Founding A Healthcare Startup (with Russell Pekala)

This podcast features an in-depth conversation with Russell Pekala, co-founder of Yuzu Health, a Third-Party Administrator (TPA) focused on revolutionizing employer-sponsored health plan design through simplicity, transparency, and non-network models. The discussion outlines Yuzu Health's origin story, catalyzed by a personal experience with an exorbitant $180,000 medical bill for a minor burn, leading to the realization that the self-funded structure—where the employer is the insurer—was fundamentally broken due to complexity and lack of transparency. Pekala, who has a background in mathematics and computational complexity, views an insurance plan as an "algorithm for processing claims," arguing that simplicity and elegance in design are paramount for effective underwriting and member understanding.

Yuzu Health's core value proposition revolves around implementing innovative plan designs that move away from traditional PPO networks. They primarily focus on two models: Direct Primary Care (DPC) focused plans and Reference-Based Pricing (RBP) plans, which they prefer to call "non-network" plans. In the DPC model, the primary care physician acts as the central care navigator and utilization management layer, driving referrals to cost-effective specialists. The RBP component is designed to pre-adjudicate claims, giving care navigators tools to understand what 150% of Medicare looks like in a given area and identify cash-pay providers. This allows Yuzu to issue a virtual or physical one-time-use credit card to members, authorized up to the allowed amount, ensuring the transaction is the claim and eliminating balance billing and post-service complexity. This framework is described as "Bottoms Up Value-Based Care," contrasting with the often bureaucratic, top-down approaches seen in Medicare Advantage or ACOs.

The conversation also delves into the critical issue of pharmacy costs, which can account for 30-40% of plan spend. Yuzu addresses this by leveraging transparent Pharmacy Benefit Managers (PBMs), specifically SmithRX, to manage costs, including implementing specialty drug carve-outs above a certain dollar threshold. Pekala acknowledges the increasing difficulty of relying on patient assistance programs (PAPs) and stresses the need for honest industry dialogue about the risks associated with these carve-out strategies. Furthermore, the discussion touches on regulatory compliance, noting that the No Surprises Act provides a mechanism (the Qualifying Payment Amount or QPA process) for adjudicating emergency claims in non-network plans, offering protection similar to network plans. Pekala emphasizes that Yuzu seeks employers who are already highly educated and willing to challenge traditional network models, viewing the TPA role as a "glorified accounting firm" that provides the necessary technology and administrative layer for these customized, local-first plan designs.

Detailed Key Takeaways

• Insurance Plan Design as an Algorithm: Russell Pekala frames insurance plans as complex algorithms for processing claims and assigning rights. He argues that the current system's complexity is detrimental to consumers and that simplicity in plan design is crucial for effective underwriting, transparency, and member comprehension.
• The Erosion of Network Utility: The utility of traditional PPO networks is questioned, as providers increasingly decline rental networks or bill out-of-network, destroying member trust and price predictability. The future of healthcare is predicted to move away from network competition toward competing on member engagement and effective outcomes.
• Bottoms-Up Value-Based Care: Yuzu Health's DPC-focused model is characterized as a "Bottoms Up" approach to value-based care. By centering the DPC physician as the primary care navigator and referral system, the model minimizes bureaucracy, focuses on efficient care, and holds providers accountable at a local level.
• Pre-Adjudication for Non-Network Plans: For specialty services, Yuzu utilizes RBP (Reference-Based Pricing) methodologies to pre-adjudicate claims. This involves providing care navigators with tools to determine fair pricing (e.g., 150% of Medicare) and identify local cash-pay providers, ensuring price certainty before the service is rendered.
• Eliminating Balance Billing via Payment Mechanism: To bypass traditional claims processing and balance billing issues, Yuzu facilitates the use of a one-time-use virtual or physical credit card. The member uses this card to pay the cash price at the point of service, and the transaction itself serves as the claim, authorized up to the pre-adjudicated allowed amount.
• Regulatory Framework for Emergency Claims: The No Surprises Act is essential for non-network plans, providing a legal framework (QPA process) to handle emergency claims. This allows TPAs like Yuzu to adjudicate emergency bills using qualifying databases to align payments with regional payer averages, protecting the member from unexpected costs.
• The TPA as a Technology and Accounting Layer: Yuzu views its role as a lightweight, technology-enabled TPA, acting primarily as the source of truth for claims adjudication and financial management. They partner with strong local physician groups (DPC centers) who handle the prior authorization, utilization management, and referral layers.
• Targeting Educated Employers: The ideal client for Yuzu is an employer who is already highly educated about healthcare costs, dissatisfied with traditional network plans, and willing to embrace innovative, transparent plan designs like DPC and cash-pay models.
• Pharmacy Cost Control Strategy: Pharmacy management relies on partnering with transparent PBMs (like SmithRX) to implement specialty carve-outs above a defined dollar amount. However, the speaker warns that reliance on patient assistance programs (PAPs) is becoming increasingly risky and less of a "silver bullet."
• Future of Healthcare is Product-Oriented: The speaker envisions a future where healthcare is more "product-oriented," with the delivery of a whole experience (like bundled surgery or digital health innovations) being regulated, transparently priced, and purchased by members based on brand and clear outcomes, rather than navigating complex service codes.

Tools/Resources Mentioned

• SmithRX: A transparent Pharmacy Benefit Manager (PBM) utilized by Yuzu Health to manage pharmacy costs and specialty drug carve-outs.
• Paro Health: Mentioned as the manager of a large employee benefits group captive and a sponsor of the podcast.
• Claim.do: Mentioned as a partner in the self-funded space.
• PlanSite: Mentioned as a sponsor providing an end-to-end RFP solution for benefits agencies.
• DoNotPay: A previous startup experience of Pekala, described as an AI robot lawyer that helps consumers understand legal rights, including those related to medical debt.

Key Concepts

• Reference-Based Pricing (RBP): A methodology where a health plan determines the maximum amount it will pay for a service based on a benchmark (often a multiple of Medicare rates), rather than relying on negotiated network rates. Yuzu uses this proactively for pre-adjudication.
• Direct Primary Care (DPC): A model where patients pay a fixed monthly fee directly to their primary care physician for comprehensive primary care services, bypassing insurance claims for those services. Yuzu integrates DPC physicians as the central care navigators within their self-funded plans.
• Assignment of Benefits: A provision in traditional insurance plans that allows providers to file claims directly with the insurer and receive payment on behalf of the member. Pekala argues this provision is detrimental to transparency and member engagement.
• No Surprises Act (NSA): Federal legislation designed to protect patients from surprise medical bills, particularly those resulting from out-of-network emergency care. Yuzu relies on NSA provisions, specifically the Qualifying Payment Amount (QPA) process, for handling emergency claims in non-network plans.
• Computational Complexity: A subfield of mathematics studied by Pekala, focusing on the efficiency of algorithms that answer questions. This mindset informs his approach to designing simple, elegant, and efficient insurance plan structures.

Examples/Case Studies

• The Ramen Noodle Incident: Russell Pekala's catalyst for founding Yuzu Health was his brother spilling ramen noodles, leading to a trip through the healthcare system that resulted in a $180,000 bill (later negotiated down to $44,000) for a non-severe burn requiring a skin graft. This experience highlighted the lack of transparency and the broken nature of the ASO/employer-sponsored insurance model.
• DataMatch Dating App: Pekala's early startup experience involved running a successful, annual Valentine's Day-only matching app at Harvard, which taught him the value of "hack together" technology and the power of binding, limited options—a parallel he draws to simplifying insurance plan choices.
• DoNotPay: Pekala worked as an early employee at DoNotPay, an AI robot lawyer platform that helps consumers navigate legal rights and settlements, including those related to medical debt and malpractice suits. This experience reinforced the potential of technology to empower consumers against complex systems.