The Key Ingredients for Building a Billion-Dollar Telehealth Company
Primary’s framework for evaluating “verticalized” telehealth businesses.
In this piece, I lay out Primary’s first telehealth thesis, the beginning of a new set of conversations about how and why we invest in this area. Our interest isn’t new—we’ve been early-stage investors in fast-growing NYC health startups like K Health, Alma, and Healthify for years. However, the combination of the recent pandemic and our own personal experiences with the healthcare world and chronic conditions (I was diagnosed with Primary Immune Deficiency at six months of age) has reinvigorated our curiosity to explore what the next frontier holds for patients.
This series—which includes an in-depth founder interview series, top advice from successful NYC founders, guidance on north star metrics, and an inside look at our favorite digital health trends—marks the first time we’re rounding up our perspective and tapping into the expertise of our network to discuss the evolution of the telehealth landscape and the key ingredients for building a billion dollar business in this space.
Great healthcare investments boil down to three key factors above all else
20% of the U.S. population lives in care deserts, which are designated as ‘medically underserved.’ Add in our country’s physician shortage and nurse shortage and you have an intersection of challenges that need to be addressed through more efficient, tech-enabled care.
Improve Patient Outcomes
In the U.S. we spend almost $11,000 per person on healthcare. Meanwhile, other wealthy countries spend about half as much per person on health. What does this spending get us? The lowest life expectancy of any Organisation for Economic Co-operation and Development (OECD) country, the highest chronic disease burden, the highest rate of suicide, and the highest rate of obesity. As we evaluate healthcare startups, we’re laser focused on identifying how they can improve patient outcomes in a safe manner.
The American Journal of Emergency Medicine estimates the net cost savings per telemedicine visit ranges from $19 to $121 per visit. Other estimates suggest up to $1,500 of savings by diverting patients away from more costly care settings (e.g. the emergency room). Either way, as we see increased utilization of telemedicine services we should experience less ER visits and better patient outcomes that will as a result reduce overall cost in the system.
What we’re seeing
Condition-specific clinics with specialized brands and experiences
Allergies, skincare, diabetes, gastrointestinal, PCOS, you name it. If it doesn’t already, it will have a telemed startup focused on it within the next 12 months.
These companies benefit from their level of focus from a brand and patient experience perspective and usually rely on expensive prescription drugs with high retention rates to make up for the at times smaller patient population sizes.
Demographic-specific clinics using primary care as the wedge
Whether it’s getting medication (79% of antidepressant prescriptions go through primary care physicians), labs, or a specialty referral, your primary care physician (PCP) plays quarterback in your health journey. While a life event like a move to the Big Apple may force a switch-up in your PCP, nearly half of patients stay with their doctor for five years or more due to comfort or familiarity. But that’s only for those who establish care to begin with. Millennials have upended the primary care model in a number of ways by prioritizing convenience and connectivity above all else, and research shows that 45% of 18 to 29 year-olds and 28% of 30 to 49 year-olds have no primary care provider (PCP).
However, many argue that relegating primary care to chronic condition management is not the right answer, and as a result, companies like Tia and Forward Health have popped up to create connecting care systems. Physicians are essentially the “front door of care” according to Carolyn Witte from Tia, and in Tia’s case, what at first glance looks like a women’s primary care clinic that addresses half of the U.S. population is actually an incredible LTV play that provides consumers with a trusted brand for all of your healthcare needs. We’re also noting growth in demographic specific businesses that were historically seen as a suboptimal fit for telehealth model such as pediatric health, postpartum, and maternity, underscoring the vital role of the pandemic as an accelerant in telehealth’s potential.
Why we love these businesses
Good for the world. Good for business
I don’t think I actually need to dive into why better access and better outcomes is great for the world, but with the global telemedicine market topping $300 billion in size over the next decade and the factors below making for great businesses, it’s hard to ignore this category as someone who wants to back things that will make a positive impact on our society.
High AOV + High Retention = Best-in-Class LTV
Best-in-class consumer subscription businesses might have north of a 50% retention rate after 12 months, and if you’re lucky you can find pockets of spending that equate to over $1,000 per year per customer. In healthcare, consumers look more like SMBs in terms of average spend over 12 months, with many consumers spending well over $1,000 per year. Whether the consumer’s spending out of pocket or pulling in insurance, the need for medicine and care drives a built-in advantage for retention that can help it end up north of 70% at the end of 12 months in some instances.
Structural advantages leading to fast paybacks via high velocity repeat
To nerd out a little further, we’ve come across some companies that have structural advantages from a payback period perspective. In what way? Well, not only can some companies get insurance or Medicare to cover the service, which helps drive down customer acquisition costs, but certain conditions require multiple patient visits in a short period of time to ensure the treatment is working. This recurring model brings in additional revenue in the first three months that results in more capital efficient scaling of the business. Therefore, if you can find a market that is covered by insurance where the patient needs medication every month for the foreseeable future AND a number of doctor visits pretty soon after joining your service, then you have yourself a beautiful market.
The beginning of a long relationship and additional opportunities to monetize
Acquiring a patient and becoming a trusted provider to them is key. Once trust has been built and you play a major role in their life, it’s easy to imagine many other ways to monetize them through other specialty or general practitioner provider offerings, ancillary products/services, hybrid telehealth/in-person offerings, etc.
Insurance pay versus cash pay
Getting insurance to cover things is a challenging endeavor for startups. However, if you can figure it out, then you should see CACs plummet and consumers flow in. In the meantime, if you don’t take insurance but charge the same as a co-pay, then you also have an amazing solution on your hands.
Why we find these businesses challenging
Highly complex funnels
Many of the founders we spoke to noted how complex the customer acquisition funnels are in their business—and they don’t end at the first appointment. While the first wave of companies thrived with asynchronous care models where doctors could message patients, many companies today not only need to acquire the user top of funnel, but they need to get them to buy a testing kit, return the testing kit, be eligible for the service based on the testing results, schedule an appointment, and show up for said appointment. Each one of these steps adds more complexity into the acquisition process, which creates more room for error or drop-off of potential patients. As a result, founders need to be incredibly thoughtful growth marketers because those who optimize the funnel the most will win in the long run.
I already mentioned the shortage of physicians in the U.S. Now layer on a shortage of physicians with a customer acquisition top of funnel that can scale far faster thanks to our friends at Facebook. Whether it’s finding the physicians, making sure they meet your quality standards, or training them on the way you do things, keeping up with the demand while maintaining quality is a beast of a problem in its own right. This is absolutely a core competency of the business as a shortage of doctors, nurse practitioners, health coaches, etc., leads to fewer available times for scheduling. Fewer available times for scheduling means a lower conversion rate, which in turn means higher customer acquisition cost and lower patient satisfaction. Two things that you don’t love to see.
Challenging roadmap prioritization
Do you launch physical clinics? Do you have to? If so, where and when? What about other products and services? Founders are grappling with so many questions on this front because not only are you fighting to scale the business as quickly as possible BUT we’re dealing with people’s lives so offering quality care should be the number one priority for all of these companies. All of this complexity leads to challenging conversations on the product roadmap side of things.
What we think will happen
The industry will continue to fragment with tons of point solutions (for a while
We’ve seen the landscape become more and more fragmented as there continues to be an influx of point solutions for new areas and channels (i.e. employers). Inevitably, there will be a tipping point where telehealth companies are either targeting an area that’s too niche to be profitable, facing fierce competition as a point solution, or teeing up an undifferentiated primary care solution.
“I expect to see the telemedicine space play out in the following order: virtual primary care (which has a few big winners already emerging), virtual specialty care, followed by a unification into virtual-first holistic health systems, and then eventually risk-bearing virtual-first health systems. I expect to see the conversation switching to how to unify various virtual care modalities within a couple years.”
—Pan Chaudhury from Perry Health
There will be a ramp up in hybrids of telemedicine and in-person and intermodality partnerships
Existing brick-and-mortar HC providers are not just being forced to scale up virtual care but are systematically integrating their telehealth offering into patient care journeys with the more prominent hybrid use cases being tele-triage/digital front door and post-op follow up. As they continue to do so at scale, we believe there will be a significant increase in partnerships across these players and newer telehealth startups.
“I think we're going to see a lot more partnerships between virtual care and traditional in-person. I've talked to so many traditional care providers that say, ‘We don't know where to send these patients. We have nowhere to send them right now. We'd love to have somewhere to refer them, even if it's virtual.’”
—Rachel Blank from Allara
Telehealth will become more effective as we design products and educate clinicians according to a virtual-first model. And consequently will continue to chip away at in-person only use cases.
“Remember when the iPhones came out and you were like, ‘Oh my God, I have my computer on my phone, but it's just like a smaller version than what's on my computer. I really just want my computer.’ I feel like that's where we're at with virtual care. What would it be like to actually design virtual first from an experience perspective, from a clinical perspective? I think that's the exciting next wave in virtual care delivery.”
—Carolyn Witte from Tia
“If you have a WHOOP band, you can see a patient’s activity and sleep pattern. If you have a glucometer that's connected to a smartphone, you can see a patient’s blood sugar level. We have to teach physicians how to take all that information and look at the whole picture because when they went to med school, none of this stuff was being taught. This is what 21st century healthcare looks like.”
The spotlight will shift toward preventing and managing chronic conditions as primary care becomes more mature.
The first wave of telehealth was focused on providing care that was convenient, but the second wave of telehealth will focus on providing care that is complex. In the fight against chronic conditions, preventative primary care is the pathway for younger patients while a more proactive and relationship-driven model is the pathway for patients currently experiencing these conditions.
“Chronic conditions like diabetes and hypertension result from a whole lifetime of behavior, right? You can't fix it in a day with some medication. It's too late for that. I can tell you about my CAC and LTV, but let me tell you what's really important. How much would you pay to significantly lower your risk of chronic conditions and death? I'm going to argue a lot in terms of value. That's my approach: delivering those life-saving outcomes.”
—Allon Bloch from K Health
Those with differentiated unit economics and an experience-first product vision that can layer in additional specialties or ways to monetize will win. Simultaneously, we can see a world where more companies go into four-wall.
Founders need to move FAST and have a clear vision of what they’re building. Patients will begin to experience decision fatigue as the market goes through saturation of telemedicine and remote patient monitoring companies in the coming years. Focusing on going beyond just technology solutions and thoughtfully designing innovative remote care models and amazing patient experiences will be paramount. Emerging telehealth enablement tools will be a vital part of staying ahead of the curve here.