Since the mid-2010s and until recently, digital health companies selling to employers had found an enthusiastic audience eager to stand out in a tight labor market by offering a variety of digital health solutions.
But with health insurance premiums rising, employee benefits managers are paring digital health options, forcing digital health companies to adapt and focus primarily on integration and cost savings.
“The last few years for employers was all about innovating through virtual health solutions and giving employees options to increase access to healthcare,” said Julie Yoo, general partner at venture firm Andreessen Horowitz, which funds digital health companies in the employer space. “The next couple of years for employers is all about how they can save costs… everyone is hyper-focused on return on investment.”
Employers have no choice but to focus on getting the most bang for their buck thanks to the higher cost of health benefits. A survey of employers from consulting firm Mercer in December 2022 found they expect the average per-employee cost of employer-sponsored health insurance to increase 5.4% in 2023. As employers pay more for premiums, benefits managers will look for more financially viable contracts from digital health companies, experts say.
“Benefit managers are having a ‘come to Jesus’ moment around pricing,” Yoo said. “A lot of these digital health companies got these amazingly lucrative per-member per-month contracts where they got paid regardless of who is using the product…Now employers are like, ‘Why did we do that?’”
Companies that take on risk-based contracts will be looked upon more favorably to employers going forward, Yoo said. By delegating risk to providers, employers can save on costs and will be incentivized to keep patients out of high-cost settings, she said.
Prateesh Maheshwari, investor at San Francisco-based Maverick Ventures, works with digital health companies in the employer space. He said a changing labor market is also affecting the employer-digital health relationship. With more companies laying off employees, the need to stand out among prospective workers by offering more digital health benefit solutions isn’t as pronounced.
“As unemployment starts to tick up…it shifts the priorities for what benefits managers want to buy,” Maheshwari said. “It’s less about buying every [solution] to make sure employees are happy to ensuring that whatever you're buying has an impact on the bottom line.”