Over the past few years, healthcare has been ushered into a new age of consumerism. Ritualistic trips to the doctor’s office are being traded in for convenient virtual consults. Long wait times to see a therapist are starting to resolve with mobile apps that deliver on-demand cognitive behavioral therapy. Even seemingly brandless prescriptions have been replaced with creatively marketed medications and OTC products.
This backdrop has set the stage for leading direct-to-consumer (D2C) healthcare companies like Ro, Hims & Hers, and The Pill Club to launch impressive debuts by acquiring and monetizing customers through a D2C business model. Despite billions in venture funding and impressive revenue growth, many have not yet turned a profit, leading investors to ask themselves – is D2C a sustainable business model in healthcare?
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A more direct way to acquire customers
Digital health companies have traditionally acquired consumers through either business-to-business (B2B) channels or direct-to-consumer (D2C) marketing. Historically, digital health companies have scaled an engaged consumer base by working within the existing healthcare system infrastructure and adopted a B2B go-to-market strategy. In this model, digital health companies acquire consumers through key stakeholder channels such as health systems, payers, pharma, or employers. Through these stakeholder partnerships, companies gain access to consumers by directly marketing to the organization’s patients, members, or employees. The model has played out quite well – multiple mature digital health players such as Livongo (now Teladoc), Babylon Health, and Hinge Health, all scaled to unicorn status with a B2B strategy.
However, the B2B acquisition model is not without shortcomings. Companies are limited to acquiring only consumers that enter the health system, participate in the trial, or surface in payer claims data. A prime example of this challenge is exhibited with mental health. While today, nearly one in five adults in the US live with a mental illness, the broad challenges consumers face cannot be categorized by an isolated ICD-10 code due to the heterogeneity of symptoms and high prevalence of co-morbidities. Furthermore, the stigma of mental health illnesses deters many consumers from entering the traditional healthcare system and accessing care all together. As a result, claims data can be both inaccurate and also, a lagging indicator that limits companies to delivering reactive medical care to a fraction of the total addressable population.
In contrast, a D2C acquisition strategy can be a highly powerful tool to acquire new customers and deliver proactive care. There are several digital health companies that have strategically leveraged D2C strategies to meet consumers where they are and acquire users before entering into the healthcare system. Examples include:
- NOCD is breaking barriers by acquiring customers earlier in the consumer journey when individuals with OCD are first experiencing intrusive thoughts and are frantically searching for a solution. Many of these consumers are too ashamed to seek out professional help so they turn to Google (where they now can find NOCD).
- Higi is another example, offering convenient and affordable medical care through kiosks that are located where consumers already are in the community – retail stores, grocery stores, pharmacies, and gyms. Higi can identify consumers with chronic conditions before formally entering into the system and intervene with a care plan or virtual consultation in the right place and at the right time.
- Finally, companies like Iora Health and Oak Street Health are pursuing tech-enabled primary care models that are attracting consumers through integrated behavioral health services, yoga classes, and health coaching. In addition, Iora has developed additional creativity in how they service populations. The company serves the uninsured immigrant population in Jackson Heights, New York through a direct-pay model, created clinics near worksites of self-insured clients in Las Vegas, and contracts with Medicare Advantage plans to provide comprehensive care for Medicare beneficiaries.
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By customizing their acquisition strategies, care delivery approaches, and payment models to fit the varying needs of consumers, these companies have successfully captured a broader consumer base.
Monetizing customers from within the system
D2C models have proven to be strong for acquisition, but scalable monetization strategies are still the exception and not the norm. Some large companies have been built on consumer out-of-pocket spend in segments such as wellness, fertility, and concierge care, presenting opportunity for digital health companies to employ a D2C monetization strategy in certain categories. However, in today’s healthcare environment, risk-bearing organizations such as health plans and self-insured employers still control the purse strings. Consumer out-of-pocket spend pales in comparison, representing only 11% of total healthcare expenditures vs. the 77% covered by public and private payers. Given the significant imbalance, consumers cannot be expected to shoulder the cost of healthcare alone. For example, the expense of maternal care in the U.S. is exorbitant with the cost of an average birth ranging from $30K-$50K. Coupled with the fact that 4 in 10 babies born in the U.S. are covered by Medicaid, a D2C self-pay model in maternity is unsustainable for the masses.
Furthermore, specialty chronic conditions like psoriasis, which affect more than 8M people in the US, are treated with extremely expensive biologic drugs that can cost a patient ~$80K out-of-pocket annually and typically require long-term use. Even though biologics are commonly prescribed, consumers may have other more affordable options – for example, at-home UVB light therapy is a convenient and effective clinical treatment that is rarely used. D2C business models are not equipped to tackle these more serious specialty chronic diseases as it requires subsidizing high costs and navigating the consumer to the appropriate treatment option within the healthcare system. To make healthcare affordable, healthcare stakeholders must continue to play a role in a consumer’s care journey. Unlike D2C companies, B2B business models can influence care pathways and shift costs from consumers to risk-bearing organizations, enabling digital health companies to not only meet the healthcare needs of consumers, but also to treat more complex and costly conditions while driving greater scalability.
What is the ideal business model?
For decades, consumers have been stuck navigating a complex and heavily siloed healthcare system of providers, payers, and pharma companies. The ideal business model is one that empowers Informed Connected Healthcare Consumers – placing the consumer in the center of the healthcare ecosystem by equipping individuals with technology, information, and data, – ultimately improving outcomes and decreasing costs. A strategic approach of leveraging D2C and B2B strategies can optimize both customer acquisition and monetization.
A prime example of the staged business model was leveraged by Sleepio, a digital health company that helps consumers improve their sleep. Sleepio acquires consumers at the first google search rather than waiting until consumers entered the healthcare system to see a sleep specialist. Sleepio has demonstrated robust clinical outcomes and impressive cost savings that enabled enterprise partnerships with employers in 2015 and channel partners like CVS Health in 2019.
Should the ideal business model tie its revenue source to consumers or payers? Ultimately, there is no perfect answer – a company’s acquisition and monetization strategies need to be tailored for the customer and end-user. While D2C can enable creativity in customer acquisition and B2B strategies allow for rapid monetization, companies must thoughtfully target consumers, track clinical outcomes, and demonstrate cost savings. In this new age of healthcare consumerization, companies will need to pursue a business model that both improves consumer outcomes and decreases costs by understanding who the consumers are, where they are, and how they can be found at the start (vs. the end) of their health journey.
Editor’s Note: Higi and NOCD are portfolio companies of 7WireVentures where the author is a partner.
Picture: Getty Images, Mykyta Dolmatov
Alyssa Jaffee is a Partner at 7wireVentures, where she focuses on investments in digital healthcare and technology-enabled services that empower consumers to be better stewards of their health in today’s changing healthcare ecosystem. Alyssa sits on the board of Caraway and Ayogo Health and is a board observer with Zerigo Health, NOCD, Jasper Health, and Brightline, and MedArrive.
Alyssa's prior experience in venture capital includes her time as an investor at Pritzker Group Venture Capital where she led investments in Bright.md and Tovala as well as worked closely with Apervita, Mingle Health, and AiCure. Additionally, she worked at Hyde Park Angels (HPA), one of the Midwest's largest angel organizations and Healthbox, an early-stage healthcare innovation firm, supporting their accelerator program called the Studio. Alyssa is also a Co-Founder of TransparentCareer, a 2016 NVC winning company focused on helping people make more data-driven career decisions.
Prior to business school, Alyssa worked as the Senior Director of Performance Technologies for the Advisory Board Company. There, Alyssa was charged with expanding new business through the sales of technology platforms. With an extensive travel regimen, Alyssa met with hundreds of hospital executive teams to understand their strategic needs and recommend various solutions. She has copious amounts of experience in launching new products and thinking about go-to-market strategies.
Alyssa holds a bachelor’s degree in Marketing and Spanish from the University of Wisconsin-Madison and an M.B.A. from the University of Chicago – Booth School of Business. Her work and accomplishments have been featured in Fortune, Stat News, MedCity News, Crain’s, and more.
