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Lumenos Opens Fourth Round of Fundraising
Va. Health Care Firm Already Has Pledges Totaling $10 Million

By Charles Duhigg
Washington Post Staff Writer
Friday, July 18, 2003; Page E05

Four years ago, venture capitalists at KBL Healthcare dreamed of creating a health insurance company where consumers choose their physicians, select the services they receive and decide how much to spend. By putting consumers in charge, the venture capitalists thought, consumers would have an incentive to keep costs down. 

They launched Lumenos Inc. in 1999, part of the national trend toward consumer-driven health care. The company provides health care services, including insurance plans, claims processing and preventive health counseling for employees of companies that self-fund their insurance.

Lumenos now provides services to 39 companies, said Douglas M. Kronenberg, chief strategy officer. He expects to contract with 16 more by the end of the year.

"We need to get to a little over 200,000 members to get to profitability," Kronenberg said. The company now has about 70,000 members, up from 15,000 at the end of last year. Kronenberg expects revenue this year to reach $14 million.

Alexandria-based Lumenos began its fourth round of fundraising last week, announcing commitments of $10 million but declining to disclose the total amount it hopes to raise. The initial investment was made by Internet HealthCare Group, KBL Healthcare Ventures, Liberty Partners, Novartis AG and Draper Fisher Jurvetson. All had previously invested in the 145-employee Lumenos. The company has raised $86 million since its founding.

"In '99 we began to believe that HMOs were running out of gas and that consumers wanted more control," said Mike Kaswan, a KBL director.

Lumenos promises consumers control over their health care choices and greater customer service, Kaswan said.

Unlike in traditional health maintenance organizations, employees enrolled in Lumenos's program receive an annual payment from their employer that is deposited into a health savings account. Those funds are used at the employee's discretion for all health care expenditures. Participants can see any licensed doctor, and no referrals are needed. Any unspent money at the end of a year is carried into the next year and is exempt from income taxes. But the accounts cannot be cashed out.

If an employee's health care costs exceed the amount in their health savings accounts, care will be provided by the company's traditional health program. At that point, the employee has to pay a deductible or a co-payment.

If an employee's health care costs exceed the amount in their health savings accounts, care will be provided by the company's traditional health program. At that point, the employee has to pay a deductible or a co-payment.

"Consumers treat these dollars like their own money," Kronenberg said. "Before, when it didn't cost anything, they may go to the doctor if they get a sore throat. Now, though, it's their money, so chances are they'll call the nurse and only go in if it's serious."

But consumer-driven health care faces challenges, both in attracting consumers and achieving profitability.

"Employers don't reward employees for picking the least expensive health plan," said Douglas B. Sherlock, senior health care analyst at Sherlock Co., a firm providing consulting and investment-banking services for self-funded health plans. Sherlock does not represent or serve as a consultant to Lumenos. "Consumers are unclear on why they should change from something they know to something that's confusing to understand."

Analysts also argue that although consumers criticize HMOs for restricting their choices, those limits are necessary for health care companies to operate efficiently.

And the promise of consumer-driven health care may not extend to those who need it most.

"The biggest threat is that people who are sick will be the losers," said Gail Shearer, health policy analyst in the Washington office of Consumers Union. Those who are chronically ill won't benefit from programs like those offered by Lumenos, Shearer said, and consumer-driven plans may drive up insurance costs for the least healthy. "There are some choices the sick can't afford," she said.

Lumenos's current round of funding will be used to continue development of the company's proprietary technology and to expand national marketing efforts, said Kronenberg.

Other venture capital investments last week include Columbia-based Plethora Technology Inc., a maker of remote computing software. Plethora received a $250,000 investment from the Bethesda-based Calvert Social Investment Fund. The investment will be used for ongoing operations until Plethora closes its first round of venture capital funding later this year, a company representative said.

Plethora has raised more than $2 million to date, and has 12 employees.

� 2003 The Washington Post Company


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