May 13, 2021

Prospect Sconsultation

The health experts

Digital-Health Startups Are Booming. Their Customers Are Overwhelmed.

5 min read

Digital-health startups have boomed during the pandemic, raising record amounts of capital for a range of services. The message from some of their customers: Enough, already.

Corporate-benefits executives, the main customers for these startups, say they are excited about technology that can lower costs and improve employees’ health. But the explosion of activity has spawned a glut of startups pitching redundant or overpriced services, they say.

Benefits executives are pushing digital health companies to add services, merge with complementary companies and cut deals on pricing, pressure that the companies are responding to in order to stand out in the crowded sector.

Numerous health apps promise to promote well-being, manage diabetes, improve sleep, monitor heart health, encourage weight loss and track whether patients are sticking to physical-therapy regimens, among others. Mental health, a growing area due in part to pandemic burnout, has spawned more than 100 startups, according to research from 7Wire Ventures, a venture firm. There are also apps to help employees navigate their company’s other digital-health apps.

“We are inundated,” says

Meredith Touchstone,

director of benefits at

CarMax Inc.

“We already have these very big portfolios of vendors. And with all this new stuff coming into the market, there’s no way to assess, literally thousands” of digital-health services now available.

A record $7 billion of venture capital poured into healthcare services in the first quarter, according to research firm PitchBook, the highest quarterly total in at least a decade.

Total venture-capital investment hit its own record in the first quarter, continuing a multiyear boom driven by surging growth and investor interest in technology companies as well as a trend of startups waiting longer to raise capital in public markets.

Even by that yardstick, investment in healthcare-service startups is hot, rising to 10% of total venture investment, according to PitchBook, also a record and double the median of the previous 10 years.

In the age of smartphones and low-cost sensors, digital-health startups promise that they can deliver cheaper, more effective and more convenient healthcare. Patients can reach clinicians or health coaches quickly via text or video and during off hours. Doctors can monitor patients remotely.

Most large employers in the U.S. self-insure, meaning they work with insurance companies to administer their health plans and provide a network of doctors, but ultimately the employers pay the cost of care themselves. Digital-health apps claim they can contain employers’ healthcare costs by specializing in specific areas and using digital tools to track results.

Glen Tullman led diabetes app startup Livongo until it was acquired by Teladoc, and recently launched his own care-navigation company.



Photo:

Kimberly White/Getty Images

Demand for digital-health services accelerated during the pandemic as patients sought remote care. State regulators waived rules preventing doctors from practicing medicine across state lines. Medicare expanded benefits for telehealth visits. And more money came into the sector when

Teladoc Health Inc.

announced a merger with diabetes-monitoring startup Livongo in October, valuing the latter at $13.9 billion when the deal closed.

“Everybody’s excited because there’s so much damn money floating around. After Livongo got sold, everyone said, ‘Where’s my piece?’ ” says

Stuart Piltch,

chief executive of Cambridge Advisory Group, a healthcare consulting and data firm. “I get that Wall Street loves these things, but do they work? It’s not clear yet.”

Measuring results for digital-health services is tricky, say benefits executives, in part because many services struggle to prove they can lower costs or improve care.

Erik Sossa,

who recently retired as head of benefits at

PepsiCo Inc.,

says digital-health services work best when connected to a company’s existing health plan, so doctors can see patients’ health histories. That was one reason Pepsi stopped using Teladoc for telemedicine services, Mr. Sossa says.

“Telemedicine is a fantastic medium, but if it’s just late-night urgent care, it’s kind of a commodity,” Mr. Sossa says. Pepsi now uses LiveHealth Online, a telemedicine service connected to the company’s health plan.

A Teladoc spokesman said its work with Pepsi has evolved over time without offering specifics. Pepsi didn’t respond to a request for comment.

Employers are asking digital-health providers to integrate with their insurers and expand the conditions their products address. Employers are also pushing the services to stop charging a monthly fee for all eligible employees and instead charge when employees use the service, since many of these apps go unused, benefits executives say.

Startup Omada Health Inc. began with a digital service to manage prediabetes, sending patients an internet-connected scale and giving them access to health coaches via their smartphone. At customers’ request, it has since added services to treat hypertension, full-blown diabetes, mental health and digital physical therapy, says

Sean Duffy,

Omada’s chief executive.

“Many employers prefer working with one party across critical disease areas,” he says.

Competition is intensifying as digital-health companies broaden their offerings, especially in diabetes care. Livongo also started as a company helping people manage diabetes, later adding hypertension, mental health and prediabetes care, putting Omada and Livongo in frequent competition.

The need for companies to distinguish themselves in a crowded market is driving deals, analysts say.

Teladoc has bought multiple companies, and a spokesman said the company has expanded its offerings as clients are looking for “a suite of connected services.” Telemedicine rivals like MDLive, Doctor on Demand and PlushCare Inc. have themselves merged or been acquired.

Care navigation—apps that coordinate other health apps—is another area of growth and deals. Grand Rounds, which started out as a provider of second medical opinions, has jumped into the area and added telemedicine, merging with Doctor on Demand. A competitor, care-navigation firm

Accolade Inc.,

last month bought 2nd.md Inc., a service for second medical opinions. Accolade also said last month it would buy PlushCare.

Meanwhile, the former chairman of Livongo,

Glen Tullman,

has already launched his own care-navigation company, Transcarent Inc., which hopes to provide a collection of its own digital-health services.

Mr. Sossa, now a consultant after leaving Pepsi, expects more consolidation. “If you’re a one-trick pony, it’s easy to replace you,” he says.

Write to Rolfe Winkler at [email protected]

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