The End of D2C Healthcare
Why digital health startups need to dual-track D2C and payor distribution
TLDR: I was an investor and board observer at Livongo, one of the largest digital health IPOs in the last decade. New digital health founders are looking to follow a similar go to market strategy to Livongo’s, starting with self insured employers and expanding to insurance companies (i.e. payors). Unfortunately, by the time they make that pivot, they’re too late. Below I explain why early stage digital health companies need to dual-track their product distribution in a different way, starting with Direct to Consumer, and entering discussions with payors / health systems sooner rather than later.
A Brief Look at History: Why digital health companies pursued Direct to Consumer
In digital health, there are two primary ways to reach users directly:
Direct membership via paid acquisition channels or referrals (D2C)
Indirect membership via self-insured employers (B2B2C)
Like so many areas of technology, the first method of paid acquisition was subsidized by venture capital funding. From 2013 to 2021, annual digital health funding skyrocketed from ~$2Bn to $30Bn.
Source: Digital Health Business & Technology, as of February 3, 2023
D2C startups thereby had plenty of cash to spend on paid acquisition via channels like Google and Facebook. Companies like Ro, hims, and Cerebral notoriously hit a nerve in the market, went direct to consumer, and scaled exponentially in their first few years.
Other digital health companies went after self-insured employers. The bull market backdrop was ripe for this. Self-insured employers desperately needed to retain employees, and offering health solutions with a great UI / UX was an easy way to show value versus competitors.
Scanning this segment of the market, many of the companies had the same value proposition; they addressed a medical problem that was a) hampering productivity, b) increasing attrition, and c) increasing costs. This included chronic conditions like diabetes; mental health conditions; childcare; and pregnancy & post-partum. Popular companies that began in this segment include Livongo (diabetes), One Medical (primary care), Progyny (fertility benefits), Hinge Health (musculoskeletal care), and Lyra Health (mental health).
Both of these models worked well in the past. CAC was relatively low given less competition, and while the path to profitability was unclear without additional product lines, the low interest rate environment helped push these fears out, similar to what we’ve seen in other areas of consumer-related technology (see Lyft & Uber).
Looking Ahead: Why D2C doesn’t ‘work’ anymore, but companies should still pursue it
With the Fed increasing interest rates, selling to employers has become increasingly difficult. There are hundreds to thousands of startups looking to solve incremental health problems, and the ROI hurdle is rising as employers look to cut costs. Companies that have been able to scale quickly in the employer market are doing so because they are bundling point of care solutions, rather than creating new ones. They are also shifting to risk-based models, which shifts the burden off the employer and onto the company to show results.
Meanwhile, health systems have woken up to a classic case of information asymmetry - they have direct access to their patient population, and are perhaps best suited to provide a vertically integrated solution in tandem. VCs have responded by creating strategic partnerships with health systems and providers in order to give portfolio companies a leg up in access. See a16z's partnership with Bassett Healthcare or Redesign's partnership with General Catalyst, CVS and UPMC as examples.
Recognizing that going directly to health systems / payors, and skipping over D2C would seem like the easy solution here, let’s consider an alternative solution. Namely, there is still a major reason to still pursue D2C as an early stage startup: data.
When startups go directly through payors, they are beholden to long and confusing email lists, and filtered segments of the population selected by the payor. It quickly becomes nebulous what is working, and why. Look at a lot of the startups with major payor contracts today, and the products look clunky at best. We can speculate as to why, but we do know that prescription-gated apps are not user friendly.
In a D2C model, companies have direct access to the patient population, and receive direct feedback. They have no choice but to iterate and engage directly with users. True, the willingness to pay will be fairly low across the user base. However, the purpose of D2C in this model is not to reach a 3 - 4x LTV / CAC; the purpose is to attain product market fit. Build a product that users love, want to use, and find significant value in. Then, as soon as there is some traction in this segment, initiate conversations with payors or providers. Why?
Two main reasons:
Time to launch. Similar to what we've seen in enterprise and govtech, where contracts can often take years to sign, pilot contracts can also take a year plus to convert, which means that path to profitability will be pushed out if founders delay those conversations. At Series A / B rounds, VCs want to have visibility into recurring revenue.
Achieve the right outcomes. Many companies waste time tracking KPIs that do not translate to ROI. For example, a payor will likely be more interested in lower emergency room visits than higher engagement in a virtual care product. Yet a startup might be focused on engagement for the first year after launch. While these two metrics can be related, it will be difficult to convert a contract without showing a direct decline in ER visits pre and post-usage. Knowing what is required beforehand, can put a company at a major advantage over the competition.
Many founders know that they want to pivot from D2C to payors eventually, but most initiate those conversations too late in their growth cycle.
How to Get a Pilot Contract with a Payor
The first step to getting a pilot contract is to segment the population. An elder care company's population might quite obviously, be 65+. Hence, they would target Medicare Advantage plans. A company tackling pediatric therapy for children meanwhile, might look to gain as much coverage as possible and start with the most innovative health plans, before expanding into health systems. See Brightline as a recent example. This can similarly be done across disease states, and therefore targeted geographies.
There are likely a ton of innovative health plans out there (i.e. willing to pilot with startups), but notable ones include Blue Cross Blue Shield of MA, Blue Cross of California, and Optum.
Final Prediction: Which companies will scale
Think of healthcare in 3 phases:
Diagnosis
Triage (Treat)
Monitor
Since COVID-19, our ability to monitor patients virtually has increased significantly, but a massive decline in patient volumes within the hospital system is leading to late-stage diagnosis. According to a recent Gallup poll, 38% of Americans have delayed medical care in the past 12 months due to cost. This is a record high over the last 20 years. Perhaps most importantly, the jump is coming from people delaying the treatment of serious conditions (chart below).
This shift occurring in healthcare is drastic, and perhaps creates the most ripe opportunity for digital health founders in tech.
The most successful startups will be those that can show the highest ROI in diagnostic preventative care & monitoring (to the tune of 5x+), specifically for high-cost segments. This includes neurology, oncology, and primary care for underserved populations. Companies will likely have to be willing to undergo risk-sharing models, which makes high ROI all the more important.
Similar to retail, yes, over time, incumbents can build their own e-commerce tools, but for certain white spaces, startups have the advantage of speed and tech talent. There's an opportunity to time the market; as physicians get burned out and margins get squeezed, integrating into doctor workflows seamlessly or preventing hospital admissions will become all the more important. Companies that can do this well, will ultimately scale.
The Diversity Angle: Black Americans & the Healthcare System
Black Americans in the United States have notoriously tried to avoid the healthcare system at all costs. It was, after all, a Black woman whose cells were illegally taken from a researcher at Johns Hopkins University. To this day, these HeLa cells have powered some of the most transformational advances in medicine, including the polio vaccine, the COVID-19 vaccine, and other developments in fields like cancer and AIDS. Henrietta Lacks never benefited from this, and she never knew about it.
The problem with healthcare access remains systemic. According to Pew Research, 40% of Black adults say they’ve had to speak up to get proper medical care, and 56% say they’ve had at least one of several negative experiences with providers at some point in their lives.
Digital health companies have a real shot at addressing these issues, not just among African Americans, but among people who don’t have access to nearby care, who are elderly, who are LBTQIA+, or otherwise marginalized.
We’re seeing it happen in many areas already, as outlined by 7Wire Ventures in the below market map. For those that find product market fit, and want to truly impact the many, consider the digital health dual-track for product distribution.
Thanks for reading.
Disclaimer: The above is an opinion and for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.