Pact Is First Health App To Become An Insurance Plan

Pact is a 15-person startup that has become the first known health-tracking app to offer insurance coverage. (Photo via Pact)

There are dozens of apps that let you track your activity to try and change unhealthy behavior. Soon, more will share your data with employers to help them track and change your behavior too, all in a bid to cut rising health insurance costs.

On Tuesday the health tracking app Pact became the first, freely available smartphone application to launch its own health plan for employers, called Pact Health. It's an insurance service in all but name since Pact can offer extra coverage the more you exercise, but the 15-person startup is calling it a health 'plan' to avoid the extra regulatory scrutiny.

Acting as a layer on top of a current policy, people working at companies who buy Pact Health can gain or lose $5 off their deductible coverage based on how faithfully they stick to workouts - all tracked by their smartphones and health monitoring devices like the Jawbone Up or Fitbit.

'We are the first health app to use individuals health data to lower their health costs,' says Pact spokeswoman Marissa Window. People who have already downloaded Pact's consumer app 'activate the insurance layer through their employer.'

Pact is initially launching the service in Massachusetts, where six companies have already agreed to start using it when they renew insurance coverage on Dec. 1. Pact, which was profitable in 2013 but went into the red this year as it geared up to sell Pact Health, gets a cut of the $5 monthly fee that employers pay for each staff member using the service.

Pact is all about stakes. Users punch in their credit card details to bet $5 or more that they'll complete a certain number of workouts in the following week. It rewards those who fulfill their goals, taking a 3% cut, and it makes further money from the ones who slack off and have to pay up.

Selling to employers is a major turning point for Pact, which was founded in Massachusetts but is now based in San Francisco. It's chasing a trend where new laws have spurred U.S. employers to create 'wellness' incentive programs.

'Health insurance is a very lucrative industry,' says co-founder and CEO Yifan Zhang, 26. 'There's a lot of room for disruption and there's a lot of money in the industry. If we can capture a small piece of the market we think it's very lucrative.'

Pact is relying on insurance brokers to guide small businesses to its heath plan in exchange for a referral fee. Its big selling point is what it's learned from the last three years of providing a consumer service.

Remember all the hoopla about Web companies like Facebook and OKCupid experimenting on users? Pact did the same sort of A/B testing over the last three years (as have most big Web firms) and in the process learned how to create a service that actually changed human behavior, using its 600,000 registered users as a test bed.

That's resulted in at least one major insight: punishments are way more effective than rewards.

'What gets you to do the very difficult thing of getting your butt off the couch and into the gym isn't the couple of bucks you'll earn,' says Zhang. It's the couple of bucks you'll lose. 'A loss is three times more motivating than a gain.'

Punishing insurance members for unhealthy metrics is nothing new. Safeway , the grocery chain, has famously kept a lid on its health care costs by taking away premium discounts from staff who don't do well on regular biometric scans. But 'that's a very crude way of using negative incentives,' says Zhang.

There is, in other words, a subtle art to effectively punishing people. Pact has learned you have to give people a chance to redeem themselves. Once its users lose $5 for not fulfilling a workout, they have two weeks to recover that money back along with any extra rewards.

'That prevents them from leaving the program,' Zhang says, which is surely what any business would hope for.