Changing employer market leaves digital health companies rethinking strategy

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.” 

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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.”

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Cost savings is not the only metric employers are considering when selecting digital health solutions. Ellen Kelsay, CEO of the employer-focused nonprofit advocacy organization Business Group on Health, said large employer members in her organization are looking for digital health solutions that can integrate with each other and traditional care providers. 

“A lot of these virtual health solutions were offered as a one-off,” Kelsay said. “They are a well-intentioned and compelling one-off solution, but the sustainability isn’t there if these systems aren’t integrated more holistically.”

Companies selling to employers have taken notice of the changing priorities. At the J.P. Morgan Healthcare Conference earlier this month, Teladoc Health CEO Jason Gorevic promoted the company’s whole-person telehealth efforts that include primary care, mental health and specialty visits. The company recently put all its virtual health offerings onto one app.

“There are a lot of virtual care companies out there that are more narrowly focused, smaller in scale and are nipping at the edges of single [software] solutions,” Gorevic said.

The phrase “point solution,” an industry term for software products that only focus on one area of medical care, has become derisive among investors, buyers and other digital health companies. Those kind of companies are going to see a shakeout in the market, said Donald Trigg, CEO of healthcare navigation company Apree Health, which formed when Castlight Health and Vera Whole Health merged.

“There are some macro tailwinds around cost and there’s an appetite coming out of COVID for an integrated solution offer as opposed to the blizzard of point solutions that we've seen over the last number of years,” Trigg said.

Omada Health, a chronic care digital health company, has started selling to health systems including a partnership with Intermountain that was announced earlier this month. Sean Duffy, CEO of Omada Health, said employers are starting to tire of having too many digital health solutions.

“We’re seeing more request for proposals where employers are like, ‘I just need to consolidate my point solutions," Duffy said.

Some companies in the space may have look to for potential merger and acquisition partners, experts say. At the very least, companies should better understand what employers are looking for in digital health solutions.

“The more they can prove over time that they've actually improved patient experiences and outcomes, it will bode well for their sustainability within the market,” Kelsay said. “But a lot of these companies come and talk about the merits of their own solution in a vacuum. They’re not paying attention to what success will look like for the patient and the employer.”

This story first appeared in Digital Health Business & Technology.