In 2006, when Amazon launched Simple Storage Service (a predecessor to Amazon Web Services), remote computing had a humble value proposition: store electronic files off-site—better known today as ‘in the cloud.’ At the time, leading technology companies did not appear to register the competitive threat created by cloud computing, perhaps believing that the performance and security features of its on-premise technology would remain the first choice of corporate CIOs. Neither the founding of Box that same year nor the launch of DropBox in 2007 made national news. More broadly, large parts of the consumer economy paid little attention to this sleepy corner of the technology sector, reflecting confidence in the strategies long employed by executives to sustain successful consumer franchises: brand awareness, convenient locations and customer loyalty.
When the Great Financial Crisis (GFC) engulfed the U.S. economy, it forced big corporations to reduce operating costs and enterprise users to adopt lower cost, cloud-based computing solutions (SaaS). At the same time, the launch of the iPhone in 2007 combined with the increasing availability of wireless data (Verizon opened its 4G LTE network in 2008) empowered mobile users to adopt emerging on-line platforms such as Netflix VOD, Uber, Square, and Spotify.
As a result, the cloud infrastructure services market (IaaS) grew rapidly—according to Gartner, 25x from 2010 to 2022, to over $100 billion. Today, Amazon, Microsoft and Google together control more than 50% of the market. However, late adopters paid a price. For example, Oracle launched its cloud services solution (now known as OCI) beginning in 2012 and its market share remains quite modest. Similarly, IBM failed to achieve commercial scale in cloud computing until acquiring market leader Red Hat in 2018 for $34 billion—at a 63% share price premium. Likewise, virtual competition inflicted real damage on a number of well-capitalized industries, including music, retail, publishing, travel, and transportation.
A lesson: fueled by market forces both expected and unforeseen, cloud computing migrated from a point solution to core IT infrastructure and helped reshape the U.S. economy.
Telehealth Pre-COVID
However elegant, innovation in healthcare delivery moves slowly and for good reasons: protecting patient safety, satisfying regulatory requirements, securing reimbursement coverage, and gaining physician adoption. Prior to the coronavirus pandemic, telehealth—also known as virtual care or telemedicine—was largely a point solution, in which a provider communicated directly with a patient in another location via video (synchronous), text (asynchronous), or with the support of a smartphone app (digital health). Early use cases included telepsychiatry, primary care, and telestroke.
While the healthcare industry has killed many meritorious ideas before they could reach widespread adoption, virtual care found an early patron in the federal government. Starting in 2009, the Department of Veterans Affairs (VA) embraced telehealth as an effective means to reach its 10 million beneficiaries. According to the Congressional Research Service, today the VA delivers more than 2.5 million telehealth sessions (or episodes) annually. The Veterans Affairs example is instructive because the Department serves as both a payor and a provider, which creates an incentive for it to adopt innovative solutions with attractive health economic benefits. To put it simply, the VA is motivated to provide higher quality care at a lower cost.
Meanwhile, specialized technology firms such as InTouch Health—now a division of Teladoc Health (NYSE:TDOC)—were gaining traction among hospital systems with an enterprise-grade, middleware solution that integrated virtual care into health systems’ existing patient record, medical billing, and data security platforms. Forward-looking hospital CEOs began to see virtual care delivery not as a bespoke solution but as a new delivery channel integrated alongside inpatient care, urgent care, home care, and ambulatory visits. Why? In the hands of a sophisticated health system, virtual care expands the catchment area for patient referrals, increases clinical productivity, meets the needs of chronic care patients and creates a more satisfying consumer experience—often translating into higher patient satisfaction scores.
Telehealth Post-COVID
By 2019, virtual care enjoyed many vocal supporters and was attracting increasing amounts of venture capital. Yet it remained largely outside the medical mainstream, more of a provocative experiment than a gold standard. A range of healthcare stakeholders slowed its adoption. Commercial health plans worried about enabling excess utilization, Medicare took a wait-and-see approach to reimbursement, physicians questioned patients’ willingness to engage on-line, and state boards of medicine sought to prevent virtual competition from out-of-state providers.
Then the pandemic struck. Within weeks of shuttering schools and businesses, the use of telehealth exploded. The Centers for Medicare & Medicaid Services (CMS), the federal agency responsible for healthcare reimbursement policy, offered a lifeline to both providers and patients when it authorized Medicare payments to physicians for virtual visits on comparable terms to an in-person visit. Many private health insurers followed suit.
The market reaction was almost immediate. Take Athenahealth, one of the largest U.S. providers of electronic patient record systems to medical groups. It reported in 2020 that the volume of virtual visits on its network exceeded 350,000 per week. Other technology vendors reported similar telehealth volume spikes. Within months, it was difficult to find a patient, physician or caregiver who did not have a telehealth experience. Moreover, the vast majority liked the convenience of seeing their provider from home along with the ability to invite family members to attend. Likewise, the majority of physicians surveyed in late 2020 agreed (or strongly agreed) that telehealth enabled better preventative and chronic care. While there will be exceptions, the majority of reimbursement and regulatory accommodations provided to virtual care as a result of COVID are expected to survive the original Public Health Emergency authorizations.
What comes next?
Is this a cloud computing moment for healthcare? The consulting firm McKinsey & Company estimates that the U.S. telehealth market can be a $250 billion industry. While this forecast made headlines, it might be conservative when you consider this represents just 22% of U.S. spending on physician and clinical services.
It is a truism that all healthcare is local. Typically, a primary care physician refers a patient to a nearby specialist, who, in turn, admits that patient to a community hospital. According to the Pew Research Center, the average travel time to a hospital for a patient living in a non-rural area is less than 15 minutes. Moreover, transfers to tertiary facilities and out-of-market second opinions are uncommon. As such, healthcare systems building regional delivery networks routinely employ a proven consumer formula: brand awareness, convenient locations, and customer loyalty.
However, history has shown that technology can rapidly transform the basis for competitive advantage. Just as many employees have adjusted to the idea of permanent work-from-home, the rise of virtual care raises a provocative set of questions: Would I prefer to be treated by a nationally recognized cancer specialist in another state if I do not need to travel routinely to see her? Is it more important that I have 24/7 on-demand access to an in-network primary care physician or that my primary care physician is located nearby but offers limited hours? Will the rise of robotic surgery—in which a surgeon performs a procedure remotely from the patient—allow nationally recognized providers to create virtual surgical networks (perhaps structured around alternative reimbursement models such as bundled payments), thereby competing directly with local providers?
Over the past decade, healthcare delivery systems have invested many millions to aggregate a critical mass of facilities, brand equity, providers, and data in order to establish leadership in their markets. However, virtual care has the potential to disrupt long-standing market equilibrium. As such, provider organizations should view telehealth not as an artifact of COVID but as a digital front door with the power to reimagine clinical delivery, provider networks and commercial strategy. The failure to do so invites potentially harsh consequences.
