Cameron Jacox is CEO at Rocket & has created over $2B in enterprise value scaling digital health innovations from Seed to Series D & beyond.
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As technology entrepreneurs and investors continue to flood into healthcare, it has become increasingly clear that one of the biggest stumbling blocks is the complexity of healthcare pricing models. The cost of healthcare is confusing enough to the average consumer that entire companies are being built to make prices clear.
But as Forbes has covered in depth, some of the most promising healthcare innovations have experienced dramatic stumbles upon trying to scale their offerings without the right understanding of these complexities. As entrepreneurs, we must learn from these experiences so the best healthcare innovations can be brought to those who can most benefit from them.
Let's take a look at three examples:
• iRhythm, a wearable cardiac monitor seen as revolutionary, was built on the assumption that the CPT code that its product category was reimbursed under would not dramatically change. However, since launching, it has been stunted by issues with Medicare reimbursement rates, delaying its growth for years. Medicare cut the price they would reimburse for cardiac monitoring from $300 to $43.
• On the value-based care front, Clover Health aimed to offer lower premiums using data analysis to keep patients healthier. When their Medical-Loss Ratio surged to over 107%, leading to soaring losses, it became clear that they overestimated how much they could control patients’ health decisions.
• And in virtual care, Nurx grew rapidly by offering birth control and other prescription medications easily online, before facing a brand crisis after it was revealed that it had charged patients for services they did not receive.
These are a few of many such examples and fall into a well-understood pattern.
Healthcare pricing is incredibly complex, and figuring out how to optimally price your product or service can seem daunting. But as an entrepreneur, founder or business owner, your pricing strategy may be the most important element of your long-term success or failure.
Navigating The Healthcare Payment Maze
The variety of payment models—ranging from Per Member Per Month (PMPM) to claims-based, value-based and cash pay models—has significant implications on the success and sustainability of healthcare businesses. Understanding the nuances of these payment models is essential for healthcare entrepreneurs to make informed decisions and create viable strategies that benefit their patients and businesses alike. Let's take a closer look at each of these options.
• PMPM
One of the most common model used by healthcare unicorns is Per Member Per Month. PMPM models involve a fixed payment per eligible member every month, paid by a health insurance plan or an employer. The model benefits young companies by providing a predictable revenue stream. Digital health platforms and virtual care providers that offer ongoing population-level care management can benefit from such a predictable model, as it typically provides a consistent revenue stream and can help build long-term customer relationships.
• Claims-Based
The more traditional path is claims-based pricing. This is how our family physicians, specialists and hospitals have been billing for decades. It involves submitting "claims" to insurance companies for services provided to their members.
The claims-based model is a fee-for-service approach, where digital health technology platforms and virtual care providers are paid for each service rendered. This model encourages higher utilization of services and often results in increased costs for patients and payers alike. Entrepreneurs in the digital health space must carefully consider the potential implications of this model, including the risk of overuse and fraud. Businesses that provide a variety of individual services, such as telemedicine consultations, diagnostic tests or on-demand therapy sessions, may find the claims-based model suitable. It is also where the vast majority of dollars are spent today.
• Value-Based
Much more recently, value-based healthcare pricing has become a reality. As the name implies, it is a partnership between a payer—a health insurance plan, Medicare or Medicaid—and a provider of health services. Reimbursements are tied to health outcomes and care quality, rewarding digital health technology entrepreneurs and virtual care providers for their efficiency and effectiveness.
Entrepreneurs adopting this model should invest in data analytics, care coordination and performance tracking. While the initial investment may be significant, I believe the long-term benefits of improved patient outcomes and reduced healthcare costs make it perhaps the most promising model for the healthcare system overall. Digital health entrepreneurs with solutions that are proven to improve patient outcomes and/or reduce healthcare costs are the most likely to benefit from these models.
• Cash Pay
Cash pay pricing models shun third parties in favor of direct relationships with patients. The cash pay model offers a straightforward, transparent approach for patients who prefer to pay for your services directly, helping you focus on building a strong, loyal user base. The downside is, it is often not suitable or accessible for those who cannot afford to pay out of pocket. The challenge is to strike a balance between maintaining affordable pricing and ensuring the sustainability of the business.
Complexity: A Burden Or A Strength
Navigating the complexities of healthcare payment models can be a daunting task for entrepreneurs. It requires a deep understanding of the financial implications of the models and how they’ll be received and perceived. Ultimately, the key to success lies in selecting the right payment model that aligns with your vision and the unique needs of your target patient population. Starting and growing a successful business is hard enough as it is; managing the enormous complexity of options for pricing your products and services in the healthcare marketplace must be a top priority.
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