How to prevent a (digital health) murder
Alternatively, my action plan if I were Chief Strategy Officer of a B2C digital health unicorn today
tl;dr-
Lay of the land - of the >$5T US healthcare market (2021), ~23% (~$1.2T) consisted of consumerized healthcare spending (i.e. patient paying out of pocket for a good or service), which includes fitness & exercise, weight loss, and alternative medicine1
However, when trying to estimate the number of patient consumers this figure may represent, one must consider wealth inequality to control for relative individual buying power; according to the US Bureau of Economic Analysis (BEA), 68.9% of all disposal income in the US in 20192 was concentrated among households making an adjusted income of $76,418 or more3
For context, in 2019 the top 10% of all households by adjusted annual income accounted for 33.1% of all disposable income; the top 5% for 23.5%
This suggests that the total addressable market (TAM) for digital health products & services targeting consumerized healthcare spend is far smaller than what it may appear to be4
Companies that built their foundation on the B2C model will find it increasingly hard to scale, eventually likely necessitating to a pivot towards reimbursement by third-party payers, such as employers, managed care companies, or the Centers for Medicare & Medicaid Services - or be murdered (i.e. exposed to the risk of being outcompeted and / or being swallowed by a massive wave of consolidation in 2022 and beyond5)
The key obtaining reimbursement will be demonstrable outcomes6; however, this is exceptionally challenging for most B2C-forward / B2C-primary digital health companies to do because they didn’t design solutions & data capture mechanisms either for the right population7, or in capturing the right data8
These challenges are fundamental to the digital product / service itself and are expensive to address not only from an R&D standpoint, but also from a business development perspective; companies need to ensure that they have the right people, the right processes, & the right capabilities to create & execute on these strategic plans
How should you do it? Amazon it; focusing on making smart, strategic choices based on your monetized population to either seek reimbursement, take over healthcare delivery, or both - with a focus on the need to redesign your solution as needed
***
So a while back, I was reading Ro CEO Zachariah Reitano’s eloquent response to this TechCrunch article about the company’s culture & potentially failed bets - and it really got me thinking not only about what I think would happen moving forward, but also what I would do if I was in charge of Ro’s overall strategy. So, in the spirit of the holidays and my own personal interest, I’d like to just throw my thoughts on the strategic challenges companies like Ro - venture-backed digital health unicorns focused on a B2C business model feeding off of consumerized healthcare spend as the core revenue driver - may face moving forward.
The big one is of course, scale - but what do we mean by scale here? As the above tl;dr states, one of the key fundamental misunderstandings of the consumerized healthcare spend market is its size. Sure, if you look at it by revenue it looks impressive, but guys - I hate to break it to you, but you guys are only looking at half the picture. The actual way to size the market is not only the total amount of spend you can capture, but also how many individual bodies are willing to use, are able to use, are willing to pay, AND able to pay for your solution. I’m pretty sure every company - and their strategy consultant vendors - have seen most of the estimations on the revenue potential, but the fact remains that wealth inequality - and really, all Social Determinants of Health9 play a huge role in translating those numbers into actual people. I’m sure the corporate strategists at Peloton figured this out the hard way.
One natural way to think about this is to say ‘I don’t care about new customer acquisition (right now); I just need to max out Customer Lifetime Value with more products and they’ll eventually come’ - and as an example, Reitano’s response hints at it. The admission that revenue comes from returning customers and the ‘encouraging’ forward indicator of ‘Almost 20% of our patients use Ro for something other than what they signed up for first within the first 30 days of joining’ suggest a company very focused on CLV vs. expanding their user base. Reitano again hints at this when he says openly admits that ‘the benchmark we’re using [to measure success] is revenue’ when referring to their weight management business.
There is really nothing ‘wrong’ with this approach - revenue as primary KPI, focus on CLV with the assumption that new features will organically drive more users - but it doesn’t help leadership make better decisions. Besides the ability to pay issue, this is because this viewpoint also assumes that the underlying experience your platform supports matches with future customers when that is probably the most dangerous mistake to make10.
Designing an experience for a 20-or-30-something Silicon Valley, fully employed & digitally empowered person already predisposed to ‘10x’ his or her health is very different than designing something for a 40-year-old single parent working three jobs with a rather poor Internet connection. Many digital health companies choose to focus on their target market - which happens to be the abled, the already empowered, and the likely easy to manage segment of the healthcare market. Certainly, when you think through Ro’s chosen therapeutic areas - erectile dysfunction, smoking cessation, etc. (and notably, an exception for women’s health - which actually is super underserved in a lot of ways), you can see how it’s easy in your design process to increasingly bias your platform to that 20-or-30-something already empowered person. But that also means you made a strategic tradeoff; by focusing on that population, you may no longer have an experience that is resonant among the rest of the population - and the people who actually cost the system the most (i.e., the chronic condition patient who, by virtue of SDoH, is generally likely to be poorer, less educated, and with a worse economic situation).
To really crystallize this, consider the following - when you design something for people shopping routinely at LVMH stores, you’re not designing for people who shop at Dollar General. And there’s only so much success you can drive from Berkin bag collector patients in healthcare before you’re forced to pivot.
Pivoting to a reimbursement-based model is strategically simple & tactically complex. At the core of it, it is outcomes data, the bedrock of creating certainty among the healthcare industrial complex that your solution is worth paying for because the outcomes are good and predictable. Getting these insights is easier said than done; however because it won’t come from a revenue KPI. You can yell all you like about how a healthcare innovation will make $20B in revenue but, if the data isn’t there, payers won’t bite and you’ll just end up failing miserably. (If you want to read more about my take on that can of worms, check out this link.)
So let’s think about Ro - or Cerebral, or Calibrate, or any number of these digital health platforms that have a B2C core as their business model. A question any strategist working at these companies should ask themselves is, what is my roadmap to data generation for widespread reimbursement to as many patients as possible? What are the outcomes I need to show? What data partnerships do I need to make it happen? Who are the people I need on that team? What are the capabilities I need to understand & define success? Because - unless I truly am a unicorn, I’m going to burn out the population of empowered people willing to pay out of pocket for my solution - and reimbursement will be part of my future if I want to survive. Even short-term cost reduction in operations & fixed costs is, let’s be honest, just a band-aid.11
All this costs money - so it shouldn’t be a surprise that success comes from just being smarter about where you’re spending money as a company. Instead of pumping it into increasing CLV - more modules built on the same core experience for the same user segment, pump it into securing a path for reimbursement. Focus on infrastructure that will let you accurately measure how much your solution is moving the needle in terms of health outcomes. Rebuild platforms - or buy earlier stage companies with interesting tech - to design for the Dollar General shopper. Assess smartly how to get the most out of the dollars you’re earning from your monetized patients to reach even more patients - and even more beyond that.
Even if you don’t angle for reimbursement, there are other opportunities. Leverage your platform as a marketplace, for instance - I’ll give credit to Ro here for their partnership with Gelesis on Plenity (though this smart idea is probably hampered by the challenges I listed above designing for the person with obesity). Focus on redesigning your core experiences to track more closely with retail experiences these patients may have - at for example, Best Buy. Work on your supply chain to make delivery of care more efficient, more streamlined, and even more convenient for your end users (like these guys maybe?). You get the gist of it - there are many paths to success, but they all hinge on making smart trade-off decisions on how your company reinvests your earnings based on what you want to do.
So that’s it! To all the digital health companies are there who don’t want to get absolutely murdered, there’s your three-step action plan-
Be ready / in the mindset to spend your money like you’re partying in 1999
Design for Dollar General customers, not LVMH - and don’t just ‘tell yourself’ you’re doing it, actually do it
Most bang for your buck - want to get drunk, don’t buy that bottle of overpriced champagne. Want to feel bougie, don’t drink a Redstripe
And with that, that’s my last post for 2021. To everyone who’s clicked on my content so far, I sincerely hope that my thoughts that I’ve cobbled together here in my little war room are helpful to all of you in your healthcare innovation journeys. If you can share this broadly with anyone who you feel may like it, I’d appreciate it; after all, who knows? Maybe I’d like to be your Chief Strategy Officer some day!
Happy holidays to all, and see you all on the other side.
-WY
https://globalwellnessinstitute.org/industry-research/the-global-wellness-economy-looking-beyond-covid/; $1,310.8 in 2020 Health & Wellness spending for North America, weighted by 93% contribution of United States to total North America GDP (US + Canada)
https://www.bea.gov/data/special-topics/distribution-of-personal-income
https://apps.bea.gov/data/special-topics/distribution-of-personal-income/measuring-the-distribution-of-personal-income-infographic-2021.pdf
Quote by Byron Ling (Canaan): “Sometimes we have met teams that are very good at growth but they don’t anticipate that the D2C health market they’re going after is actually pretty small.”
https://www.headspace.com/science/meditation-research
https://journalofethics.ama-assn.org/article/why-arent-our-digital-solutions-working-everyone/2017-11
https://www.brookings.edu/blog/techtank/2021/10/05/using-digital-health-to-improve-health-outcomes-and-equity/
https://www.healthcareitnews.com/blog/giant-sucking-sound-digital-health-consolidation
https://www.cdc.gov/socialdeterminants/index.htm
Ro likely got bit by this already - Reitano writes regarding their smoking cessation app that ‘it unfortunately hasn’t seen rapid adoption,’ suggesting that the product design wasn’t resonating with the target audience.
To their credit, they’re trying - https://cerebral.com/blog/announcing-new-insurance-options-and-reduced-plan-pricing.