits from operating HMOs in the state, so the market is dominated by large nonprofits. A law change in 2017 now opens the door to for-profit health plans, but so far there have been no big shake-ups. Sheehy says that the goal is to be in 15 to 20 markets within the next three to five years: “We tend to see ourselves as more of a national organization.”

Bright Health will expand in 2019 to offer health plans in Ohio, Tennessee, and New York City. The company will also add individual coverage in Arizona, where it had previously only offered Medicare Advantage.

Bright Health’s leadership also includes president Kyle Rolfing, who co-founded two other successful local startups, Definity Health, started in 1998, and RedBrick Health, founded in 2006. The common thread between the two companies was an emphasis on giving consumers more control over their benefits, a philosophy that extends to Bright Health.

“We really have a consumer-focused DNA in this company,” Rolfing says.

Bright Health’s chief medical officer Tom Valdivia began his career as a doctor, but then joined Ingenix as its medical director of informatics. Ingenix is now Optum, the health services arm of UnitedHealth Group. Valdivia also worked with Rolfing at Definity Health.

UnitedHealth acquired Definity Health for $300 million in 2004. In May, RedBrick Health merged with Providence, R.I.-based Virgin Pulse to create what the companies describe as “the world’s largest, most comprehensive digital health and engagement company.” (Virgin Pulse had been part of Richard Branson’s Virgin Group; a private equity firm acquired both companies and merged the two.)

Bright Health also recently added Andy Slavitt, a big name in the health care world, to its board. Slavitt is a former Optum executive who served as the acting administrator for the Centers for Medicare and Medicaid Services under President Barack Obama. He founded and serves as board chair for the nonprofit United States of Care, which is working to create affordable health care for all Americans. In May, Slavitt announced that he had co-founded and launched Town Hall Ventures, a health-care focused venture capital firm with offices in Minneapolis and New York.

Serial health-care entrepreneur Abir Sen, co-founder and CEO of Minneapolis-based Gravie Inc., was a co-founder of both Definity Health and RedBrick Health along with Rolfing. Sen says that Bright Health is anchored by a “dream team” of founders and leaders. “I think they have a strong team and I think they have a great idea,” Sen says. “They’re going after it with the right design and they’re having success.”

Go west, young health plan

Denver is more than 900 miles from Minneapolis, but Bright Health’s leaders saw an opening there and zeroed in on it as the company’s first market.

The Colorado HealthOp was one of many consumer-focused nonprofit insurance cooperatives created under the Affordable Care Act (ACA). The concept was that the co-ops would offer alternatives to established carriers. But many of these co-ops quickly failed, unable to surmount large financial losses. In late 2015, Colorado state regulators shut down Colorado HealthOp, barring the group from selling insurance for 2016. Centura Health, with a network of 17 hospitals and about 250 clinics across the state of Colorado and western Kansas, had been the exclusive network for the state’s co-op.

“The folks from Bright Health gave us a call and asked us if we would be interested in continuing a similar relationship,” says Mark Carley, vice president of managed care and payer relations for Centura, which is based in Centennial, Colo. “We kind of forged the partnership together. We worked collaboratively to design benefit plans.”

At the outset, Sheehy acknowledges, Bright Health wasn’t much more than an idea. “It was the three of us and a PowerPoint presentation,” Sheehy says. “We explained the concept to them and they said, ‘This is exactly what we’d like to do, and we’ll do it with you.’ So we said, ‘Holy smokes, we better get going.’ ”

Centura’s commitment to working with Bright Health was a key factor in pulling together its first round of financing: an $80 million round announced in April 2016.

The Series A financing round was led by Bessemer Venture Partners and New Enterprise Associates; both firms are based in Silicon Valley. Bessemer has backed high-profile companies such as Pinterest, LinkedIn, Skype Technologies, and Blue Apron; New Enterprise focuses on health care and technology investments.

“I actually participated on a number of calls with their financing sources; we were very supportive,” Carley says.

Bright Health’s plan with Centura was offered for the plan year starting Jan. 1, 2017. For 2017, its Colorado plan had about 11,000 enrollees. That more than doubled this year to approximately 24,000 members. Centura has no ownership stake in the health plan.

“We’re hearing good response,” Carley says. “Bright has a really good relationship with its beneficiaries. It’s a highly consumer-centric organization. … It attracts a population that’s a little bit cutting-edge in health care.”

Bright Health is not for everybody. The company is not pitching its plan to big companies as a group health plan. It is focused on the individual market for customers who don’t have employer-provided health insurance, and also offers Medicare Advantage coverage. Rolfing says that there may also be a market to more subscribers under the federal Small Business Health Care Relief Act, which allows employers with 50 or fewer employees to put money into a health reimbursement account that workers use to buy plans.

One of the problems of the current system, Rolfing says, is that companies want broad coverage for employees. That means that most insurers work with providers across the board.

“The economics of that employer-based system basically is a weighted average of where everyone goes to the various health care systems rolled up into one effective premium. You have your most cost-efficient health systems subsidizing the least cost-efficient health systems, which are also their competitors,” Rolfing says. “We’re seeing migration from an employer-based system to an individual market, and we lean into that.”

Federal statistics underscore Rolfing’s point. In 2016, 57.2 percent of employees were covered by employer-provided health insurance. That’s down from 61.5 percent a decade earlier. Throughout the 1970s and ’80s, the rate was steadily 68 percent or higher.

Bright Health’s leaders argue that they’re creating a system that will work more smoothly for everyone.

“It’s all about the alignment that this creates,” Valdivia says. “What that means is it’s changed the dynamic from ‘I’m going to work with everybody’ to ‘You and I are partners in this relationship.’ ”

Carley says that he’s often fielding calls from around the county from executives with other providers who want to learn more about Bright Health and its arrangement with Centura.

“There’s no question that they are creating energy and noise in other markets,” Carley says.

“We think that their business model … is very expandable.”

Venture capital backing other startups

Bright Health is not alone in trying to shake up the health insurance industry. It’s an appealing target because the landscape is dominated nationally by a small group of large companies. But it’s exceedingly complex and heavily regulated terrain—and building a new health plan is not cheap.

Health care industry analysts say that creates big barriers to entry. “Unless a new company has a really novel idea, I think health insurance markets are very difficult to enter,” says Paul Ginsburg, who chairs health policy studies for the Washington D.C.-based Brookings Institution. “Basically, you’ve got four national insurers. The health insurance market, in general, it’s very daunting.”

New York-based Oscar Health Corp. is another young company trying to upend the world of health plans. With its latest financing round of $165 million secured in March, the company had a reported valuation of $3.2 billion. The company bills itself as the “first technology-driven health insurer.” Oscar will offer plans in nine states and 14 markets in 2019.

San Francisco-based Clover Health is another new player offering health insurance, currently available in four states. While the company raised $425 million in venture capital, a CNBC report earlier this year found that the company was missing financial targets and suffering executive turnover. In March, Clover touted adding alums of Amazon, Google, and Airbnb to its leadership team.

Alphabet Inc., parent of search engine giant Google, has invested in both Oscar Health and Clover Health. (Alphabet has not invested in Bright Health.)

In June 2017, Bright Health announced it had raised an additional $160 million in its second round of financing. The money Bright Health raised accounted for 21 percent of the total $750 million in medical business investments in the state last year, according to statistics from Golden Valley-based trade group Medical Alley Association. Sheehy says that Bright Health is not yet working on another round of financing.

Ginsburg says that UnitedHealth, Aetna and Cigna are dominant national players, but adds that Blue Cross Blue Shield has been able to “act like a national entity” with its Blue Card, which allows members to tap into benefits from other Blue networks. Regional companies are in decline because many are being absorbed by bigger players, says Ginsburg. But he does not expect more contraction.

Ginsburg says that Bright Health’s model sounds promising.

“That sounds actually like a viable strategy,” Ginsburg says. “It’s a big bet on the success of these networks built around a health system. That’s actually a very intriguing model.” But Ginsburg does not see a notable decline in employer-provided health insurance on the horizon.

Another challenge is the current administration’s work to unwind many components of the ACA.

“The current administration has clearly been sabotaging the individual marketplace set up by the ACA,” Ginsburg says.

Narrow network arrangements like Bright Health’s have become the norm for individual health care plans.

“I would view them in the context of provider/health-plan partnerships, and there’s a range of those kinds of partnerships,” says Allan Baumgarten, a health policy and finance analyst and consultant, who produces the annual Minnesota Health Market Review. “What Bright Health is doing is also a version of that. They are jointly marketing the product and they’re using the local provider partnership as the core of their delivery system.”

Such partnerships may be more palatable to consumers who detest health insurance companies.

“One of the underlying premises of this whole range of partnerships is that patients have kinder feelings for their provider than they do for their health plan company,” Baumgarten says.

But Baumgarten notes that Bright Health’s business niche presents inherent challenges.

“The individual market is not an easy market to work in,” Baumgarten says. “It’s hard to get a large-enough enrollee bloc to be able to effectively manage risk, but there are also opportunities there because other major health companies have pulled out.”

Venture capitalists have grown more bullish on investing in health care startups as the industry landscape shifts.

Abir Sen’s Gravie is designed to provide employers and individuals with access to better health insurance and other benefits. Since launching in 2013, the company has drawn more than $47 million through four rounds of financing.

Sen says that in the changing medical business landscape, venture capitalists are increasingly interested in backing health-care startups. Says Sen, “There’s more interest in health care now than there probably was 10 years ago.”

Healthy outlook despite startup losses

There are always bumps in the road for startups. Filings with Colorado’s Division of Insurance detail Bright Health’s first year in the state. For 2017, Bright Health reported revenue of $36.2 million. (Bright collected $45 million in premiums, but the reported numbers deduct the projected risk adjustment payment—a component of ACA that transfers money from plans with lower-risk enrollees to plans with higher-risk enrollees.)

But the company saw a net loss of $17.5 million for its first year in Colorado. While losses are commonplace for startups, there is always the risk of burning through capital too quickly. Bright Health leaders say that they’re confident in the “scalability” of the startup.

Chief technology officer Mike Rynchek left the company in May. Rynchek founded Minneapolis-based marketing technology firm Spyder Trap, which Bright Health acquired in 2017.

Rynchek says that he left on good terms and that much of his work with the company focused on ramping it up to launch in multiple markets.

“What prompted me to go there in the first place was the team,” Rynchek says. “I think coming into it our goal was to help prove the scalability of the business and we accomplished that. It was just the right timing for me.”

At the end of the day, starting a new health plan is a steep uphill battle.

“I think in general it’s still a very difficult time for startups in the health insurance space,” says Baumgarten. He notes that new companies have little name recognition and are battling “the power of well-established and well-financed competitors.”

Bright Health’s leaders are focused on creating a healthy company culture. They are prone to refer to the startup as a “mission” as much as a business. Beyond having the right business model, they strongly believe that they need to draw the right talent to successfully build the company.

“One of the lessons that I’ve learned is that a huge element of your success has to do with the ability to attract the right people to work with. It’s not simply attracting great talent, which I think we have, but it’s attracting people and working with people in teams that makes all the difference in the world,” Valdivia says. “Health care is so complicated … having people that can work together on teams to solve these problems is so important. Getting the right people involved is the number-one aspect.”

Sheehy believes that they are bringing a fresh eye to the often-maddening business.

“It really is less about insurance and more about health care,” Sheehy says. “It’s a huge marketplace, people aren’t happy with it—it’s ripe for disruption. Companies that focus on providing better value to consumers are going to be successful.”

Burl Gilyard is senior writer at Twin Cities Business.