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In this Friday, Jan. 24, 2014 photo, a bed sits empty in an operating room at Grady Memorial Hospital, in Atlanta. In two years, federal payments to hospitals treating a large share of the nation’s poor will begin to evaporate under the premise that more people than ever will have some form of insurance under the federal health care law. The problem is that many states have refused to expand Medicaid, leaving public safety net hospitals there in a potentially precarious financial situation and elected officials facing growing pressure to find a fiscal fix. And in an election year, Democrats are using the decision by Republican governors not to expand Medicaid as a major campaign issue and arguing the hospital situation could have been avoided.
AP Photo/David Goldman
But how much does it cost?
BOOM

Meet Obamacare’s first multi-billion dollar IPO

Tim Fernholz
By Tim Fernholz

Senior reporter

Today Castlight Health went public in a very big way.

The San Francisco company—which gives companies and institutions data to help them choose cheaper healthcare providers—went public today at $16 a share. That price valued the company at at $1.39 billion—despite the fact that it lost $62 million last year on $13 million in revenue. But Castlight is currently trading at about $38 a share, making the company worth about $3.3 billion—some 136% above where it began the day.

Castlight is at a sweet spot for equity investors right now. It’s a tech company that benefits from the latest ideas coming out of Silicon Valley, and it’s a an innovator in health care, a sector ripe for disruption, and one where an aging population guarantees growth. Health stocks are the second-fastest growing sector of the S&P 500 this year, expanding 5.6% since Jan. 1.

But more than that, the rush for Castlight shares reflects the opportunity created by the US’s new health-care reform. Obamacare pushes the health-care system to spend less money while delivering more value, and Castlight’s focus on transparency fits right in. (It also does Castlight no harm that one of its founders, Todd Park, left it to work for the US government, eventually becoming the country’s chief technical officer and working to correct the problems that plagued the new health-care exchanges.)

In the US, patients can rarely compare the price and quality of medical services before choosing a doctor or hospital. That’s one reason market forces don’t do a good job driving down costs. New data from the government shows hospitals in the same city offering the same services at prices that differ by tens of thousands of dollars. Castlight uses data like that to show consumers the up-front cost of of care, allowing them—and the companies that insure them—to choose a provider that will save them money. It has saved some clients as much as 13% of their health care costs.

“You really see changes in behavior, with customers making sure they go below the reference pricing, in some cases they can get rebates, and in some cases they get the advantage that they pay less out of pocket,” Castlight’s CEO and co-founder, Giovanni Colella, a physician-turned-entrepreneur, told me last year.

Ideally, this should give health-care providers an incentive to offer the best value, lowering prices everywhere. But so far, Castlight is still losing money. And for investors, the question is how it will grow further, after raising $178 million in today’s IPO.

Colella says the company’s platform creates a virtuous cycle, where the more price information it gathers, the more powerful the network grows. ”Once you have more data, the amount of information you can give on quality doesn’t grow linearly, it grows exponentially,” he said. “[There are] pretty clear cut economies of scale at this point.”

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