Virtual-first care, wearables and biosensors, and home health care are among segments ripe for innovation. Yet observers caution that increasingly scarce trained medical workers could limit some health care delivery.
By Nate Birt
The rapid expansion of the direct-to-consumer (DTC) health care marketplace signals major opportunities for investors in the next two to three years. These seismic changes are expected to equip average Americans—including the most vulnerable and historically underserved—with tools to better manage their own well-being, experts say. Yet successful investors will do so only by navigating an uncertain future marked by declines in the health care workforce, an aging population and medical reimbursement disparities.
“We’re very aware of the growing movement to identify patients that lack current access to the care they need,” says Ron Krauskopf, head of health care at Lakeland Bank. The regional platform stretches from New England to Florida with a core market in the New York-New Jersey tri-state area, helping health-care providers such as doctors, hospitals, health systems and senior living operators secure financing. “We’re viewing it as sort of a natural evolution, a real effort to invite technology into the health care space.”
Krauskopf points out health care has historically lagged other industries upended by disruptive technology such as Uber in transportation or Amazon in retail. That’s quickly changing, and COVID accelerated the timeline.
“It’s a natural evolution from the pandemic and telehealth not just being a fringe benefit offered by employers to employees and people who have coverage to being the go-to now for a lot of families,” he says.
Clues for sizing a multi-billion-dollar market
A near-term explosion in the DTC marketplace is anticipated in the next several years, experts say. Already, it’s valued at $700 billion.
“I think we’ll get more and more risk, and more and more specialization,” says Adam Cohen, a neurologist at Yale University who’s part of a team focused on digital health innovation. He also serves as chief scientist for the National Health Mission Area for the Johns Hopkins University Applied Physics Lab. “But there was a contraction in 2022 … it just mirrored the contraction in investor funding everywhere. That puts pressure on investors who might be shy now and want to really understand what they should invest in. You want to invest in companies that are differentiating themselves based on their ability to demonstrate impact.”
In Cohen’s view, the DTC marketplace is likely to expand beyond virtual-first care and basic wearables into a niche ecosystem with greater entrepreneur and investor appetite for treating high-risk medical conditions. Krauskopf sees additional applications in DTC for mental health, behavioral health and substance abuse care.
“I think people are realizing from lessons of the pandemic that this is a real bona fide way to reach people, stay in touch, have interactions to follow through, make it as accessible as possible,” Krauskopf explains. “In some ways yes, there are investment barriers, technology barriers. But we probably live in a time in which the costs of those are not as prohibitive as they once were.”
Workforce declines and reimbursement rethinks among variables clouding DTC’s future
From a financial vantage point, getting there will be a journey. Digital health funding in 2022 is on track to hit about $21 billion, nearly a third less funding than 2021’s $29.1 billion, note research fellow Ashwini Nagappan and Adriana Krasniansky in a July 10 analysis for Rock Health. The advisory firm focuses on accelerating digital technology adoption.
“But as the saying goes, there are two sides to every (market) story,” the authors note. “Though this year’s funding will fall far short of last year, 2022 digital health funding is nonetheless on track to outpace funding in 2020. This multi-year trend indicates continued funding growth, with funding in 2021 perhaps standing out as an anomaly.”
They anticipate more M&A among startup digital health care companies through the end of the year.
Sustained investment in DTC health care reflects ongoing consumer needs in the marketplace, adds consumer products consulting firm Clarkston Consulting in a 2022 trends report.
“Consumers continue to place increasing focus on their wellness, taking proactive control of both their short-term and long-term health,” the report notes. “This changing focus is not only on physical health, but also on mental health.”
Krauskopf sees those trends, too, and notes the potential for DTC to create greater access to health care for people in highly populated medical care “deserts” with little or no hospital access within an hour’s drive. At the same time, there are additional trends in the workforce, demographics and logistics that could expand or limit DTC marketplace potential. Specifically, he calls out five to watch:
- A shrinking pool of qualified medical professionals: By 2030, it’s estimated there will be 200,000 fewer physicians in the U.S. than there are today. That’s striking considering there are just about 1 million licensed physicians in operation today serving a nation of 333 million people, Krauskopf said. Meanwhile, 1 million registered nurses are expected to exit the workforce on that same timeline, representing a third of that workforce. DTC models can provide a lot of direct benefit to consumers, but the need for back-end infrastructure, technology and licensed care providers will remain. The limited pool of medical professionals could become a cap on DTC effectiveness in the absence of systemic changes to encourage more workers to enter health care.
- An aging U.S. population: In parallel to shrinking doctor and nurse numbers, the population of aging Americans will rise, Krauskopf points out. There will be more 65-year-olds than those under 18 in 2030. “How does your model fit with an aged population?” he asks. “Because of the Baby Boomer generation and the Great Resignation, there are a lot more constraints on the system and a lot more burnout. How do they answer that as a care provider and us as their financial institution to provide capital to make it all happen?”
- Outdated regulations: “There are some states where licensed transfers or practicing medicine in other states won’t be accepted, even if your resume and experience is all the same,” Krauskopf says. Updates to these rules could create greater flexibility to deliver DTC medical care broadly.
- Reimbursement model disparities: Today, DTC services are billed at lower rates than conventional in-person office visits. “Why should that be reimbursed less than the time it takes to go to the doctor?” Krauskopf says. “It seems like the priorities are a little bit backward there, maybe.” If the Centers for Medicare and Medicaid Services (CMS) were to create an environment that enables greater parity, it could mean higher reimbursement rates for DTC services and a more attractive marketplace for investors and service providers. Insurance companies, for example, build their models off of Medicare and Medicaid payments, and might be inclined to make adjustments to reflect the tangible benefits of emerging value-based care models. “So much of the reimbursement system of insurances and (Centers for Medicare and Medicaid Services -paying providers back for services rendered is doing more with less. That can only sustain itself for so long,” Krauskopf says. “Patients are living longer, they’re having co-morbidities, they do require more attention than the reimbursement model can handle.”
- ESG connectivity: Another factor that could accelerate growth of the DTC marketplace might be to draw stronger public linkages among DTC, inflationary-driven cost saving measures at home and reductions in greenhouse gases. Awareness campaigns about the co-benefits of DTC models—such as fewer doctor’s visits, which could cut gas bills and lower emissions—could encourage policymakers, investors and the general public to embrace them further.
These are but a few factors that illustrate the promise of DTC, on the one hand, and the uncertainty of bigger systemic challenges that will have a direct bearing on marketplace success.
Krauskopf does forecast some predictable trends, though. Investors who are students of health care industry history will recognize them.
“Health care always has the tendency to serve as the current-day gold mine for opportunistic investors, and so a lot of really good ideas can be oversaturated very, very quickly,” he says. It happened with ambulatory service centers and urgent care facilities, and it’s likely to recur in DTC.
When this happens, consolidation is often on the horizon. Although M&A and private equity acquisitions slowed during the pandemic as lockdowns restricted many procedures and surgeries, activity has picked up of late.
“By all accounts, it will be a bonanza in 2023 in the first and second quarter,” Krauskopf says. “In talking to a lot of folks that seems to be how the wind is blowing. If that’s the case, maybe things like direct to consumer and applying some of those models as add-ons to these other acquisitions and part of these platforms, maybe they’re taking a backseat to the old rat race of consolidations.”
Key DTC categories investors should monitor
There are plenty of new and emerging DTC categories that haven’t reached the point of saturation. Krauskopf predicts it will take time to ascertain which startup players will eventually sit atop these new health care subsectors.
Yale’s Cohen calls out several of these subsectors he’s following closely for rapid growth: virtual-first care, wearables and biosensors, and innovations for higher-risk medical conditions.
Whereas today’s virtual-first care companies, such as telemedicine and e-pharmacy providers, often provide products that address common conditions such as hair loss or migraines, tomorrow’s DTC marketplace will have a greater appetite for higher-risk medical conditions, says Cohen, the Yale digital innovation expert. That could include taking on conditions such as autoimmune diseases that affect the skin and other organs, diabetes and related metabolic conditions, or even heart disease.
“You’re really going to have to address both the risk of the condition and the need to maybe escalate care if things aren’t going as expected,” Cohen says. “If you’re just managing, let’s say, hair loss—of which there are a host of direct-to-consumer companies—you don’t have to go to the ER for that. You’re not going to have a crisis. But even with an autoimmune skin condition like psoriasis, what if you start getting a lot of infections because systemic medicine is suppressing your immune system? What do you do next? There are a lot of examples like this.”
Wearables and biosensors are poised to take on higher degrees of complexity, as well. Traditionally, this segment has served up devices that capture data on basic vitals such as heart and respiratory rates, which are “only one piece of the story,” Cohen points out. They’ve also focused primarily on applications for wellness and exercise.
The new wearable world will look quite different as innovators stretch their capabilities, potentially into diagnosis and monitoring for an array of conditions including heart failure, emphysema and even Parkinson’s disease. “Can we diagnose dementia by tracking your text and passive audio data collection from a smartphone from mics you allow in your environment?” says Cohen, posing a hypothetical scenario. “This stuff isn’t necessarily sci-fi anymore.”
Patient outcomes will ultimately decide the success of the DTC marketplace
Impact metrics are a priority for Cohen and his collaborators, and he advises DTC investors to pay attention to them, too. Ultimately, how patients respond to DTC care will play a big role in deciding whether markets are successful.
In a commentary for The Lancet published at the start of the coronavirus pandemic, Cohen and his co-authors suggest engaging clinicians and even adopting a labeling framework to strengthen the DTC marketplace and boost consumer confidence. The ability to sift significance from snake oil remains even truer in a COVID-endemic world.
“Patient outcomes are kind of at the apex of metrics of a particular product,” Cohen says. “There’s all sorts of what I would call impact metrics. Those could be cost reduction; resource utilization, reduction or use; and then there’s outcomes. I think investors will want to know, and should want to know, what is the clinical impact, particularly on patient outcomes, for whatever they’re considering investing in. The reason it’s important for them is because there are very few stakeholders that aren’t increasingly caring about outcomes.”
Health care institutions, payers and government agencies are among those constituents with eyes on the next big DTC breakthrough.
Cohen acknowledges getting to those kinds of product milestones won’t be easy.
“Investors are going to have a leg up on others if they invest in something that really works, and that’s kind of the bottom line here,” he says. “It’s hard to do that. Companies who do that have to spend resources to show that the thing works. That can be in the form of a clinical study. They have to have the teams and the resources.”
Entrepreneurs should also consider their target audience, particularly when it comes to virtual care. The federal Health Resources and Services Administration’s Telehealth.HHS.gov website, for example, coaches innovators through key DTC topics, such as whether consumers have sufficient broadband internet access to take advantage of a product or service.
“Direct-to-consumer, on-demand telemedicine has a lot to offer, but it’s not right for everyone,” the website notes. “Incorporating it into your practice takes planning.”
Align DTC investment to deliver real-world impact
Look into high-opportunity and high-burden areas of care within the dozens of defined medical specialties, Cohen advises. Think about where the digital health opportunities in each might be and consider which innovations are not only doable but could have real impact. For example, “heart failure is a super high burden, and so is heart disease,” he says. “What’s game-ready from a digital front?”
Exactly where the DTC marketplace will go is unclear. Yet over the next two to three years, the financial opportunities seem substantial—especially for those who can precisely define their corner of the market, verify outcomes and navigate complex systemic headwinds few have dared take on before.
