Estimated total financings for digital health companies in the first quarter of 2019 have just been published.
Startup Health, an online networking community for digital health, attempts to track this space globally. Its estimate was US$ 2.9 billion worldwide.
Rock Health, a U.S. digital health seed fund that tracks this space, gave an estimate of US$ 986 million for U.S. companies.
The annual trend in financing volume illustrates the explosive growth (and competition) of digital health entrepreneurship since 2010. (Figure 1)
Digital health, or health tech, is a broad and confusing space. Rock Health and Startup Health offer research reports that are helpful in describing the different sectors and segments within this space.
Telemedicine is foundational to health tech
Understanding health tech can be simplified by looking at telemedicine. Telemedicine is the use of technology to provide health care remotely.
This modality can be extended to provide different health services under different business models, making telemedicine foundational to the entire health tech space.
Let’s look at the evolution and growth of telemedicine.
Historically, basic telemedicine has been performed situationally since the existence of telecommunications, such as a doctor speaking over a telephone or radio. (1) Science fiction has foreshadowed telemedicine since 1925. (2)
A technological description of telemedicine was offered by scenario analyses even before the advent of the internet.
Scenario analysis as a business strategy tool
Scenario analysis is a strategy tool that can be used to make flexible long-term strategic plans.
Royal Dutch Shell pioneered its use as a business strategy tool in 1971 to consider geopolitical risk, economic cycles, and technology trends in making decisions on multibillion dollar investments that span decades into the future. (3)
Shell’s scenario planning group identified confounding events like the 1973 energy crisis and the oil price shock of 1979. These insights allowed Shell to prosper through industry turbulence, making scenario analysis a credible tool. (4)
Today, well-performed scenario analyses remain very useful in identifying critical factors that can drive market directions over extended periods of time.
Four common themes underlying scenarios of health care: telemedicine, affordability, patient-centricity, trust
Forty seven detailed scenario projects have been published since 1990 in the fields of healthcare, health, medicine, epidemiology, life sciences, and pharmaceuticals. (5)
These have been performed by a diverse set of organizations: the World Bank, public policy institutes, medical education and accreditation organizations, universities, physician groups, pharmaceutical companies, business and strategy consultants, government health departments, and healthcare foundations.
They all identify common macro themes that are driving the interaction of technology and health care.
The first modern scenario analysis for the future of medicine was performed by researchers from Groningen University (Netherlands), Utrecht University (Netherlands) and the World Bank. They submitted their publication on October 12, 1994. This was the eve of Netscape launching the world’s first consumer browser for the World Wide Web.
Their scenario of the future was introduced as follows. Note that this was written before the Internet was known to consumers, before tech stocks caused the first boom in the NASDAQ, and when computing power was a tiny fraction of what it is today:
Technological change is considered as the major force for economic progress and innovation. Medical technologies burgeon and contribute to confidence in technology’s contribution to solving medical and social problems. Disease prevention is well developed, with widespread adoption of screening, use of self diagnostic kits, and other innovations in prevention; this becomes an important prerequisite for the use of long term corrective treatment. In this process advanced computer and information systems are applied in quality assurance, monitoring of drug usage, patient compliance, and evaluation of medical outcomes. Such systems offer opportunities for patients at home to communicate with their doctors and pharmacists, professionals to engage in telediagnosis, and patients to interactively acquire individualised medical information. (6)
Their study, and all health care scenario projects since then, have identified persistent themes: tech themes we see emerging in healthcare today. These themes are prescient, because good scenario projects are also grounded by fundamental elements of the human imagination and psyche, the impulses of human nature, and the practice of medicine.
These strong underlying human factors drive themes that appear consistently across time – even generations – and across countries. Here are four of the more common themes:
1) Telemedicine: “Advanced computer and information systems offer opportunities for patients at home to communicate with their doctors and pharmacists, professionals to engage in telediagnosis, and patients to interactively acquire individualised medical information.”
This application of technology towards patient services has been growing and has now surpassed a tipping point.
2) Affordability: “Large parts of the population cannot benefit from all the technological advances and have no access to reasonably affordable modern drugs [and services]. For them and even many others, a minimum package of health care benefits rationalizes the use of services, care, and drugs.”
All scenario projects that address the affordability theme suggest that a minimum package of products and services will be the end state. An example of a minimum package is insurance only for catastrophic circumstances, also known as safety net insurance. Presently, in the United States, the first iteration in this direction are high deductible insurance plans and restrictive formularies. In India, it is mostly a self-pay market where government mandated drug price caps are a proxy solution for drug affordability until seeds for a new innovation are planted. Affordability is a fundamental theme worldwide.
3) Patient centricity: “Hospitals provide several models of care with a focus on empathy and behavioral medicine.”
Patient centricity did not appear as a term until 2000. Yet the idea of designing a service or solution around the patient, or taking the perspective of the patient, has been a longstanding need in healthcare. Over the last dozen years, the convergence of competition, technology and customer expectations have propelled this concept into mainstream practice.
4) Technology trust: “A series of failures of high tech can lead to a more cautious view of medical technology.”
All scenario projects point out that where there is technology, there will always be the potential for a prominent failure. Today we see the failure in the form of security breaches. Failures are not always regressive events. They can catalyze higher standards that ultimately enhance adoption. For example, FDA’s new pilot Digital Health Software Precertification Program includes a requirement for good cybersecurity practices as a criterion for high quality medical software.
Another form of failure is the propagation of distrust, which is an even greater problem that may signal a more fundamental issue of technology. This is a topic for other posts.
The evolution of telemedicine companies using USA, India and Russia as examples
If telemedicine is a predetermined direction in health tech, how are these companies arising, and where is the industry going?
U.S. telemedicine companies are summarized in Table 1.
The first generation of telemedicine companies were founded between 1999 and about 2010. They predominately focused on connecting patients to general medical practices. The early ones started with telephone services or proprietary videoconferencing systems. They all pivoted to mobile and non-proprietary hardware over time.
These first generation companies were the visionary ones that pioneered their entry into the space. Of these, Teledoc (founded 2002), American Well (founded 2006), and MDLive (founded 2006) have become large players today, achieved through consolidation and channel growth.
In 2009, there is a proliferation of more of these companies.
Also, the second generation of telemedicine companies emerged around 2009. These started to focus in medical specialties such as psychiatry and dermatology, or they have an enterprise business model providing private label technology to doctors and institutions who want to provide telemedicine to their patients. Consolidation of these specialty companies has not yet started.
2009 is a milestone point, because a series of government legislation catalyzed the growth of information technology in healthcare as part of healthcare reform:
- Health Information Technology for Economic and Clinical Health Act (HITECH), 2009, under the American Recovery and Reinvestment Act
- Affordable Care Act (ACA), 2010
- Children’s Health Insurance Program Reauthorization Act (CHIPRA), 2009
Some major Indian telemedicine companies are summarized in Table 2.
The early major companies in this space played to India’s competitive capability of the IT outsourcing business model. For example: teleradiology services to foreign hospitals and second opinion medical advice to foreign patients.
There are many small domestic companies operating below the radar. Almost all of these combine telemedicine with an electronic medical record (EMR) as the “full stack solution”. The adoption of EMRs in India is still nascent. Hence many of these companies feel a need to incorporate their own proprietary EMR in their telemedicine system. In resource-constrained start-ups, developing two tech platforms is holding these companies back.
The current state of the country’s medical infrastructure is affecting directly the evolution of the telemedicine space.
The standout company in this space is Practo, which is a pure telemedicine model. They are an early entrant, founded in 2008, and has leveraged heavy promotion to build brand recognition. They have raised US$ 234 million to date. Following the IT outsourcing business model paradigm of other Indian companies, it has gone international in 15 countries, offering both telemedicine as the service, or telemedicine software tools to foreign doctors and institutions who want to provide telemedicine to their patients.
Russian telemedicine companies are summarized in Table 3.
The milestone year for telemedicine in Russia was 2018, when the “Law on Telemedicine” came into effect. Online medical prescriptions became legal in January 2019.
Telemedicine companies have existed prior to this date. Their business models were shaped by the prior legal framework. Their original primary service may be something like making appointments for house calls.
Since last year, telemedicine offerings are adapting and pivoting. The standout market share leader is Yandex.Health which benefits from the Yandex brand. Yandex is Russia’s largest search engine and is a strong e-commerce brand, among other services.
However, telemedicine calls are still very expensive for the average Russian. Hence, Sprosi vracha is also a market share leader. This service is cheaper. Customers send text questions for doctor advice. This is also suitable to users who are not yet comfortable with fully remote telemedicine.
Key points about telemedicine companies
The prior examples show:
- The foundation of telemedicine companies are the domestic factors. For example, in the US, it is access to the domestic market. In India, it is affected by the EMR infrastructure and the country’s competitive business model capabilities. In Russia, legislation and cultural context have the strongest influence.
- Telemedicine companies are shaped by the healthcare infrastructure of the country, such as the status of electronic medical records, payment structures, and transportation infrastructure.
- The legal framework of the country is the strongest driver of telemedicine adoption and growth.
Despite the emergence and growth of many telemedicine companies, and the first cycle of consolidation of U.S. companies, the fundamental aspect of the telemedicine macro theme means that we have barely seen anything yet.
In the United States, legislation is just beginning to expand Medicare coverage to include telemedicine.
Even doctors have been migrating to telemedicine. Here are two accounts of doctors choosing to go exclusively to telemedicine (here and here). They recite reduced overhead costs and flexibility in their daily schedules. (7, 8)
Telemedicine really is a domestic endeavor, because each country has its own regulatory framework and culture of health practice. The US is among the most developed in commercial telemedicine applications. This is attributable to the country’s entrepreneurial culture. Smaller countries, such as Estonia (population 1.3 million), also have an advantage in advancing telemedicine.
Canada’s population is just at the threshold where size gives it an advantage. It’s internet adoption ranks among the top countries. These are positives.
On the negative side, the Canadian Constitution gives provinces jurisdiction over healthcare. Telemedicine’s strength is its ability to transcend borders. The Canadian Constitution was written long before the internet and telemedicine was envisioned to be possible. The inappropriateness of a framework created from a prior era will not change in our lifetime without strong political vision.
For now, the adoption of telemedicine in Canada will be driven primarily by providing rural access. There are other possibilities, which is where entrepreneurship comes in:
Telemedicine is foundational to other applications
This field will explode as it hybridizes with other applications and themes. This is why telemedicine is foundational to the health tech space.
Here is just one example. In the US, a class of new direct-to-consumer drug companies have emerged:
- Hims: selling drug products to men for erectile dysfunction, hair loss, acne
- Hers: selling products to women for acne, birth control
- Roman: selling drug products to men for erectile dysfunction, hair loss, herpes, cold sores
- Keeps: selling drug products to men for hair loss
These companies target millennials on social media with engaging messages, use an online platform to sell, and provide chronic care medications on a subscription model.
These are very different businesses from the strict definition of telemedicine.
However, since they are selling prescription drugs, telemedicine is foundational to their full stack platform. They all use telemedicine platforms to connect customers remotely to a licensed doctor to diagnose and prescribe the medicine. The product is then shipped to the customer by mail.
This can and will get out of hand as tech companies push boundaries, as we have seen in the past, in other industries. Kick is the newest entrant that promotes a set of medicines for anxiety. Hims and Hers are following along by adding these same medicines to their portfolio of online products.
This is not without controversy, because the medicines they are promoting for anxiety are used off-label (i.e. they are not approved for this medical condition). These companies claim that this is legal, because they are not promoting the medicines. Rather, they are a technology platform that connects customers to doctors, and it is the doctors who can legally prescribe medicines off-label.
This is a common argument of tech companies: claiming they are a connection platform rather than a true operator within a regulated industry, hence they do not need to abide by the industry’s conditions. Real pharmaceutical companies are bound by laws concerning promotion. To remain legally compliant, pharmaceutical companies have doctors, pharmacists, lawyers and other representatives review every detail in the language and methods of promotion.
This is how disruptions can occur at frontiers. We will see telemedicine confronting challenges and raising controversies along the way.
The way forward for entrepreneurs and investors
If telemedicine will take a long evolutionary path, where does one enter?
Maha Ibrahim, general partner at Canaan, an early-stage venture capital firm, notes this important piece of wisdom:
Forty percent, on average, of our companies go to zero. And by and large, the reason that our companies fail is that we got the timing wrong. (9)
Here is a podcast of the full interview on Recode:
It is very possible to pick some appealing new telemedicine startup and business model, but be off by ten years or more.
Knowing the current landscape and the companies are essential.
From this starting point, Andrew Chen, general partner at Andreessen Horowitz, a Silicon Valley venture capital firm, has advice that is directly pertinent. His full explanation is online (10), which I paraphrase here:
What do you look for in an investment?
Being in venture capital is about being in the “exceptions” business.
There were hundreds of mobile photo apps prior to Instagram and Snapchat, and they would have been money-losing investments. Same for social networks before Facebook, or there were more than a dozen investor-backed search engines before Google.
My job is to find the exception to the rule, and pick an individual company that will stand out, and I don’t have to be bullish about an entire category of companies.
First, taking advantage of a new technology helps answer the “Why now?” question and explains why it’s a fresh opportunity that should be tried. If your new startup could have been built 15 years ago, perhaps the idea’s already been tried and just isn’t that good.
Second, technology changes constantly but people stay the same. And their motivations also stay constant over time. So when a new startup purports to create new consumer behavior, I’m sometimes skeptical. But if a product allows people to tap into a pre-existing motivation but in a new, fresh way, then I’m interested. What classic human motivation does it tap into?
I want to reiterate that it’s all about finding the exceptions. You can spend as much time as you want analyzing a space, but it’s just about picking the individual startup you like most.
The next breakthrough telemedicine company which will propel this industry into the next generation will be something very different from what exists already, that taps into classic human motivation. In the same way, it is how scenario analysis identified the fundamental elements of the human imagination and psyche, the impulses of human nature, and the practice of medicine that drives telemedicine.
1) Telemedicine: A Guide to Assessing Telecommunications in Health Care. Institute of Medicine (US) Committee on Evaluating Clinical Applications of Telemedicine; Field MJ, (ed.), National Academies Press (US); 1996.
2) Telemedicine Predicted in 1925, Smithsonian.com, March 14, 2012
3) Inside Oil Giant Shell’s Race to Remake Itself For a Low-Price World, Fortune Magazine, January 24, 2018
4) Art Kleiner, The Man Who Saw the Future, Strategy & Business, February 12, 2003, Spring 2003, Issue 30.
5) These can be found with a Pubmed search. Here are some examples:
- Institute for Alternative Futures, for the Picker Institute, Patient-Centered Care 2015: Scenarios, Vision, Goals & Next Steps. 2004.
- Meristö, T. et al., Alternative Futures of Proactive Tools for a Citizen’s Own Wellbeing, IOS Press, 2009, 144.
- Enzmann, DR., et al., Scenario Planning, J Am College Radiology, 8(3), 2011, 175.
- Accreditation Council for Graduate Medical Education, Medicine in 2035: Selected Insights from ACGME’s Scenario Planning, J Grad Med Educ. 2015 Mar;7(1):139-42.
- Subramanian S et al., The Coming $1.5 Billion Shift in Healthcare, Strategy + Business, March 2016.
- Will patients and caregivers embrace technology-enabled health care? Deloitte University Press, 2016.
6) Leufkens H. et al., Scenario analysis of the future of medicines, BMJ 1994;309:1 137-40.
7) Why one doctor started doing telemedicine full time, Advisory Board, January 27, 2015
8) Despite Licensing Hassles, More Doctors Moving to Telemedicine, Insurance Journal, March 27, 2019
9) Investor Maha Ibrahim talks venture capital, Recode Decode, September 25, 2017.
10) What do you look for in an investment? Andrew Chen, Quora, March 10, 2019.