This article originally appeared in Entrepreneur May 31, 2022, and is republished here with permission.
In what feels like a moment, telemedecine has gone from an emerging niche to a must-have. The pandemic has created an opportunity for telemedicine providers to grow – rapidly – giving even more reason for venture capital and private equity firms to accelerate this growth and support many new entrants. With plenty of capital supporting the expansion, coupled with a significant increase in consumer use of e-commerce, the focus has been on growth and market share. Many emerging telemedicine companies have prioritized planting flags and building a user base as quickly as possible.
The next chapter might not be so easy.
Recent stock market volatility, inflationary pressures and interest rate hikes, increased competition for online page views and advertisements, and rising customer acquisition costs are prompting entrepreneurs and investors to explore other tactics. Now investors are starting to talk about profit rather than growth. And even for growth-oriented companies, some are betting cash/self-pay models can only get them so far.
For telemedicine companies with big goals — and big investor expectations — the pool of available consumers willing to pay out of pocket will always be a fraction of what’s possible in the traditional insurance world. This is especially the case for companies moving from virtual-only to click-and-mortar models, which tend to have higher capital costs, offer a fuller range of medical services, and would charge a retail price if high that consumers would go elsewhere. In order to maintain a competitive direct cost to attract consumers, many telemedicine companies are turning to health insurance as a solution.
But make no mistake and don’t let anyone tell you that this transition is easy. The adage “What got you here won’t get you there” is especially applicable in a world where talented, technology-driven entrepreneurs suddenly find themselves in the uncharted jungle of healthcare bureaucracy and feel the pressure of donors. The administrative nightmare of fee-for-service and third-party reimbursement can quickly increase operating expenses, require true revenue cycle management, and bring businesses to a much greater degree of oversight and regulation. regulatory review.
The pitfalls are many, but the ultimate reward – a dramatically expanded user base that pays less to receive services – can be worth it and the investment. How are entrepreneurs, and the investors who support them, managing this transition? Here are three considerations:
1. Manage your payer’s expectations
Just signing a contract with a health insurance company is an achievement. But this marks the beginning, not the end, of your journey.
In a previous iteration, your only concern might have been dialing in the right price on your subscription model to attract the optimal number of cash-paying patients. Now you should also be aware of what the health plan provides.
What is the service fee reimbursement rate of the plan for what you have to offer? How do these rates, as well as the rates for members paying in cash, change when you start working with multiple health plans? What is your overall patient-payer mix and how does this affect your ability to predict profits? How do you operationalize benefit screening up front to better bifurcate between cash and insured patients (and to let potential patients know what their co-pay will be)? What is your official fee schedule versus what you accept from health plans (hint: it’s less than your fee schedule) versus what you charge patients in cash?
These are not necessarily problems in themselves. But these are requirements you must meet, and for many telemedicine entrepreneurs – especially those who come from a technology/e-commerce background and not a medical background – these challenges are new. Without the right guidance and a deliberate transition plan, these challenges will become problems.
2. Welcome to your new tightly regulated environment
Your new paying partners are intimately familiar with the Byzantine world of state and federal health care regulation. Health plans wield so much power in the relationship because they control the money. They can easily slow down payment, subject you to prepayment review, subject you to post-payment audits and overpayment requests, impose detailed documentation requirements, and claim that you should have known about these rules before submit a complaint. (Wait: haven’t you read the 500-page manuals published by every health plan?) Hope you like the complexities, because now it’s up to you to learn the system.
In the world of cash-paid health care, regulations are, relatively speaking, rarely enforced. But that application risk changes the moment you start contracting with a health plan.
Health plans have three primary obligations to their members: quality of care, timely access to that care, and managing medical expenses so that there is enough money to continue to meet the first two obligations. The plans meet these obligations by organizing a contractual network of providers (eg, telemedicine companies) to support these members in a timely and cost-effective manner. In other words, the supplier is only a means to an end. It’s time to get used to becoming a “provider”.
When a vendor has substandard practices or becomes an outlier in the plan’s data mining, the plan has significant and draconian resources it deploys for auditing and enforcement – both administrative and judicial. Dealing with a single patient who wants a refund has nothing to do with a health plan that has the know-how, the resources, and the force of the law behind them.
Not to mention the need to understand and comply with fraud abuse, bribery, and privacy laws at the state and federal levels. It’s one thing to stay in good standing with your health plans, it’s another to make sure you’re not breaking those who enforce the law.
3. You may get paid more, but when?
So you’re networking, expanding your user base, and you’re dealing with a new volume of patients. Your clinicians are working around the clock, investors are happy with the hockey stick charts, and you tweeted out a congratulatory press release about this new partnership. That’s great for optics, but what about your billing service? Cash payment facilitates invoicing and collection. Billing and collection from third-party insurers is difficult.
Many founders who have built successful telemedicine companies, and the venture capital firms that back them, see the healthcare industry differently, and that perspective has been a tremendous asset in creating something new and of different. But many of these founders come from tech, not healthcare, and have likely never had a reimbursement audit. Their models of when and how much they’re going to get paid might not include an appropriate percentage of denied claims. They know about chargebacks and merchant accounts, but not about statistical extrapolation and how a $15,000 sample of 30 claims often becomes a $5 million overpayment claim.
Revenue cycle management is an afterthought when payment is simply a swipe of a customer’s card. This becomes an absolute necessity when these payments do not arrive after 30 days, 60 days or sometimes not at all.
The transition from cash-based to pay-as-you-go contracts is something many telemedicine companies are evaluating, including those in the growth stage. But for every problem, there is a solution, and entrepreneurs and their investors can take comfort in knowing that there are business models and solutions they can use to move from cash to insurance. As these three considerations demonstrate, going through them carefully is critical for telemedicine businesses that want to not just survive, but thrive.