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Business models shift as health goes digital

on January 25, 2012

Early-stage digital health entrepreneurs named “establishing a sustainable revenue model” their second-biggest concern in a 2011 Rock Health survey, just behind “funding.”

As digital approaches to healthcare grow in popularity and ability to attract venture funding, the way entrepreneurs develop a sustainable healthcare business plan is changing, too. Early-stage digital health entrepreneurs are now building business-to-consumer companies, rather than the business-to-business medical device and pharmaceutical companies that formerly ruled the healthcare space.

Like the 60 percent of entrepreneurs surveyed who said their venture will make money by charging consumers directly, genetic testing company 23andMe chose to charge consumers directly for its mail-in DNA testing services from the get-go. During a panel discussion at last week’s Health Innovation Summit, founder Linda Avey said this business model worked but was especially challenging at first. “How can we explain what this (test) means to people before they have their data, so that they understand the value of it?” she said.

Ron Gutman proposed that the solution is to focus first on creating something that customers will love before figuring out how to make money from it. “First add value for users, build great products, and build distribution,” he suggested. “Then figure out how you can monetize.”

Gutman is the founder and CEO of HealthTap, a network of more than 8,000 physicians who answer consumer health questions online. He said that before establishing a revenue model, the company focused on an innovative way to solve the problem, which was that consumers didn’t trust online health information and doctors were worried about liability issues with offering medical advice online.

Jennifer Wong, the founder and CEO of Alt 12 Apps, agreed. “The word-of-mouth factor has been number one for us. We polled our users, and it’s been mostly referral,” she said. “Put money into your product (rather than marketing and advertising) to get that user to open that app a second and third time.”

Alt 12 Apps, which develops lifestyle apps for women, bootstrapped for two years on a strictly consumer-paid business model before morphing into a premium model that allowed it to offer advertising and subscription services. Startup costs for digital health companies are oftentimes quite low, which is ideal for bootstrapping, Wong said.

Despite the always-referenced skyrocketing prices of healthcare, out-of-pocket health costs have gone down significantly over the past 50 years, said panel moderator Dave Chase, founder and CEO of Avado. As a result, consumers seem to assume that healthcare should be paid for by someone else. But there is no reimbursement protocol covering consumer-oriented technology that digital health entrepreneurs are developing. This could be a barrier to the digital health market.

However, the healthcare system is shifting to value-based payment rather than volume-based payment, said United Healthcare Chief Medical Officer Sam Ho during a panel discussion on reimbursement. Payers are rewarding providers and consumers with richer incentives and lower co-pays if they do the right thing.

Now that providers are being held more accountable, they will be looking for ways to better engage patients, which will in turn create opportunities for digital health companies.

“We didn’t know when we launched if people were going to pay,” Avey said. You just have to create the value and try it.”

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