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Investors are betting big that a company called ikaSystems Corp. stands to cash in on health insurers’ urgency to reduce administrative and medical costs to rein in the price of premiums.
The provider of Web-based software applications for the health insurance industry reeled in a $120 million venture capital round last month, led by Palo Alto, Calif.-based Essex Woodlands Health Ventures and Providence-based Providence Equity Partners.
But it’s no overnight success story.
The Southborough company had been quietly subsisting on angel and family investments for 10 years before this infusion of cash, which was the largest venture capital investment in Massachusetts in January. Officials there acknowledge that the system, which automates all key processes from marketing and sales, through claims administration and customer service, to care and quality management — was slow to catch on.
“It’s a conservative industry that doesn’t take on new products easily,” said Eran Broshy, a partner at Providence Equity Partners and a member of the ikaSystems board of directors.
But the combination of a recession, spiraling health care costs and potential government intervention to bring prices down through a health care overhaul has changed insurers’ minds.
“It was a struggle through 2007. Then the economic situation and the market situation helped us, payers began to feel more pressure,” said CEO Ravi Ika.
Ika said that most insurers have different systems for each administrative function, that many tasks are done manually, and even those that are automated are clunky. For instance, the process of enrolling a new patient in a health plan takes two steps in the ikaSystems platform, versus up to 35 steps in others, he said. Ika said these shortcuts, applied throughout the organization can take a bite out of the 9 percent to 12 percent administrative costs that are part of every health care dollar.
The systems consist of several different modules, such as claims, billing and portals for health plan members and medical providers. They can be bought separately or as part of a comprehensive suite called ikaEnterprise. The company also offers a total technology outsourcing solution. The company would not disclose the prices for these systems, but said insurers are charged a startup fee and then billed on a subscription basis. The company, which would not disclose its revenue, has 200 employees, up from 110 workers a year ago. Officials hope to grow to 300 employees by the end of 2010.
But reducing administrative costs puts only a small dent in health care spending. By far the biggest chunk of the health care dollar goes to medical costs as opposed to administrative costs. IkaSystems also has medical management modules designed to help streamline care.
“It’s like EMRs (electronic medical records) on steroids,” said DeDe Davis, vice president of Louisville, Ky.-based University Health Care, doing business as Passport Health Plan. Davis said that the ability to track patient information between plans and providers has saved on administrative costs and medical costs by reducing duplicative testing.
University Health Care is a provider-sponsored health plan, so the goals of both the plan and the providers are aligned. But whether some other providers would balk at being given real-time electronic advice from insurers remains to be seen.
“I think it depends how the information is conveyed. If it’s telling them what to do, then that’s a different story. It’s not doing that, ” Broshy said.
IkaSystems currently has 35 clients, all of whom are outside of Massachusetts.
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