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Castlight Health is a name hospital and health system executives should know. Founded in 2008, Castlight offers price “transparency tools” designed to help employers and individuals control healthcare costs by allowing employees to gauge the relative cost and quality of specific services before selecting a provider. Such tools are not new to health care. They have been offered by other companies and some healthcare payers in various forms for years, but their adoption has increased rapidly as of late.
This trend is evidenced by Castlight’s initial public offering (IPO), which was completed on March 14, 2014. The company’s market valuation grew to $3 billion by the end of the first day of trading—evidence cited by some analysts of a bright future for such companies.
Whether or not Castlight’s IPO proves to be a predictor of strong future performance, executives should understand:
Castlight’s tools drive savings for employers and individuals by encouraging the use of lower-cost sites of care. Annual savings as high as 13 percent of an employer’s total healthcare expenditures have been achieved, according to the company’s website. Castlight has an extensive database of claims information supporting its price and quality comparison tools, and it offers engagement tools aimed at incentivizing individuals to use its services.
Based in San Francisco, Castlight is rapidly expanding its client base: Approximately 95 of its 106 customers have signed up since 2012. Its focus is on large, self-insured employers. Current clients include Walmart, Microsoft, Cummins, Safeway, Honeywell, Eaton, Indiana University Health, Indiana University, Purdue University, and Liberty Mutual Insurance. Twenty-six of Castlight’s top clients are Fortune 500 companies.
Although Castlight’s 2013 revenue was relatively modest at $13 million, its growth is accelerating, according to the IPO filing. In the 12 months ended December 2013, Castlight’s backlog—the portion of contracted revenues not yet invoiced—increased from $44 million to $108.7 million. Such rapid growth reflects the growing momentum that transparency tools are achieving among employers. The portion of employer groups providing price and/or quality transparency tools to employees rose from 33 percent in 2012 to 56 percent in 2014, according to the latest Towers Watson Employer Survey.
Rapid market growth and increased demand is attracting many new entrants into the sector—Castlight’s competitors now include Change Healthcare, Healthcare Bluebook, HealthSparq, ClearCost Health, and Truven Health Analytics. Most major insurers also offer proprietary transparency tools for their self-funded and fully insured employers and enrollees.
Transparency tools alone will not drive consumerism and behavior change. However, when combined with strong financial incentives and “activated” consumers, the tools have the potential to drive material shifts in utilization, particularly among outpatient services perceived to be “commodities.”
Financial incentives. The potency of transparency tools will increase with the increasing enrollment in consumer-directed and high-deductible health plans as a result of employers shifting more healthcare costs to employees and the expansion of public and private health exchanges. Some employers are opting for health plans that offer reference pricing, in which employees are responsible for any cost in excess of a predetermined standard price for a drug, procedure, service, or bundle of services. Payers also are creating benefit designs with site-of-service differentials that steer patients to less expensive sites of care.
“Activated” consumers. Not all patients with a transparency tool and financial incentives will choose to shop for alternatives. However, preauthorization requirements and proactive interventions that raise awareness of less-expensive alternatives at the point of need are becoming more common. Companies like Castlight appear to be having more success driving patient engagement with comparison shopping tools.
Behavior change. Depending on cost, quality, access, and physician considerations, not all patients who shop will make a different decision than they would have otherwise. We believe patients are most likely to actively choose less-expensive sites of care for outpatient services they perceive to be commodities (e.g., lab tests).
As tools like those offered by Castlight become more widespread and commonly used, we expect the pace of consumer activation to increase, but at varied rates by market. Given the significant financial contribution of commercial outpatient services at most hospitals, it is imperative that hospital leaders analyze their outpatient service offerings and sites of care to develop transparency strategies tailored to the evolving market and their cost and quality positions.
Andrew Cohen is a vice president in the strategy practice and Jason O’Riordan is a vice president in the financial planning practice of Kaufman, Hall & Associates, Inc., Skokie, Ill.
Publication Date: Thursday, April 17, 2014
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