The unbundling of healthcare.
Sometime around 1994, while pitching Netscape to investors, Jim Barksdale famously stated “There are only two ways I know of to make money: bundling and unbundling”.
Outside of true technological invention, this thesis has proven itself over the last 20 years and it’s something his co-founder at Netscape, Marc Andressen, has frequently referenced since founding Andreessen Horowitz in 2009.
Bundling.
The healthcare industry has seen two periods of significant consolidation in the last 30 years. In the 1990s, hospitals & physician practices went through a period of “merger mania” to form larger hospital groups and in the 2010s, hospital groups acquired a significant portion of the nation’s private practices.
This flurry of consolidation is typically blamed on the additional costs of adhering to the ACA, but the purchase of private practices has also been a good investment for hospital groups because it’s helped cushion their margins. By vertically integrating, hospital groups have created revenue opportunities by expanding the services offered. For example, mergers have increased the likelihood of surgeries and other procedures. While this drives more revenue, there’s not much evidence that it’s improved patient outcomes.
There are several issues that are putting pressure on this consolidation trend. First is the increasing cost of healthcare. Second is the entrance of new telehealth competitors who promise to provide cheaper and easier care.
Telehealth is unbundling the role of a hospital or generalist physician and it all started with cheap viagra, legally sold online.
It started in 2017.*
In 2017, two landmark telehealth companies were founded, Hims and Roman (now operating under a parent organization called “Ro”). These companies focused on helping men get access to erectile dysfunction and hair loss treatment without the embarrassment or hassle of going to their primary care physician. With such a narrow and taboo niche, the medical community rolled their eyes at these new entrants and failed to recognize the bellwether of change these companies would be for their industry.
By January 2019 Hims became the second-fastest startup to join the unicorn club, achieving a $1B valuation just 15 months after being founded.
*Since publishing this story, I’ve found a birth control company leveraging this business model that was founded in 2015. 🤦 Hims was the fastest to $1B, but not the first to use the model.
The innovation wasn’t telehealth, it was the business model.
Hims and Ro employed a new business model. Rather than providing telehealth for general care like Teladoc, they stacked all stages of the consumer’s care in one convenient place beginning with a consumer brand through pharmaceutical care.
These companies focused on chronic conditions where the lifetime value of the customer was worth far more than a doctor’s visit and because of this, the call with a doctor was free.
This “fully verticalized”, telehealth business model is repeatable for many chronic care conditions and flips the current payment model on its head.
Sidebar — I’ve been calling this business model a “Ghost Hospital”. This is a play on the “Ghost Kitchen” business model where a restaurant runs delivery without a storefront. What do you think?
Hims and Ro treated healthcare like a Direct to Consumer (DTC) brand might treat customer acquisition and took over the top of the marketing funnel, beating hospitals to their patients. They splashed their ads over every sports network, aggressively targeted ads online, and built a brand that people knew they could trust. By capturing the top of the funnel with an online product and removing access barriers like cost, embarrassment, and convenience, they now had customers locked in for the life of their treatment.
Hims and Ro created the business model for scaling a Ghost Hospital nationwide and proved that it could work effectively at scale. They demonstrated that a digital brand could identify a niche condition that could be treated over telehealth, capture the top of the funnel with aggressive marketing, and scaling that service nationwide in just a couple of years. While previously ignored, Hims’ 71% gross margins demand the attention of the healthcare industry.
What about the generalists?
While Hims and Ro have defined the “verticalized care” model, Teladoc has defined the “general care” model. Teladoc was founded in 2002 and is the largest player in the remote patient healthcare space with a market cap of about $18B.
Teladoc’s model was not built on recurring revenues of a chronic condition or verticalized care, it was designed to replace the medical clinic at your local drug store.
Teladoc lulled the medical community into a false sense of security by demonstrating that they would not steal high value, chronic care patients. They primarily focused on simple conditions such as the flu and chose to work with existing pharmacies instead of verticalizing their care.
Teladoc and other generalists (such as GoodRx’s new telehealth clinic) will continue to grow as consumers discover the ease of visiting a clinic online instead of waiting in line at their local pharmacy for the minute clinic. They have a place, but they won’t command the same valuation multiples that a Ghost Hospital will. The Ghost Hospital will always have an edge thanks to its recurring revenue model.
In contrast, Ghost Hospitals are stealing revenue from doctors and hospitals by capturing a patient before they ever step foot in a physical location. Unlike Teledoc, Hims and Ro aren’t creating referrals for your existing general practitioner or pharmacist.
I’ve dug for statistics demonstrating how new entrants like Hims and Ro are affecting existing doctors' offices but haven’t been able to find much outside of their rapidly growing revenues. Hims’ 2020 projected revenues of $218M are still just a drop in the bucket compared to the total industry.
The unbundling.
With a proven business model, the stage is set for the growth of Ghost Hospitals for dozens of chronic conditions. This existing momentum will be compounded by the increasing technological capability of telehealth, expanding the reach of the Ghost Hospital business model to hundreds of disease states.
Many chronic conditions will be unbundled, impacting markets worth hundreds of billions of dollars of spending within healthcare. As consumer adoption grows, the market will expand to care pathways previously deemed too complex for a fully verticalized telehealth solution.
We’re already seeing it happen with many new entrants over the last couple of years such as:
