Health insurance startup company

Insurance companies are notoriously unloved. But few of us hold as much contempt for the industry as Ali Diab. For Diab, insurance companies aren’t just opaque and overpriced bureaucracies, they’re “profiteering, morally hazardous middlemen” who will do anything to avoid following through on what we pay them to do: insure our health.

Diab’s disdain is somewhat understandable. Last April, he was clinging to life in an intensive care unit after his small intestine became twisted on itself. When he was released after extensive surgery and a month in the hospital, including several weeks in the ICU, Diab was told that many of his surgical bills weren’t covered under his plan. A serial entrepreneur, Diab was part of the founding team for AdMob, an ad network that sold to Google for $750 million, so he wasn’t one to skimp on insurance coverage. Yet his insurer claimed that the surgery Diab had undergone was experimental and that he should have reviewed his plan, talked to his surgeon, and pre-authorized the procedure before going forward with it.

“Meanwhile, I was on the operating table hours away from passing away, ” he says.

Diab spent the next six months battling his insurance company. In the end, he got nowhere. “In that situation you feel lonely, vulnerable, and you’re not 100 percent fit and healthy, ” he says. “To be taken to the cleaners by your insurer at that moment in time is abominable. It motivated me to want to do something to fix the system.”

In October 2013, he partnered with his friend Rajaie Batniji, a physician of internal medicine at Stanford, to come up with a solution. On Tuesday, they officially launched Collective Health, a new Silicon Valley startup that’s offering an alternative to the crummy insurance experience by turning employers themselves into insurance providers.

Your Employer, Your Insurer

Backed by the venture capital firm Founders Fund and others, Collective Health is trying to make it easy for employers of any size to skip dealing with insurance companies altogether. Instead of signing up for a traditional managed care plan and paying an insurance company a monthly premium, employers pay for employees’ healthcare costs out of pocket. Employers still collect a monthly premium from their employees, but instead of passing that money on to an insurance company, they add it to their internal pool of cash to cover employees’ medical bills. These employers have the freedom to decide which types of procedures are covered. Plus, because they’re not paying for an insurer’s overhead and contributing to its profits, self-insured companies typically save money, too.

The less their members understand about their coverage, insurers figure, the less likely they’ll be to fight for it.