Telemedicine IS a service
Where "contrarians" miss the mark
I came across a recent thought-piece from a group called Healthy Ventures (“HV”) entitled “Why We’re Short Telemedicine.” I disagree with their main takeaway that investors won’t be successful investing in telemedicine platforms.
While the article contains some compelling points (particularly around the areas adjacent to telemedicine which entrepreneurs might target), the argument falls flat because it sets up a narrow view of telemedicine, focusing on the most commoditized format/use cases for telemedicine. Meanwhile, it fails to appropriately contextualize telemedicine within the broader continuum of care and, in doing so, misses a significant market opportunity for entrepreneurs and investors.
It’s About Access
Let’s start with what HV “likes” about telemedicine:
- Patients like not having to travel to the doctor and wait in a dreary waiting room for doctors who are inevitably running very late.
- Physicians (many who were doubtful that telemedicine could deliver adequate care) were pleasantly surprised as how easy the process was and how much they and patients liked it.
- Administrators like that the privacy / security regulations have been loosened, allowing them to use many familiar platforms, like Zoom or FaceTime to interact with patients.
- Medicare changed its policies to reimburse many telemedicine visits at the same rate as in-office visits. Commercial payers often follow Medicare.
These are all things to like. However, the bullets above ignore one of the most important advantages of leveraging telemedicine - enhancing access to care.
The problem for patients is not being forced to wait in “dreary waiting rooms.” In many components of the care continuum, patients don’t have reliable access to care at all. This is particularly true in areas where there is a dearth of clinicians.
Just look at psychiatric emergency care. According to a 2015 NAMI survey, 70% of patients reported waiting 10 hours or more to see a mental health expert in the emergency department. Meanwhile, 83% of emergency departments don’t have a psychiatrist on call (also via NAMI). Telemedicine is a method that hospitals can use to create access to psychiatrists and provide critical services when/where they are needed, and there is a tremendous market opportunity for companies that can provide reliable access to psychiatric clinicians to meet the demand.
Another example is telemedicine in skilled nursing facilities. The challenge of finding and retaining NPs and physicians to provide daily clinical care at SNFs is well documented. SNFs, particularly in rural areas, run on razor thin margins (average Medicare margins of ~11%, with frontier facilities at ~4% margins), and the economics of having full-time clinical staff on location often do not work. To fill this critical care gap, companies like TapestryHealth (a Sopris Capital portfolio company) can leverage telemedicine to deploy NPs who can provide daily, “hands-on” comprehensive clinical care to nursing home residents, significantly improving outcomes for SNFs and their patients (e.g. reduced readmissions, increased occupancy).
Services as a Service
Another big miss for me is this notion presented in the article:
“Telemedicine is really a service business. Like Uber or Lyft”
…
1. Not only is the structure similar to a service business, the margins are too.
Two points here.
Yes, telemedicine is a service business. Healthcare is fundamentally about providing services.
If the argument is “don’t pay SaaS multiples for telemedicine businesses,” I agree. High-touch clinical care is unlikely to achieve 70-80%+ SaaS margins. That doesn’t mean that these companies can’t create tremendous value for investors and improve the standard of care for millions of patients across the care continuum, albeit trading at lower multiples. Investors should adjust their valuation lens accordingly.
No, it’s not like Uber or Lyft. The supply of drivers is not constrained like the supply of clinicians, as described above.
More on what HV doesn’t like about telemedicine as an investment opportunity:
Margins are driven down by:
· High CACs as providers first sell to employers and payers to get their services “covered.”
This is true. Many vendors who aim to sell into employers/payers are likely underestimating the CAC involved with landing customers in this segment. Additionally, as more competition enters this space, CAC is likely to increase (by the way - that’s true for every industry ever). Successful telemedicine companies are ones that are likely to service customers outside of these highly competitive spaces.
· Difficult communication to members — platforms need to somehow ensure that the patients who are eligible know they have this benefit and call in to use it; yet, the telemedicine companies don’t control the marketing channel to the patients!
· Low utilization — partially as a result of the above, only 2–4% of patients who have the benefit ever use telemedicine…
These points are similar and largely reflect the narrow model that HV picks on in their article. Many successful models in telehealth will avoid the pain of having individual patients opt-in. For example, services provided at a facility level will benefit from “captive” patient populations. This is particularly true in settings where patients wouldn’t have a “regular doctor” (e.g. psych emergencies and SNFs as discussed above) and the alternative to telemedicine enabled care is no care at all due to clinician shortage.
Similar to the Uber and Lyft models, where drivers usually drive for both: doctors can contract with every service and just do the calls that bring them the highest value. So, the platforms have less pricing power on their take rate as labor will migrate to the platform that is most advantageous to them. Prices get competed down. Unit economics (per visit) are challenged.
Discussed above - it’s a stretch to compare those two labor supplies. Additionally, many telemedicine companies are moving away from an Uber-like model to models where clinicians work as FTEs. There is significant value to clinicians who join entrepreneurial telemedicine companies as part of their in-house network - e.g. clinicians can often earn significantly more working for telehealth companies than in conventional settings because of the concentration of demand and consistency of encounter volume.
Telemedicine is a Modality
Another point here is that telemedicine should be looked at as a modality through which which services can be provided. It’s a means, not an end.
For example, TapestryHealth blends telemedicine and in-person clinical care to best meet the needs of its SNF customers - e.g. some larger facilities are best suited to have an NP in-person, whereas smaller facilities would benefit the most from on-demand remote care.
Tele-enabled access to clinicians is one component of a larger care paradigm. The Teladoc/Livongo merger is an illustration of this (e.g. RPM + instant access to a clinician when adverse events occur). The surge in activity from decentralized clinical trial platforms is an illustration of this (e.g. digital measurement + remote interfacing with clinicians for outcomes reporting).
Yes, the delivery mechanisms of telemedicine are likely to be commoditized. But that’s a narrow sliver of the picture. There is tremendous opportunity for entrepreneurs and investors to build defensible, valuable businesses while improving patient outcomes via telemedicine.
Please don’t sue me:
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