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The Next Frontier of Digital Health: The Consumer
We're about to see an explosion of DTC Virtual-First Provider startups
We’re in the golden era of digital health. “First generation” virtual providers are finally striking gold: we’ve seen the massive success of Teladongo’s stock, Hinge Health hit a $3B valuation, and an explosion of mental health funding. COVID-19 has solidified virtual care’s presence in our lives; these companies are here to stay.
At the same time, it’s never been easier to start a digital health company. Startup costs have plummeted due to a plethora of API-first companies dubbed the “Tech Stack for Virtual-First Care”. To illustrate this, Chris Hogg wrote, “Today I can acquire a user on Facebook, give them access to physicians via partnership with Wheel, have medicines seamlessly shipped to their homes via Truepill, deliver a home-lab experience via Everlywell, integrate a wireless blood pressure cuff from Omron, create a seamless referral flow with data from Ribbon, and even get paid for much of this via traditional fee-for-service reimbursement, processed via Eligible.”
We have all the ingredients – high valuations, low startup costs, and lots of dry powder – to spur the funding of a massive new wave of direct-to-consumer (DTC), virtual-first providers focused on conditions ranging from menopause to migraines and demographics ranging from LGBTQIA+ to BIPOC. Incumbents like Livongo, Teladoc, and Hinge are also innovating to capture consumer preference. We’re entering the next frontier of digital health: a battle for the consumer. The consumer will ultimately decide the next set of digital health winners, and smart digital health companies are acting accordingly.
To understand why the consumer is the next frontier, let’s take a look at the history of virtual-first providers.
The Virtual-First Digital Provider Lifecycle
“First generation” virtual-first providers (Livongo, Hinge, Omada, etc.) jumped through a crazy number of hoops to be successful.
First, they had to prove clinical efficacy and economic feasibility through clinical trials and claims analyses. Adoption and revenue were somewhat limited while gathering all the evidence required to get paid at scale. Many of the large virtual-first providers cleared this hurdle years ago.
Next, they had to convince someone to pay for their product, usually an employer or health plan. Many companies died here; smart ones understood their payer value prop early, articulated it well, and effectively navigated bureaucratic health plans and employers to land sales. To date, payer adoption has differentiated winners from losers.
We’re at a point where payer adoption of virtual-first providers is becoming somewhat ubiquitous. Livongo partners with >30% of the Fortune 500, including Walgreens, Microsoft, and Target, health plans like Aetna, and large PBMs like Express Scripts. I’m sure Omada and Hinge are hot on the trail.
While there’s room to expand, leading digital health companies are looking to the next phase of digital health: consumer adoption.
The Next Frontier: The Consumer
It’s one thing to get your digital health program covered by insurance; it’s another to convince consumers that your program’s worth their time.
User enrollment is a known revenue barrier, even for the best companies. Since most products are priced by engagement, increasing enrollment from 15% to 30% equates to doubling revenue. And yes, enrollment rates are often that low. Companies go to great lengths to enroll members, as evidenced by Exits & Outcomes’ great Enrollment Report.
Fortunately, the pandemic forever increased consumer awareness of telemedicine and led to subsequent increases in enrollment rates, revenue, and valuations. So, what’s next?
Forward-thinking employers and payers are already forcing digital health providers to compete with one another for consumer preference. Just like plans contract with multiple endocrinologists in a geography, they’re contracting with multiple virtual diabetes companies and allowing consumers to choose the program that best suits their needs. Want to get the best results? Try Virta. Not into keto? Maybe Onduo is the best for you.
This isn’t the future; it’s happening today. I can’t overstate the importance of this shift: instead of fighting for payer contracts, companies will fight for consumers. Digital health companies with a killer go-to-market machine will be forced to focus more on consumer differentiators to maintain or grow their current market shares.
Digital health companies like to think of ourselves as more than just digital disease management programs, we’re “virtual-first providers”! Accordingly, like local providers, virtual-first providers will be forced to directly compete. Revenue will be inextricably tied to consumer preference.
Ultimately, this will be a net positive for consumers. Many virtual-first providers eschewed user experience in favor of enterprise features to land payer contracts. Now that consumers drive revenue, virtual-first providers are shifting their product roadmaps to favor products aligned to consumer preferences.
Companies’ Strategies to Capture Referrals
Given the shifting market dynamics, digital health companies are placing large bets on different methods to proactively capture consumer preference.
Hinge Health is betting that more touchpoints with MSK patients will translate to increased consumer adoption of higher-margin products. They recently launched two free offerings: “Prevention” programs and Expert Medical Opinions (EMO). This bundle is designed to increase consumer awareness and trust to drive pull through revenue of their higher-margin chronic MSK health coaching program.
Imagine you have severe back pain and get an EMO from a Hinge orthopedic surgeon who says, “Hey, why not try Hinge’s back pain health coaching program for free instead of getting a spinal fusion?” You’ll probably enroll in Hinge’s program, even if Kaia and Physera are also offered by your health plan.
Livongo is taking a different approach by merging with Teladoc. Just like health system PCPs refer patients to specialists within their own system, Teladoc PCPs will refer members to Livongo’s programs. From drugs, to devices, to, now, digital programs, we know physicians’ recommendations play a major role in consumers’ healthcare choices. Livongo is betting virtual PCP referrals will maximize consumer adoption and crowd out Virta, Onduo, Omada, Onedrop, etc.
This strategy can be applied to all chronic conditions Livongo aims to manage, including hypertension, diabetes, and behavioral health. If you subscribe to the “your PCP will eventually be in the cloud” idea like I do, this seems like a good long-term strategy. More Teladoc touchpoints (revenue) means more Livongo revenue. If the consumer experience is good, members will return to Teladoc to manage other chronic conditions. A flywheel indeed.
Because it drives downstream chronic condition revenue, expect the virtual primary care space to be hotly contested for years to come. Everyone will want to be the “front door”.
An Alternative Model: Starting DTC
Alternatively, some DTC healthcare companies (Ro, Hims/Hers, etc.) are now trying to land payer/employer contracts, essentially flipping the Livongo/Hinge/Omada strategy. DTC digital health companies enjoy strong consumer awareness & NPS but lack chronic condition management capabilities. Their challenge will be moving to real healthcare, a seismic shift that will be, in my opinion, difficult to pull off.
There’s a new breed of DTC digital health companies that start with an eye towards long-term chronic condition management. These companies focus on a specific chronic condition (like Oshi Health for digestive conditions) or a specific demographic (like Folx Health for queer & trans health) and aim to longitudinally manage all aspects of their members’ care. They focus on groups that historically have poor access to specialists for their condition/demographic and aim to become their members’ de facto provider by offering a superior consumer experience.
Many of these DTC companies may struggle with initial payer sales because either their condition isn’t a top priority or they increase the overall total cost of care. Payers with vendor fatigue may not be interested in a menopause platform because it isn’t a major cost driver, but patients desperately seeking answers will pay out of pocket for higher quality care.
DTC virtual-first providers will likely utilize a hybrid business model similar to OneMedical, comprised of two parts:
1. Monthly fee for platform access, likely paid for by the consumer. This includes anything lacking a CPT code or otherwise not reimbursable, such as asynchronous texting, disease education, etc. Some companies may convince employers to cover these fees. Over time, we might see additional CPTs created to cover more services, shifting fees to payers.
2. Billable services sent to insurance. Anything with a CPT code (i.e. telehealth visits) or otherwise billable through fee-for-service reimbursement systems (i.e. medication delivery) will eventually be paid by insurance, if it’s not already.
Eventually, payers will recognize “virtual-first providers” as simply “providers” and contract with them in similar ways. Not every self-insured employer will need to approve every virtual provider; the payer will maintain a network of in-person and virtual providers. Of course, DTC providers will need reimbursement to expand their market size. But, by building a brand and consumer-friendly technology first, these companies are laying the groundwork for rapid consumer adoption once more expansive payer contracts are in place.
Which Approach is Best For Your Company?
In my opinion, for conditions that drive high payer spend (i.e. MSK, diabetes), a B2B approach focused on securing payer contracts will likely be the best strategy. Incumbents like Hinge and Livongo will continue to dominate in these conditions by shifting their product roadmap to focus on the consumer. Over time, they’ll learn what works and what doesn’t, and we very well could see further M&A to plug urgent consumer experience holes.
However, most (not all) high-priority conditions have been carved out by incumbents already at scale. We’re about to witness an explosion of DTC chronic condition management companies that will focus on conditions characterized by frustratingly poor access to quality care. Initially, consumers will foot part (or all) of the bill, but payers will reimburse more and more services over time. The time scale of that shift will be key to those companies’ success.
If you’re building a new virtual-first provider, ask yourself a few questions: (1) do payers care about this condition, and (2) can I save payers money? If the answer is yes to both, go to payers first. If your target consumers lack access to specialists and have a frustrating health experience, consider building a direct-to-consumer model, even if it’s not a major line item in payers’ budgets.
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