Doug Kronenberg

Entrepreneurial Dominion

Power to the Patient

Step aside, HMOS. Consumer-driven health care is the Next Big Thing in the medical marketplace -- and Lumenos, which packages Health Reimbursement Accounts, is perfectly positioned to benefit.  

If the driving force of the medical marketplace in the 1990s was the Health Maintenance Organization (HMO), it’s the Health Reimbursement Account (HRA) today. Where HMOs acted as gatekeepers to control patient access to doctors and hospitals, HRAs put the patients back in charge – and reward them financially for spending their health care dollars wisely.

Alexandria-based Lumenos was one of the first companies in the United States to fashion a comprehensive insurance package based on the HRA concept four and a half years ago. It took a big risk launching a business on a concept that had been floating around for years but had never quite caught on. But senior management was convinced it had a better idea: Wrap the health reimbursement accounts with catastrophic insurance to protect against major illnesses, provide easy access to medical information, and create financial incentives for people to adopt healthier lifestyles.

Now the company has a tried-and-tested product just as the market for HRAs is poised to take off. “There are an estimated one million folks in consumer-driven health plans now,” says Doug Kronenberg, chief strategy officer. “That’s projected to increase to three to four million over the next 12 to 18 months.”

And those estimates don’t include the impact of recent federal legislation which, as part of the Medicare drug overhaul, encouraged the creation of Health Savings Accounts (HSAs), which are, in essence, portable, highly flexible HRAs. The Congressional action has catalyzed the HRA/HSA concept, Kronenberg says. Corporate interest in them is rising dramatically. Roll over, HMOs!

It’s one thing, of course, for Kronenberg to predict revolutionary changes in the medical marketplace that will benefit his company. It’s quite another for investors who are putting their own money at risk. So, it’s significant that the company completed its second round of venture capital financing in an April deal that raised $26.9 million.

“From my perspective as an investor, Lumenos possesses all the key attributes of a sound and promising investment: a cutting-edge approach to health care coverage endorsed by the president of the United States, a sound business philosophy and a product that is receiving more and more positive attention as the nation learns about the Lumenos products,” says Michael Kluger, a founding partner of Liberty Partners, one of the lead investors.

Driving change in the medical marketplace is the resurgence of health care inflation, which spurs companies to find new solutions. HMOs contained health care costs in the 1990s by wringing out much of the frivolous utilization of the health care system that typified the traditional indemnity health care plans. But the HMOs seeded their own demise: Standing between patients and their doctors, they came to be perceived as creating barriers to care. There were limits to how much more they could squeeze from the system without alienating their customers.

The thinking behind “consumer-driven health care” is to let patients engage freely with doctors and other providers – but give them incentives to utilize health care services prudently. That’s what HRAs and HSAs do. By allowing unspent funds to accumulate in their health accounts, people will curtail frivolous visits to the doctor’s office. For instance, says Kronenberg, studies indicate that physicians prescribe antibiotics to patients with sore throats about 70 percent of the time – even though 90 percent to 95 percent of all sore throats are viral in origin and immune to antibiotics.

By themselves, HRAs have limited appeal. Most people want protection against catastrophic events, like cancer or bypass surgery, that would drain HRA accounts. Also, most people lack the confidence to make intelligent consumer choices. Where do they go for unbiased information advice if not their doctor?

The luminaries at Lumenos have thought of all that. They have developed what they believe is the most comprehensive, integrated HRA plan in the country. Says Kronenberg: “We’re offering a program where the consumer can get everything from us – health protection, financial administration, health support. No one, to our knowledge, is doing that today.”

First, Lumenos administers the HRAs, giving subscribers the benefit of discounted rates negotiated with a national network of 375,000 physicians and 50,000 hospitals and other providers. Secondly, the company backs up the accounts with catastrophic insurance to cover the expenses of a major illness.

Thirdly, the company arms patients with consumer information. Anyone can go online and find out how much any given physician, hospital or drug will charge under the plan for any given procedure or condition. Anyone can check his or her current account balance at any time. Where the data exists, Lumenos even publishes information on patient satisfaction and the quality of medical outcomes of different providers.

Fourthly, Lumenos provides its patients telephone access to nurses and “personal health coaches.” The nurses can alleviate patients of many fears that might impel them to unnecessary doctor visits – or point them towards the most appropriate source of care. Health coaches are nurses who partner one-on-one with people to help them manage ongoing health conditions, coordinate care, and coax them into following programs to stop smoking, eat better and exercise more. In the case of patients with chronic diseases like hypertension, diabetes and asthma, the coaches direct them to preventive medical care.

Fifty percent of health care costs are driven by lifestyle behaviors that can be changed, Kronenberg notes. Preliminary evidence suggests that the Lumenos package – which includes financial rewards for signing up with a health coach and enrolling in various programs – has induced roughly half of its subscribers to at least try to maintain healthier lifestyles. Also, there’s hard data that Lumenos patients are changing the way they interact with the health care system. “We’re seeing a reduction in office visits and hospital stays but an increase in preventive care services. About five percent of our claims are for preventive care – about twice the national average.”

The value proposition for patients is better health care. Says Kronenberg: “People like the HRAs. It’s a good benefit.” Employees exhibit higher levels of satisfaction with their health benefits, and they spend less time bugging their H.R. departments. The value proposition for employers is restrained health care costs. “We’re seeing some important reductions in cost, on the order of 50 to 60 to 70 percent savings from the trend line.” In other words, if medical insurance costs had been escalating at the rate of 20 percent per year, the Lumenos plan brings that rate down to 10 percent.

The marketplace has reached the tipping point. As more and more companies achieve success with HRAs, the word will spread and acceptance will grow. Competitors may try introducing similar products, but Lumenos has a four-year head start. “The integrated approach is hard to do,” Kronenberg contends. “We’ve raised $103 million to get where we are. [Our system] is very expensive to build. But at the end of the day, it’s the only way to ensure that the customer experience will be right.”

-- May 12, 2004

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