Business Models in Healthcare
As a Digital Health Connector, I regularly speak with digital health startups and support them with their business model to increase their success on the market. There is not that much practical information about business models in healthcare specifically out there so here is a blog post focusing on a small but critical part of the business model: customer segments and revenue streams specific to digital health solutions. You will also find some examples of new popular business models that, I hope, will inspire you.
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‘What’s your business model?’
We often mix that question with ‘How are you going to make money’?
Business models are more than just the financial part. As Joan Magretta says, business models are stories that explain how enterprises work.
A business model describes the resources, processes, and cost assumptions that an organization makes that will lead to the delivery of a unique value proposition to a customer. (Strategyzer)
Although I am focusing here on market access, it’s critical to have defined first the unmet need, the customer segments affected by it, directly and indirectly and to have a clear value proposition for each segment based on the research carried out. Defining that value proposition for each of your potential customer segments will play a huge part in the success of your business. So many solutions come to the market and don’t find buyers because they don’t bring value to the users.
Let’s now focus on market access. There are several ways to reach the market based on your product/solution, who it serves and the country you are targeting. You can absolutely have different market access strategies in parallel:
B2B: Business to Business
This is when you sell directly to big companies like pharma, hospitals or insurance companies to help their business work better. (e.g. decision support, automation software, etc). Make sure you insist on the money they can save or the extra revenue they can generate using your solution. Think also in terms of work/life balance (for hospitals especially) or competitive advantage it could provide them. For hospitals, it’s important to think about integration: How does it fit into the system? (Is it integrated with the hospital’s EMR?) to make sure the experience is as smooth as possible for the users and that it doesn’t create any additional workload for the healthcare professionals.
B2B2C: Business to Business to Consumers
This is when you sell your solution to a big company to either help them collaborate more efficiently with their customers/patients (e.g. telemedicine) or to support their customers, to be more proactive and reduce absenteeism for instance (e.g. mental health solution that insurance companies or self-insured employers can offer to their customers/employees). Make sure you insist on the value for the end users when talking to the company who would be paying.
Those 2 options are the most popular as you can reach many customers at once and/or sign bigger contracts.
B2C: Business to Consumers
This is when you sell directly to end users/consumers. It’s a slower process that requires a lot of marketing. Penetration also depends on culture and on the country (in the US, consumers are more used to buying healthcare services out of pocket than they do in Europe where the healthcare systems cover most of the costs). Make sure you define well the value proposition and why customers should purchase your solution.
B2C2B: Business to Consumers to Business
This is when you start selling directly to consumers until you reach a critical mass, at which point you can obtain reimbursement for your solution from statutory insurances. You then continue selling to consumers directly but they now can be reimbursed. This is what Maven or Kaia Health did. That option also offers you more leverage to sell to self-insured employers as you can show them that many people are already using your solution. It serves as validation for them. (Check that podcast episode from a16z to dive deeper on B2C2B)
C2B: Consumer to Business
Consumers are now more and more involved in their care and in the decision process. This is creating more on-demand services and new realities in which consumers/patients could build their own systems of care. It also enables consumers to sell their data to businesses. It’s a rising model, not very common yet but we see it popping up with companies like Nebula Genomics. Consumers receive tokens each time a pharma company or a research center access their anonymized data on the Nebula platform. With the emergence of Web3 and NFTs, we will see more of those models.
Once you identify the market strategy, you need to define the revenue streams that will make your business sustainable. Here are some of the most common revenue streams for digital health products:
One off sales of product or services. (e.g: machines or medical devices for hospitals)
The client pays to use your software or solution for a determined period of time. It offers recurrent revenue without much customer support.
Subscription (Software as a Service, Software as a Medical Device)
Similar to licensing but it includes maintenance and support from your side, which means that you should have a dedicated support team.
Pay per use
The client only pays when he uses your solution. This is often used for radiology softwares in hospitals for instance.
This is an easier way to get recurring revenues and it’s easier to integrate although it could be annoying for the users
Customers have access to a basic free version. If they want to unlock premium features, they have to pay. It's a good way to acquire customers quite easily but there is a risk that those customers never convert to premium. That’s why you need to have an attractive premium version and to price it correctly.
Popular option to increase incomes. Users pay to access extra services on a one time basis. It can be additional features, extra services (e.g.: telemedicine sessions, wellness accessories boutique).
Users’ data monetization
Make money out of the data collected through your solution. Data can come from social media, devices, surveys, etc. This is a bit of a controversial model as some companies are making millions/billions using end-users data while those users who shared their data are not getting anything. (Hence the evolution towards the C2B model).
Here are the most popular revenues stream per customers:
Hospitals: Sales, licencing, subscriptions, pay per use, freemium
Pharma companies: Licencing, users’ data monetization, co-development
Insurance companies: Subscriptions, users’ data monetization, fee-for-service, value-based reimbursement
Direct to customers: Sales, subscription, advertising, freemium, in-app purchases
Let’s now look at examples of emerging business models in the healthcare sector:
It’s about making sure the patient has the right care at the right time. We are moving away from fee-for-service where volumes matter to a more personalized approach where patient outcomes matter.
Omada is a great example. Their main clients are self-insured employers. Their model is based on a small fixed price per employee + a performance fee based on how much weight the employees lose. If the employees don’t reach their weight loss goal, the employer only pays the small fixed fee, nothing else. The model has proven to be very effective and successful for Omada.
It’s about bringing access to healthcare for patients/consumers where they are, on demand, online and in real-time. Patients/consumers are more empowered and are asking for more personalized access to healthcare. Those solutions help to reduce costs, offer a more universal and accessible healthcare as well as a more continuous care experience. Good examples are solutions like Trancarent, a new consumer-directed health and care platform acting as concierge or the digital health insurances like Alan, that are using digital tools to offer faster services, online-based, more adapted to the new generations.
It’s about creating a moral partnership between the patients/customers and the provider. It helps the patients/customers take a more participatory role in their health. A good example is the insurance company Vitality. They give their customers an Apple watch and set goals together to improve their health. If the customers reach those goals, they don't have to pay anything towards the Apple watch, if they fail to reach their goals, there is a monthly instalment to pay. Additionally, customers earn points each time they exercise, eat healthy etc and receive discounts on vegetables and fruits.
Digital Therapeutics (DTx)
DTx are apps or software that can replace or complement a drug or traditional treatment and that are scientifically validated. They can be prescribed by healthcare professionals and reimbursed by national insurance companies. The best known example is Germany and its now famous DiGa. As of today, they have validated 33 apps over nearly 2 years. There is a price assigned to each app that is paid to the startup each time the app is prescribed. That price is reviewed after one year on the market. Kalmeda for example saw the price of their solution increased by 70% after year 1 while others saw their prices decreased.
It’s a great model for startups as it gives them access to a big market at once and a good financial deal.
Other countries have been following Germany’s path establishing or preparing a regulatory framework for digital health solutions: Belgium, Luxembourg, France, Scotland, etc
We are living in an exciting time where adoption of digital health solutions are increasing both from healthcare professionals and patients’ side, regulators and payers are more engaged, enabling a better setting for new business models to emerge centered each time more around the patient.
I hope this blog post inspired you. If you need help figuring our your own business model, don't hesitate to reach out.