$80 million investment for Philadelphia health-care firm founded by Swarthmore grad

Pareto Health Inc., a Philadelphia company that organizes health coverage for groups of businesses that pay medical bills directly, announced Wednesday that it had received an investment of more than $80 million from Great Hill Partners, a Boston private equity firm.

Pareto, founded in 2011 by Swarthmore College graduate Andrew Cavenagh, has 800 employers with 100,000 enrolled employees as customers and expects to triple in size in the next three years as employers continue looking for ways to trim the cost of providing health insurance benefits.

Headquartered in the FMC Tower, Pareto employs 30 to 35 here and a handful elsewhere, and could double its employee count in the next 12 to 18 months, Cavenagh said. Revenue is expected to top $30 million next year.

Great Hill is Pareto’s first “professional" investment, according to Cavenagh, who said he, company president Andrew Clayton, and three friends who each had a small stake in the company still own a substantial portion of Pareto.

Cavenagh, who was joined by Clayton in 2012, the year the company got its first customer, said Pareto has been growing at a rate of 30 percent to 40 percent a year, but still has “a rounding error of a rounding error in terms of market share.”

Its potential customers are businesses with 50 to 500 employees and that would typically pay premiums to insurance companies such as Independence Blue Cross, Aetna, or Cigna.

“Our competition is in general not somebody doing exactly what we’re doing,” Cavenagh said. Instead, he continued, it’s companies staying with what they’ve always done, which is buying coverage from big insurance companies.

To avoid the volatility that can come with self-insurance, Pareto arranges for groups of employers to band together to smooth out the impact of extremely costly episodes of care.

Among the reasons self-insurance is cheaper is that it allows employers to avoid some of the rules set by the Affordable Care Act.

The ACA mandated that the only factors insurers could use to set prices for groups were age, tobacco use, and the employer’s location. In addition, rates had to be set based on the broader community, so it didn’t matter how little health care a particular group used. Essential benefits and affordability requirements meant that employers could no longer reduce benefits to get a price they could afford.

Self-insurance typically allows employers to save at least 5 percent compared with fully-insured plans, according to Pareto. But some of the savings may come from benefit reductions.

Aetna and other big insurers have devised ways for businesses with even fewer than 50 employees to adopt self-insurance.

What’s the advantage of Pareto over Aetna’s so-called level-funded self-insurance plans for small employers?

“We give our clients what we think are more robust cost-containment tools to bring down the cost of health care,” Cavenagh said.