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Can direct-to-consumer models work in digital health?

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It’s a familiar story within digital health. A new startup enters the market with a direct-to-consumer strategy, then finds themselves pivoting to selling to providers, payers or employers as they’re confronted with reality of who holds the purse strings in the U.S. healthcare system.

But the question on whether the business model can find traction in certain segments of the market still remains open.That was one of the major topics discussed by a panel of digital health investors at the Digital Health Showcase in San Francisco.

Their general verdict? No, but with a few caveats.

“I think I’m still skeptical of the direct-to-consumer model because I just don’t think there’s enough cash lying around for consumers to shell and spend on things that cannot be reimbursed,” Array Ventures Managing Partner Shruti Gandhi.

Manatt Ventures lead Lisa Suennen said the fact that consumers have largely shielded from paying the costs of healthcare by their insurance has created expectations that healthcare products and services will covered by their health plan.

The few exceptions to the rule that she mentioned were companies working in the fitness space or in areas like fertility treatments which have traditionally never been covered by insurance.

Zack Lynch, an investor with JAZZ Venture Partners said his firm believes in the direct to consumer approach if the company can prove out their case in improving a person’s overall wellness, with meditation apps as one example.

One potential driver of the direct to consumer model that has been suggested is the rise in high-deductible plans, but panelists still said they were taking a wait-and-see approach to the trend.

“You could point to a thousand circumstances where you can say ‘your life could be so much easier and it’s not that high of a cost so why would you do it?’ But we’ve just watched a lot of companies die on that vine,” Liz Rockett from KP Ventures. “If you believe your insurance should pay for it, it’s a hard mental hurdle for folks to get over, myself included.”

One example raised by an audience member as a potential counterfactual was 23andMe which has sold thousands of genetic testing kits directly purchased by consumers. Suennen replied that while the product is marketed to consumers, the larger business model is still based on partnering with the pharma industry for drug development.

Another additional insight is although a number of companies have grown their business by selling into the employer space, the market’s attractiveness for investors has waned somewhat.

“We have become more skeptical of businesses targeting employers and the reason is employers are spending a lot of mental bandwidth and money looking at how to move to platforms so they can get out of this world and that has fundamentally changed the dynamics for everybody,” Rockett said.

“I think that talking to employers about their biggest cost problems is still a good avenue to understand where value is still resonant in our market, but it cannot be the long term plan.”

Picture: Getty Images, Eonren

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