ELI5 tl;dr-
Current strategic thinking behind business-to-consumer (B2C) / direct-to-consumer (D2C) / direct-to-patient (DTP) models in US healthcare is highly flawed due to 3 major errors:
Error 1: Frequent & persistent overestimation on overall patient willingness-to-pay & overall financial opportunity due to a consistent misinterpretation of what out-of-pocket (OOP) spend in the US means
OOP spending on healthcare reached $388B in the US in 2020, making up around 9% of total national health expenditure (NHE)
This spend, however, is mostly a result of forced consumerism due to changes on the market access side; it does not represent ‘real’ willingness to pay
Of particular note, the rising popularity of high deductible health plans - a shift partially driven by patients looking to avoid rising premiums - does not support presence of greater innate patient willingness to pay; if anything, it results in less
Error 2: Overestimation of addressable patient size due to failure to consider wealth inequality in modeling patient ability-to-pay (ATP)
In 2021, around 10% of the US population controlled 70% of the wealth
Simply put, ATP is increasingly being concentrated in a small group of patients; for the majority of the population, ATP on a per patient basis is increasingly falling; this paradox where patients with the highest unmet medical need have the lowest financial ability to pay OOP has been documented many, many times
As wealth concentration continues, ATP for the average patient will decrease; this is one of the chief drivers behind the challenge of poor LTV / CAC ratios faced by digital health companies
Error 3: Misinterpretation of WTP / ATP results in digital health companies building solutions for the ‘wrong’ patient population
The consumer population with high WTP / ATP for a given healthcare service likely has very different needs than patients with low WTP / ATP
While these differences manifest differently from therapeutic area to therapeutic area, they present a persistent challenge for digital health companies to constantly iterate with a clear market in mind
Case studies already abound on companies failing to do so; Peloton, Ro, Carbon, etc.
These strategic errors have resulted broadly in the underperformance of pure B2C / D2C / DTP models
Stock performance of digital health companies - many of which focused on B2C / D2C / DTP models - have dramatically underperformed
One key challenge - high customer acquisition cost (CAC) relative to lifetime value (LTV) - is directly linked to total addressable market (TAM) overestimation (i.e. user base with attractive LTV too small, increasingly harder to identify & reach new users results in higher CAC)
In order to survive, a large percentage of formerly pure B2C / D2C / DTP companies have already begun moving to hybrid B2C2B models
Correcting these strategic errors may allow B2C / D2C / DTP innovators not only greater clarity in key opportunity patient segments, but more realistic operational benchmarks for strategic execution (i.e. R&D, execution, long-term sustainability)
***
There’s not much else I want to say about the above points, so I want to talk more about my reflection on the overall context below.
A big insight for me is the realization that too many professionals got caught in the narrative instead of challenging assumptions. When you read articles like this, or see Substacks like this and this, or hear from your trusted consultants things like this, it is easy for anyone passionate about changing healthcare to get caught in the hype. It’s also equally easy for the VCs, angels, etc. of the world to buy into the story, especially since the healthcare industry is a difficult-to-understand market relative to areas like retail or fintech.
Honestly, I think the real ‘villain’ behind the $388B myth is us - people. Health is a critical part of the human experience, and healthcare - maintaining our ability to live our lives & find happiness - is as much an emotional pressure point as it is just a simple market opportunity from a business perspective. Accordingly, many people - including myself - often unconsciously give themselves a ‘pass’ for not thinking things through. It takes a certain kind of mental fortitude to marry the emotional desire to make an impact in something as fundamental as human life with the pragmatic, ruthless calculus of building something sustainable. Instead, though, of fostering a culture of challenging those assumptions, in many ways this whole B2C / D2C / DTP / whatever is an example of how we’ve instead expanded a culture of protectionism to include ourselves. I mean, it doesn’t matter if we’ve make bad decisions because what we’re doing is so important, right?
Well, yes and no.
I’ve always said that the problem with any business is not that people make bad strategic decisions. In that sense, I ‘agree,’ at least from a utilitarian perspective, with the idea that bad decisions ‘do not matter’ in the face of the vision or outcome companies & people are striving for. That’s my ‘yes.’
The problem is that leaders need to also learn from them; finding out exactly what were the core challenges that led leaders, innovators, and operators astray. Many healthcare professionals - regardless if you’re a physician, a health-tech guy, a consultant, whatever - are understandably proud of the impact they have to the point where it becomes a part of their identity. Yet, this also results in their single-minded obssession for improvement becoming conflated with their self-perception. When that happens, leaders do not grow; criticism becomes a personal attack, and that ‘bad decisions do not matter’ becomes a shield used to justify previous decisions, rather than to pave the path to the future. That’s my ‘no.’
In the end, what I wrote above is the ‘real takeaway’ that I hope people realize. After all, the numbers in the ELI5 tl;dr section are just that - numbers. They may be helpful, but like all numbers they only have the potential to be truly useful if people are open to finding them useful.
That won’t happen if we as a industry do not hold ourselves to a strategic standard. Think critically. Execute to the best of your ability. If you’re wrong, you’re wrong; if you’re right, you’re right. Or, at the very least, you’re not wrong yet.
Hope this helps.
Oh, and by the way - if I’m wrong, tell me! I try to practice what I preach.
-WY