Q3 2020: COVID-19 creates tipping point for telehealth

Existing healthcare system challenges, including physician shortages, rising costs of care and inefficiencies, have long been ripe for digital transformation. Up to USD 250bn of current US healthcare spend could be “virtualised” if consumers and providers continue to embrace telehealth, according to McKinsey. For this to happen, consumers and providers will need to adopt new systems, new levels of data exchange and deeper integration. Ongoing education around the benefits of technology-enabled healthcare, and how to use it, will also be crucial to maximise success. 

Prior to 2020, telehealth in the US had been largely stifled by ambiguous and often changing regulations concerning the reimbursement of doctors and licensure. But the dial is beginning to move in the right direction, with one of the provisions of Congress’s emergency COVID-19 funding relaxing rules on telehealth services under Medicare. Legislation was also passed that allowed remote doctors to connect with patients in different states, an important development as it enables providers to operate at scale. We heard that such legislation is unlikely to be “clawed back”, as it was already in the pipeline. 

Against this backdrop, a USD 18.5bn merger between Livongo and Teladoc was announced in August this year and, according to a former VP at Livongo, the deal heralds a new level of focus on integration. To enhance health and wellness outcomes, each part of the new entity’s healthcare process will be addressed holistically — from observation to delivering treatments and working with platforms within the wider ecosystem. “The whole piece has to work together,” the specialist said. With Teladoc and Livongo having a similar “look and feel”, they should be able to capitalise on their merger in the short term while a larger and more complex build-out takes place. 

As this market matures, our research suggests that two or three players will ultimately come to dominate the US telehealth market. But any more than that could prove disruptive in the long term because of the highly complex nature of healthcare systems. We heard that direct-to-consumer options will “continue to grow and thrive” but it will “boil down to only a handful of players” at the systems level. “There are probably two or three more turns before you really see who the final players are in the landscape because the market potential is so significant… it really will be fairly dynamic for a number of years.” 

In the meantime, the industry also faces potential disruption from technology giants such as Google, Apple and Amazon. Shortly after the Livongo-Teladoc merger was announced, it emerged that Google’s cloud division, Alphabet, is investing USD 100m in Amwell, as healthcare providers shift on-premise systems to the cloud. According to a former Teladoc executive, the “big elephant in the room” is Amazon’s healthcare venture. “I think that’s the biggest threat to anyone in the space, is Amazon going to acquire any of these players?” But as we heard, healthcare “is a completely different business model”. A former Google executive is doubtful that Google will invest significantly in direct patient services. “There are privacy reasons, there are liability reasons, all of which make this very difficult, not to mention that the profit margins in healthcare are significantly different from what Google is used to, so a lot less attractive.”

Our research increasingly suggests that consolidation among the “pure players” is how the acquisition path will continue. “If Livongo-Teladoc continues to go in the right direction from a share price point of view, and if Omada goes public, which I think everyone is expecting… top talent is going to continue to be attracted to those companies, at least in the near-term, and so you’re going to have a rich-getting-richer dynamic,” a former C-level executive at Omada Health Inc told us. This will lay the foundations for further consolidation, he explained, particularly in light of Omada and Livongo’s long-standing relationships with employers and, increasingly, insurers.

Traditional healthcare providers have also been adopting telehealth as an extension of their own services, with COVID-19 accelerating this trend. These players could also enjoy an advantage given that medical care is often relationship-driven. One view is that this will put telehealth providers on a collision course with existing healthcare players “who clearly have some catching up to do in terms of digital transformation”. However, another reading of the situation is that ad-hoc interactions for urgent matters will always be inherently different in nature from those a patient would build with someone supporting them for a chronic medical condition.

As we look forward, there is no doubt that coronavirus has underscored the need for cost-effective medical alternatives for those unable to travel for support or treatment — but the opportunity extends far beyond that. Although healthcare is a highly regional process for various privacy, regulatory and sometimes cultural reasons, the overwhelming consensus is that “we have to do something differently” to build a more efficient system and drive better patient outcomes. The Teladoc-Livongo merger is at the fore of the next generation of healthcare and we heard that the move is likely to “spur on a couple more [deals] that look similar”. The vitals of this nascent but rapidly growing industry are promising, but whether this is healthcare’s new normal remains to be seen.