Sesame, Marketplaces, Price Transparency, and Cutting Out Insurance
A startup builds a marketplace for the uninsured
You’ve probably noticed: I like to write about companies that are shifting healthcare incentive structures by coming up with new business models. Building on that theme, today we’ll look at Sesame.
Sesame was launched early in 2019 via—what else?—a Medium post by founder David Goldhill. I’ve written before about some of Goldhill’s ideas, and I’m intrigued that he’s putting them into practice by starting a company. Furthermore, Sesame has been affected by COVID, and it’s interesting to see an early-stage company maneuver through it.
What Sesame Does
In Goldhill’s words:
Sesame is a marketplace for health services where customers pay upfront for care.
With Sesame, people who are uninsured get fair prices for services because they’re paying in cash before they see the doctor. When physicians don’t have to deal with hassles of insurance, the patient gets a more affordable price.
You’ll see a full range of services on Sesame — well outside what is typically seen online. From preventative and chronic care to physical therapy, dental services, and more, we’re proud to offer a wide range of care options at transparent prices.
Pretty classic marketplace business here. Sesame plays the matchmaker role for doctors and patients, much in the way Uber does for drivers and passengers. More discussion on marketplaces in a minute.
Having read Goldhill’s book, it’s clear that the underpinnings of this business model are driven by some key beliefs about how healthcare should work. He writes:
Almost all our interactions with the health care system occur through insurers, Medicare, government agencies—the intermediaries I call the Surrogates. On our behalf, they negotiate prices, agree on appropriate procedures and treatments, and oversee results. In theory, there seems to be a good reason for the Surrogates to serve this role: being large and powerful, they have the leverage to negotiate the best deals with doctors and hospitals…
This theory—that the Surrogates are more effective health consumers than we as individuals are— is the most important structural foundation of our health care system…After forty-five years of relentless expansion of the role of the Surrogates, we should now admit that this theory is wrong. (Catastrophic Care, p. 65)
Per Goldhill, insurance companies remove consumers’ ability to reward the providers that best meet their needs, and punish those who don’t. Providers instead focus on meeting the needs of payers, who actually, like, pay them. Payers’ needs don’t include things like a good patient experience, or even low costs, and so those things don’t get addressed.
Certainly there are counterarguments to Goldhill’s point; I would suggest two in particular:
It’s often hard for patients to make good decisions about the treatments they buy from providers, either because they’re incapacitated, or because their ailment is complex, and treating it requires deep medical knowledge. An insurance company can at least theoretically enforce the right standards of care on the patient’s behalf.
In France, for example, rates for healthcare services are negotiated by big intermediaries—public insurance funds, or the government—yet France outperforms the USA on both affordability and effectiveness.
Nevertheless, Goldhill’s beliefs about the need for more market-based mechanisms are at the core of Sesame’s model and structure. It makes sense that Sesame takes the form of a marketplace, which encourages patients to connect directly with doctors, and notably excludes any third-party payer. In fact, Sesame explicitly forbids patients to submit insurance claims for care purchased through the platform.
The Patient’s Perspective
Most marketplaces involve two sides, buyers and sellers. We’ll start with the buyers—in this case, the buyers are patients.
It’s worth paying attention to see how patients handle health care without insurance. Consider that patients must now pay up front and in full, with cash or a credit card, when they get treatment.
Also consider that, by excluding insurance payments, Sesame’s product is mostly useless to the large majority of patients that DO have insurance; such patients wouldn’t have even existed without the repeal of the individual mandate. I imagine that the repeal, which took effect in January 2019, had a lot to do with the timing of Sesame’s launch the very next month.
For the uninsured segment that Sesame is focused on, price transparency is a major concern. Providers don’t generally publish their prices. Insured patients don’t care that they can’t see the prices, because they’re not the ones paying. However, an uninsured patient IS paying, and needs to know what it’s on the hook for. This leads to something extraordinary:
Specific prices listed on Sesame’s homepage!
The key here is that Sesame is solving a major problem for a new segment of the market by providing price transparency to uninsured patients. Surprise bills are removed from the equation, a substantial achievement.
Transparency isn’t the only problem for these patients. Payments are also a hitch—Sesame currently only allows you to pay by credit card, where borrowing costs can be prohibitive. This approach protects Sesame, since the patient’s bank is taking the risk for non-payment, but it does limit the size of their addressable market. That works against them in a marketplace business, which thrives on scale.
And note there are some fundamental limits on what kinds of care can be provisioned through a marketplace. For example, no one can shop around for a trip to the ER after a car accident, which is both expensive and unpredictable. That means Sesame can never be a true replacement for insurance. However, it can absolutely reduce the amount of insurance people need.
I expect Sesame to eventually offer an insurance product that complements (in the economic sense of the word complement) and enables their core direct pay business: cheap coverage for only unexpected events, which lets their target segments more easily forego traditional insurance. Critically, the product must integrate into Sesame’s payment systems, since a core part of their value proposition on the provider side is simple payments, and that can’t be put at risk. The product might be designed and funded by an outside provider, but it must be integrated.
The Provider’s Perspective
Why might a doctor join Sesame?
They’d like to get access to more patients
Collecting payment from an insurance company is a burden that costs them time and money, and claims are often denied. Since Sesame collects funds via credit card, Sesame patients represent guaranteed revenue, at a known price.
Diversifying their source of customers, which helps when negotiating reimbursement rates with insurance companies.
Use of any tools/platforms that Sesame offers. (e.g. for telemedicine)
I suspect the first reason—access to more patients—is the most attractive one. That means it’s critical to have enough patients on the platform that doctors can expect to materially benefit by participating. And if that happens, more doctors will in turn attract more patients, contributing to a positive feedback loop.
It also matters whether those doctors that participate are of good quality. If the best doctors are able to fill their schedules with high-value commercially insured customers, they may not feel the need to participate in the uninsured marketplace, meaning that Sesame will be offering a poorer experience. This is less of a problem in the more commoditized parts of the medical profession, and more of a problem in the specialties.
Pricing is an interesting consideration: doctors are the ones setting prices for care in Sesame’s marketplace; compare that to Uber, where prices are set centrally / algorithmically by the app. Why? Uber offers a single product (a ride) where supply and demand can change quickly and in real time, while Sesame offers many products (from psychiatry appointments to allergy assessments), where demand moves slowly. With the former, it’s worthwhile to optimize a price mechanism to match supply and demand, but for Sesame, it’s better to decentralize that function and let sellers make their own decisions.
This means that Sesame’s doctors must compete on price, as well as on the experience and quality they give customers. Much more so than Uber drivers, which are completely commoditized. In the long run, a great doctor will do far better on Sesame than an average one, while even the very best Uber driver won’t stand out.
When analyzing marketplace businesses, it’s extremely obligatory to reference Bill Gurley. I duly refer to you this classic piece; here’s one of the most critical bits:
A true marketplace needs natural pull on both the consumer and supplier side of the market. Aggregating suppliers is a necessary, but insufficient step on its own. You must also organically aggregate demand. With each step, it should get easier to acquire the incremental consumer AS WELL AS the incremental supplier. Highly liquid marketplaces naturally “tip” towards becoming a clearinghouse where neither the consumer nor the supplier would favor an alternative. That only happens if your momentum is increasing, and both consumers and suppliers are sensing an increasing importance of your place in the world. Much easier said than done.
He goes on to name 10 factors that can determine the success or failure of a marketplace. I don’t have space to cover them all, but here area few:
In Sesame’s Favor:
Provides an economic advantage vs status quo. Sesame’s price transparency solves a genuine problem for uninsured patients, who are not otherwise well-served
High Fragmentation. Many patients, many doctors, at least for most types of care. There isn’t some tiny oligopoly of provider practices that controls all of the supply of doctors like there is in, say, the music industry.
Working Against Sesame:
Frequency. High frequency is better, but for a lot of the uninsured, medical care may be infrequent (if it was frequent, they’d try to buy insurance). When patients do require frequent care, it might be with a single doctor, so they only need to use the marketplace once to get matched, and future encounters don’t involve Sesame.
In addition to Gurley’s 10 factors, consider the take rate (i.e. the amount that the marketplace charges its users, similar to a bid-ask spread). It’s not clear what Sesame’s take rate is, but there’s an obvious trade-off between the size of the take rate, and the attractiveness of your platform for each side. It’s hard to achieve critical mass with a high take rate, and hard to reach profitability with a low take rate, although venture capital can help bridge the gap. Sesame raised a $23MM Series A last summer.
Take rates also have an impact on whether competitors can enter. It’s tempting to think of a marketplace/network effect business as being winner-take-all; but note that in Uber’s case, Lyft has hung on to prevent that. The key lies in the ability for both buyers and sellers to switch marketplaces at will, and Sesame doesn’t currently have any lock-in mechanisms that I can identify.
The Google Cloud Blog, of all sources, describes how Sesame has handled COVID:
In January, when COVID-19 first entered the global vernacular, Sesame was still operating in two small markets: Kansas City and Oklahoma City. While telemedicine was on its roadmap, it wasn’t a top priority—nearly 100% of its business came through in-person visits with the local providers it had signed on. But, as the pandemic escalated, Sesame quickly transformed its business and introduced a new virtual appointment and telemedicine system built using Twilio and Google Cloud…
Sesame is now operating in 48 states across the nation, with 86% of its bookings coming through virtual appointments—all because of the team’s ability to pivot and move fast…
While adapting to COVID-19, Sesame has been focused on getting even more providers on its virtual appointment system, making it available for free to providers. Since mid-April, Sesame estimates it has increased its provider network by more than 50%.
That (clearly promotional) article is a month old; growth is likely a lot higher than 50% by now. Impressive! With few patient visits during the pandemic, doctors looking to plug their revenues have turned to telemedicine.
And telemedicine creates a huge amount of liquidity—critical mass of buyers and sellers—which is what makes marketplaces really hum. During COVID, doctors can treat patients anywhere in the country, which massively expands the pool of doctors available to any given patient, and also the pool of patients available to any given doctor. Both buyers and sellers benefit from higher volumes of each other, attracting more people to the marketplace and increasing its value.
It’s a huge credit to Sesame that they were able to act quickly enough to take advantage.
Big Picture / Future
With a new company, it’s fun to consider the end game: assuming everything works like it’s supposed to (which it won’t), where is this all leading?
In Sesame’s case, I’ll speculate on an upside scenario:
Among uninsured patients, Sesame is successful and popular. In some markets, people become comfortable going without health insurance, or with lightweight, catastrophic-only insurance.
Local employers, noting this, begin offering employees vouchers for treatment via Sesame (or any potential competitors) as an alternative to insurance. Employees begin to choose vouchers over health insurance, since they get to keep the balance of any unused vouchers.
A trend catches on, and employer-sponsored health insurance steadily declines. Large insurance companies reduce their premiums to maintain share, which works only temporarily. For most medical treatment, self-pay becomes the norm, perhaps supported by public funds for those in need.
This would obviously be a poor outcome for the existing insurance industry, which has a great deal of power and influence, and there are certain downsides to providers as well. But if Goldhill is looking to change the structure of the healthcare system, some seeds of potential are beginning to take root.