Tim Armstrong, CEO of AOL, made headlines last week (of the bad kind) by suggesting that he was going to modify  AOL’s 401k plan because AOL’s healthcare costs had been driven through the roof by two “distressed babies” and Obamacare.  Armstrong’s and AOL’s plight, though poorly presented, does represent a real challenge to Corporate America.  Benefits costs, especially healthcare costs, continue to rise and there is only so much of that expense burden that can be shifted onto employees (who are not getting salary increases).

To the rescue comes Castlight Health, a SaaS company which just filed to go public and is focused on reducing employer-covered healthcare costs.   Before exploring Castlight further, let’s talk about the opportunity to generate savings in employer-borne healthcare costs.

The Market

Employee compensation costs vary tremendously by industry, but average around 20% of revenue for all companies.  Of total compensation costs, salaries represent 69% and benefits comprise about 31%.  That makes benefits about 6% of revenue, which in turn means they are equivalent to about half of corporate operating profits.  In other words, benefits are a big deal.

Data from the Bureau of Labor Statistics demonstrate that employee-sponsored healthcare insurance is the biggest single driver of this benefits expense:

data from bureau of labor statistics on the cost of various benefits

Castlight Health is taking aim at the 8.5% of compensation that is employee sponsored healthcare benefits.  Castlight’s prospectus suggests that this represents about $620 billion annually. In particular, Castlight is primarily targeting the 61% of this market that comes from the largest employers who self-insure and therefore bear most of the burden for healthcare cost increases directly.  (Presumably, AOL is one of these companies.) Castlight figures that about $5 billion in fees will be generated in helping these self-insured companies save on their $400 billion in spend (Total Addressable Market (TAM)).  That 1%+ figure seems reasonable based on what companies spend to source and procure complex categories and the savings that are likely to result.

To drive these savings, Castlight is building an application that:

  • collects and analyzes massive amounts of data on healthcare costs, providers, and outcomes (“Big Data”)
  • serves up this data to both employers and employees in an engaging way (applications)
  • and helps each of those parties make better decisions on choice of providers and benefits packages (behavioral sciences and clinical knowledge)

Here’s the “Markitechture” rendering from the Castlight prospectus:

Diagram of Castlight Health ecosystem and platform

It is a massive task for a massive opportunity.


Castlight has raised $160 million and has spent about $100 million as of December 31, 2013.  As of that date, Castlight had 106 customers, annual revenues of $13 million and a net loss of $62 million–you read that right.  Castlight’s single largest client is Walmart, representing 16% of revenue.  Castlight hopes its public valuation will be above $2 billion. You read that correctly, as well.  Don’t bother dividing the expected valuation by the trailing 12 months revenue number.  I think we are going to start evaluating  IPOs on an EV/TAM basis!

The prospectus lists as competitors: Truven Health Analytics Inc., ClearCost Health, Change Healthcare Corporation, Healthcare Blue Book and HealthSparq, Inc, as well as the major health plan providers (such as Aetna, Wellpoint, Cigna, etc.) who provide their own cost containment tools. With so much money at stake, and so much pressure on the country to contain healthcare costs while improving outcomes, the competition figures to be fierce.


From the perspective of someone who has worked with large enterprises to reduce their operating costs, benefits is a fascinating area.  Most spend management initiatives tend to tiptoe around employee benefits, since benefits programs are considered difficult to source and are under HR’s purview.  Corporate HR has been busy investing in (increasingly cloud-based) applications for  more efficiently:

  • administering payroll and benefits
  • recruiting and engaging employees

After all, this is what Human Capital Management (HCM) software from Workday, Successfactors (SAP), Taleo (Oracle), ADP, Ultimate, and many others is about.  Now HR departments of large enterprises are going to see SaaS applications using Big Data to help them and their employees attack the 30% of non-salary compensation costs.

If Castlight has not tweeted or called Tim Armstrong yet, it is a missed opportunity.

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