Hardly a day seems to go by without a new healthcare startup raising money, jumping into the digital health market, and launching a new app or service. Innovation is rampant and willingness to invest is so high that the digital health market is projected to grow to $500 billion by 2025, according to Transparency Market Research’s 2017 Digital Health Market report.
Furthermore, investment in digital health is at an all-time high. Investment in the sector reached $1.6 billion in the first quarter of 2018. This represented a total of 77 digital health deals and was up by 44% compared with the first quarter of 2017, according to Rock Health.
But digital health uptake has still been slow within established medtech companies. Many pilot programs exist, but getting from pilot to scale is a considerable challenge. One key reason that has emerged from conversations with medtech leaders is the lack of a clear path for reimbursement. This is a critical step in launching a new device, and the fact that there is no clear parallel for digital health is daunting for many medtech executives, but maybe it doesn't have to be. Could it be that digital health companies are figuring out how to survive in a world without reimbursement? Anne Wojcicki, the CEO of 23andMe Inc., made a strong statement at the recent Digital MedTech Conference, declaring herself to be “anti-reimbursement.” Is there merit to this thinking?
ZS experts believe that the answer is yes. The longer that medtech companies stay on the sidelines waiting for reimbursement to catch up, the more disruptive the startups will be. Disruption that’s beginning to take off in diabetes monitoring and management is a prime example of how new players are creating new business models and changing the game. Novel business models can be more of a competitive barrier than technology, which is why now is the time for medtech to act. What can medtech learn from early successes and other industries in order to seize the opportunity in digital health?
- Think outside of the traditional funding box. One reason why medtech has not been successful in capturing digital health dollars is due to a constraint in evaluating new funding options. Medtech operates in a world of fee-for-service and procedure-based reimbursement, and we see many companies struggling to look beyond this to develop new reimbursement strategies. It is simply a very different world in which they are not used to operating. Digital health companies, on the other hand, have taken innovative approaches to unlocking existing funding pathways among public and commercial payers. In the UK, payers are supporting digital health innovation with a new tariff that is fast-tracking apps and mobile health devices that have shown to be cost-saving or help patients with supported self-management.
The U.S.-based health startup Livongo Health Inc.,demonstrated the value of engaging the patient and caregiver, and was able to shift a health services reimbursement payment for remote monitoring to its device and service business. Another example, Omada Health, which offers a disease management program for diabetes prevention and wellness, set up risk-sharing programs with payers, and the company only gets paid when weight loss and pre-diabetes biomarkers are achieved. These examples show that new funding mechanisms can be set up beyond traditional reimbursement pathways.
- Think about adding real value, not incremental features and benefits. A second reason why getting paid for digital health has not been top of mind in medtech is due to the historical precedence of giving services away for free to differentiate from the competition. The traditional model focuses on loading in services to gain share versus focusing on outcomes or new business models. This has led to nothing but a “features war” and decreasing margins. Burned by such experiences, as device prices continue to be beaten down, manufacturers have even less of an appetite to invest in tech-enabled services, accelerating the downward cycle of underinvestment and commoditization.
How can companies break free from this cycle? ResMed Inc., which manufactures sleep apnea products and solutions, thought hard about the value that its service provides beyond the product and the clinician. The company developed a connected sleep apnea product that had a strong value proposition to DMEs, increasing adherence from 73% to 83%, and therefore increasing Medicare payments as well as saving 60% in labor costs. The result was significant growth in market share with customers favoring ResMed’s connected apnea products. Another example, Dexcom Inc., created an open API marketplace for diabetes app developers to access glucose monitor data and create a vibrant ecosystem of innovative apps. This made Dexcom’s product more personalized for patients—a win-win business model for both Dexcom and the developer partner. In these two examples, the companies have looked beyond the clinical value and product features and benefits. The business have successfully examined the value that they bring to the entire chain of stakeholders, not just the clinician, and have leveraged data as an asset.
- Think about the patient’s needs. Another angle that medtech has too often omitted is the value that digital health apps and services can create for patients and caregivers. Patients, although the end users of medtech products, have traditionally been thought of as recipients of a therapy or a diagnosis but not as consumers. However, patients and caregivers have many needs that go far beyond the pure function of a device. They want to feel safe and secure, to be informed, to stay connected with friends and family. In many instances, they may even be willing to pay for a device or app that fulfills these needs.
Two examples outline this in very different cases: Empatica Inc., which provides an epileptic-seizure-detecting wearable, has unlocked a subscription-based caregiver revenue stream of $12 to $53 per month due to the value that it provides in terms of peace of mind, safety and staying connected with family. Patients and caregivers experiencing acute or one-off events also get value from digital health apps and are willing to pay out of pocket for them. Such customer interactions could turn into longer-term value as seen by 23andMe. The direct-to-consumer genetic testing company launched its consumer pay model for $99. While the company assumed that it was a one-off transaction with the patient, 23andMe recently polled patients to participate in a clinical trial and were surprised to find that past patients were extremely engaged in participating and contributing their health data. It's clear that patients and caregivers are stakeholders that medtech needs to understand deeply, and to nurture in order to serve their needs and unlock what could be a very significant source of direct value (revenue) or indirect value (data).
What can we learn from these examples? We believe that the funding exists even if it is not as easy as a fee-for-service or procedure-based reimbursement. Digital health companies are innovating and thinking beyond the current paradigm, and this is a clear precedent for medtech to follow given where the payment landscape is heading: more value-based, more risk-bearing and more consumerism in health.
Medtech companies were the original “digital innovators” long before new entrants, and it is imperative that medtech not let this advantage slip when it comes to business model innovation. Companies must iteratively test and evolve their value proposition in the healthcare ecosystem and capture this value via new business and revenue models. Medtech companies should disrupt their status quo on “how to get paid” before someone else does it for them.
