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The Reckoning: What Happens to Digital Health After COVID?

By JEFF GOLDSMITH and ERIC LARSEN

It has been a rough year so far for digital health. After an astonishing $45 billion poured into new digital health companies in 2020 and 2021, and an early 2021 peak in market valuations of publicly-traded digital health providers, valuations and multiples have collapsed. Once high-flying Teladoc, which traded at an eye-watering 42x revenues and commanded a $45 billion market capitalization, is now trading around 2.7X at about $5.7 billion. AmWell, the next largest telehealth player, has seen its stock drop more 90% from its high.

Nor is the evaporation in market value is confined to just a few highly visible incumbents. The 29 healthtech companies to go public (either via IPO or SPAC) in 2021 were collectively trading 45% lower than their opening day price by the end of the year, according to STAT. Among the privately held firms, re-valuation of digital health is getting underway. Bearish market signals portend a sharp correction in digital health, characterized by brutal price competition, widening (and less tolerated) operating losses, layoffs, and ultimately, widespread consolidation. 

However, there is also major pushback from the ‘demand side’ of the digital health equation. With the explosion of digital health players, potential customers are confused and frustrated. There is a fundamental disconnect between the exuberant (and as yet largely unsubstantiated) promises of digital health startups and the needs of the four ‘phenotypes’ of health care customers. How digital health firms respond to those customers’ needs will ultimately determine the shape and size of the digital health market.

Why is the Digital Health Market Correcting?

Let’s start with the supply side. It is not difficult to identify the source of the digital health boom: hyper liquidity in the market fueled by expansive COVID-related fiscal and monetary policy. In the heat of COVID, Congress enacted three enormous stimulus/relief packages in eighteen months. The Federal Reserve also turned deeply dovish, keeping interest rates near zero and embracing epic quantitative easing – pumping $120 billion a month into the economy and expanding its balance sheet by more than $6 trillion. Much of this newly printed cash found its way into the coffers of private investors. Private equity, growth equity, and venture capital collectively raised $733 billion in new capital across 2021.  Globally, private equity firms alone invested $151 billion in healthcare in 2021.

Telehealth Ignition

The spark to ignite the digital health explosion came from the surprise growth in telehealth visits in the spring of 2020. In the wake of the spring 2020 lockdown and freeze on elective hospital care that accompanied the COVID public health emergency, telehealth visits went from less than 1% of total Medicare Part B patient visits in 2019 to nearly 13% during the spring of 2020 (and nearly 38% of all behavioral health visits), according to an analysis by DHHS’s ASPE. Private insurers saw 50-70% of behavioral health visits turn virtual.

This surge was not caused by a spontaneous surge of consumer activism but rather by hospital systems desperate to remain in touch with existing patients during the spring COVID lockdown. These systems saw plummeting visit volumes not only due to service closures but to patient reluctance to visit hospital ERs and outpatient clinics crowded with contagious COVID patients. Larger systems with extensive IT infrastructure were able to stand up far more robust telehealth offerings than smaller systems. As Bob Wachter, Chair of Medicine at University of California at San Francisco said, “We made 20 years’ worth of progress in twenty days.”

The sudden multi-thousand percent rise in telehealth volumes led to breathless estimates of future growth in telehealth volumes and revenues. In July 2020, McKinsey estimated a total addressable market (TAM) of $250 billion for telehealth services — this from a business with a revenue base McKinsey itself estimated at $3 billion in 2019-2020, and $5.5 billion in 2020-2021. This risible TAM estimate assumed that 24% of all physician and outpatient visits (a 1.8 billion visit “universe”) and 25% of Emergency Department visits would be addressed through telehealth alternatives.

However, more than 90% of telehealth visits during the spring of 2020 were with physicians patients already knew, not random, anonymous physicians signed on to cover telehealth services by vendors. And 47% of those visits were one-time users, according to a recent Trilliant analysis. Visit volume growth was also materially aided by Congressional approval of temporary Medicare coverage for telehealth visits as part of the COVID Public Health Emergency declaration. 

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THCB Gang Episode 90, Thursday May 5 – Cancer Special

#THCBGang on May 5 was an extraordinary special on cancer & navigation. Everyone on this gang has been touched by cancer as a patient or caregiver.

Joining Matthew Holt (@boltyboy) will be fierce patient activist Casey Quinlan (@MightyCasey); Jennifer Benz (@Jenbenz); Suntra Modern Recovery CEO JL Neptune (@JeanLucNeptune); patient advocate Grace Cordovano (@GraceCordovano); policy consultant/author Rosemarie Day (@Rosemarie_Day1); Jeff Goldsmith; Jennifer Benz (@Jenbenz); PLUS Adam Pellegini (@adampellegrini) from cancer navigation company Jasper Health. It really was a great conversation about what to do (and what is being done) to make the experience better for people with cancer and those that love them.

You can see the video below & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

THCB Gang Episode 87, Thursday April 14th

Joining Matthew Holt (@boltyboy) on #THCBGang on April 14 for an hour of topical conversation on what’s happening in health care and beyond were fierce patient activist Casey Quinlan (@MightyCasey); futurists Ian Morrison (@seccurve) & Jeff Goldsmith; Jennifer Benz (@Jenbenz); and policy consultant/author Rosemarie Day (@Rosemarie_Day1).

Lots of chat about McKinsey and conflicts of interest, what’s next with COVID, where employers are now, and Casey has a unique idea about how to profit from data brokers.

You can see the video below live (and later archived) & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

Hospital Systems: A Framework for Maximizing Social Benefit

By JEFF GOLDSMITH and IAN MORRISON

Hospital consolidation has risen to the top of the health policy stack. David Dranove and Lawton Burns argued in their recent Big Med:  Megaproviders and the High Cost of Health Care in America (Univ of Chicago Press, 2021) that hospital consolidation has produced neither cost savings from “economies of scale” nor measurable quality improvements expected from better care co-ordination. As a consequence, the Biden administration has targeted the health care industry for enhanced and more vigilant anti-trust enforcement.

However, as we discussed in a 2021 posting in Health Affairs, these large, complex health enterprises played a vital role in the societal response to the once-in-a-century COVID crisis. Multi-hospital health systems were one of the only pieces of societal infrastructure that actually exceeded expectations in the COVID crisis. These systems demonstrated that they are capable of producing, rapidly and on demand, demonstrable social benefit.

Exemplary health system performance during COVID begs an important question: how do we maximize the social benefits of these complex enterprises once the stubborn foe of COVID has been vanquished? How do we think conceptually about how systems produce those benefits and how should they fully achieve their potential for the society as a whole?

Origins of Hospital Consolidation

In 1980, the US hospital industry (excluding federal, psych and rehab facilities) was a $77 billion business comprised of roughly 5,900 community hospitals. It was already significantly consolidated at that time; roughly a third of hospitals were owned or managed by health systems, perhaps a half of those by investor-owned chains. Forty years later, there were 700 fewer facilities generating about $1.2 trillion in revenues (roughly a fourfold growth in real dollar revenues since 1980), and more than 70% of hospitals were part of systems. 

It is important to acknowledge here that hundreds more hospitals, many in rural health shortage areas or in inner cities, would have closed had they not been rescued by larger systems. Given that a large fraction of the hospitals that remain independent are tiny critical access facilities that are marginal candidates for mergers with larger enterprises, the bulk of hospital consolidation is likely behind us. Future consolidation is likely not to be of individual hospitals, but of smaller systems that are not certain they can remain independent. 

Today’s multi-billion dollar health systems like Intermountain Healthcare, Geisinger, Penn Medicine and Sentara are far more than merely roll-ups of formerly independent hospitals. They also employ directly or indirectly more than 40% of the nation’s practicing physicians, according to the AMA Physician Practice Benchmark Survey. They have also deployed 179 provider-sponsored health plans enrolling more than 13 million people (Milliman Torch Insight, personal communication 23 Sept, 2021). They operate extensive ambulatory facilities ranging from emergency and urgent care to surgical facilities to rehabilitation and physical therapy, in addition to psychiatric and long-term care facilities and programs.

Health Systems Didn’t Just “Happen”; Federal Health Policy Actively Catalyzed their Formation

Though many in the health policy world attribute hospital consolidation and integration to empire-building and positioning relative to health insurers, federal health policy played a catalytic role in fostering hospital consolidation and integration of physician practices and health insurance. In the fifty years since the HMO Act of 1973, hospitals and other providers have been actively encouraged by federal health policy to assume economic responsibility for the total cost of care, something they cannot do as isolated single hospitals.

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THCB Gang Episode 85, Thursday March 17th, 1pm PT 4pm ET

Joining Matthew Holt (@boltyboy) on #THCBGang at 1pm PT 4pm ET Thursday for an hour of topical and sometime combative conversation on what’s happening in health care and beyond will be: double trouble futurists Ian Morrison (@seccurve) & Jeff Goldsmith; consultant focusing on platform business models and strategy Vince Kuraitis (@VinceKuraitis), & back after a long while analyst and Principal of Worksite Health Advisors Brian Klepper (@bklepper1).

Today there will be more discussion than usual about platforms and whether health care is ready for them!

You can see the video below. If you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels

After the Crash

By JEFF GOLDSMITH

These are grim days for innovative healthcare companies.  The health tech and care innovation firms mature enough to make it to public markets have been eviscerated in the ongoing market correction. As of January 29, 2022, high fliers like One Medical (down 83% from peak), Oscar (down 83%), Bright Healthcare (down 85%), Teladoc (down 77% but still selling at 6X revenues!), and AmWell (down 90%) are the tip of a much larger melting iceberg.    The dozens of digital health unicorns (e.g. pre-public companies valued at more than $1 billion) and their less mythical brethren, into which investors poured more than $45 billion during 2020-2021, are sheltering in the comparative safety of VC/Private Equity balance sheets. They are protected from investor wrath until those firms’ limited partners force a revaluation of their portfolios based on the market value of their publicly traded comparables.   

Yet it is the next moves that these innovative firms and their equity holders make that will determine whether these firms realize their full transformative potential or fade into insignificance. The Gartner Group, which tracks the technology industry generally, popularized the notion of the Hype Cycle- a seemingly universal trajectory that tech innovations and the firms that produce them follow (see below).   

                                                    The Gartner Hype Cycle

Everyone seems to focus on the colorful first phase of this cycle- the inflating and deflating part- where an innovation rises on a wave of the adulatory press (and breathless futurist punditry), then crashes ignominiously into the Slough of Despond.  A classic example was the Apple iPhone’s ill-starred great uncle, the Apple Newton, which launched in 1993 and crashed shortly thereafter.

For founders and investors, as well as customers, however, it is the less visible succeeding phases that determine if the innovation survives and the firms that produce them become ubiquitous and indispensable parts of our lives.  The rising initial phase of Gartner’s Hype Cycle is driven by the question “Is it cool”?, mediated by hyperactive media and Internet buzz.    The inevitable crash, on the other hand, is almost always driven by the troublesome real-world question,  “Does the product actually work as advertised?” Analysts, writers, and, most importantly, customers press uncomfortable questions about not only functionality, but also reliability, affordability, stickiness, and “value for money”.

How do firms survive the crash and climb Gartner’s “Slope of Enlightenment”?  This is the unglamorous “pick and shovel” part.  If the sticky “product integrity” issues (does the product actually work?) are resolved, then a host of important questions challenge the firm, its founders, and owners, which answers the crucial question:  whether it is a real business:   

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THCB Gang Episode 81, Thursday Feb 3

Joining Matthew Holt (@boltyboy) on #THCBGang at 1pm PT 4pm ET Thursday for an hour of topical and sometime combative conversation on what’s happening in health care and beyond will be: Suntra Modern Recovery CEO JL Neptune (@JeanLucNeptune);  the double trouble of vaunted futurists Ian Morrison (@seccurve) & Jeff Goldsmith, WTF Health host & Health IT girl Jessica DaMassa (@jessdamassa). Today’s special guest returning to #THCBGang is the “I make unicorns” King Bill Taranto from Merck GHIF (@BillTaranto).

You can surmise that there will be some discussion around #DigitalHealth valuations!

The video will be below. If you’d rather listen to the episode, the audio is preserved from Friday as a weekly podcast available on our iTunes & Spotify channels

THCB Gang Episode 78, Jan 13

On #THCBGang I hosted the double trouble of vaunted futurists Ian Morrison (@seccurve) & Jeff Goldsmith, and medical historian Mike Magee (@drmikemagee) for an hour of conversation and banter about the health care system, the world in politics, and whether “Don’t Look Up” is a spoof or a documentary. Really good stuff, especially from Jeff on whether Medicare pays enough to keep hospitals alive. (Spoiler alter–he doesn’t think so!)

You can see the video below & if you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels.

THCB Gang Episode 75, Dec 16

Joining Matthew Holt (@boltyboy) for an hour of topical and sometime combative conversation on what’s happening in health care and beyond were — medical historian Mike Magee (@drmikemagee); futurist Jeff Goldsmith; fierce patient activist Casey Quinlan (@MightyCasey); and policy consultant/author Rosemarie Day (@Rosemarie_Day1).

Plenty of talk about voting rights, the future of American “democracy” and much more, and we did get back to health care eventually. A great & fun, while important, conversation!

You can see the video below where it’s kept for posterity. If you’d rather listen than watch, the audio is preserved as a weekly podcast available on our iTunes & Spotify channels

Healthcare Not a Part of the US Inflation Surge: Who Knew?

By JEFF GOLDSMITH

When I first appeared in The Health Care Blog fourteen long years ago, it was to decry the policy community’s obsessive search for bad news about the health system: https://thehealthcareblog.com/blog/2007/10/03/the-perpetual-health-care-crisis-by-jeff-goldsmith/. So while we struggled with the COVID pandemic, we continued hearing regularly about pharmaceutical price gouging, anti-competitive hospital mergers, bad labor relations, and provider burnout.  Thus, we can expect to hear nothing whatsoever about the failure of the health system to participate in the current outburst of inflation in the US economy.

The Washington think tank Altarum Institute tracks such things, and in its November 16 report https://altarum.org/sites/default/files/uploaded-publication-files/SHSS-Price-Brief_November_2021.pdf, we learn that healthcare prices rose by an annualized rate of just 2% in October 2021 compared to the Consumer Price Index’s 6.2% and the Producer Price Index’s 8.6%. Altarum commented that this was “surprising given that  many of the same factors impacting economywide  prices (labor shortages, supply chain issues, and increased demand for economywide services) would be expected to impact health care as well.”  

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