23 Feb Are Telehealth and Telemedicine the Right Prescription for Investors?
By Clint Whitaker, Austin Dale Group
This article was recently published on Axial, a private deal network serving professionals who own, advise, and invest in North American lower middle market companies.
As an M&A advisory firm, we closely monitor trends in the industries we serve. Our practice focuses broadly on the technology and healthcare segments, so we take note when market forces spur interest in both of those sectors.
The COVID-19 pandemic has been a catalyst to accelerate adoption of technology and virtual service models across many aspects of the economy. Healthcare has traditionally been an industry that lagged in technology adoption due to inelastic regulation, payer restrictions, provider resistance to change, and information privacy concerns.
COVID-19 has presented a number of challenges for healthcare that have forced the industry to change more rapidly than normal.
- COVID-19 caused a shortage of emergency and acute care providers needed to treat patients with life-threatening symptoms.
- The case load for COVID-19 has been spread unevenly across the country, leaving providers idle in some locations while other locations faced critical shortages.
- Patients have postponed or avoided treatment for non-life-threatening conditions due to fear of exposure to COVID at doctor’s offices, hospitals, and other healthcare facilities.
‘Telehealth’ and ‘telemedicine’ are two loosely defined terms that are generally applied to new technologies and service delivery models which allow the provider to be physically separate from the patient (or receiver of service). Telemedicine generally applies to services delivered by licensed medical professionals while telehealth is a broader term that can apply to an array of health-promoting services.
Teleservices (to use a more generic term) help to solve the challenges brought about by COVID by allowing healthcare providers to utilize professionals from other regions to support localized staffing shortages and also to provide remote services to patients who might otherwise avoid in-person health services.
The technology underlying these service models is not new. Video conferencing and remote access to information via the internet are readily available technologies that are used widely across most segments of the economy; however, healthcare presents some idiosyncratic challenges that have delayed adoption:
- Information privacy – medical information is sensitive, and access is regulated (e.g., HIPPA), which precludes use of ‘off-the-shelf’ video conferencing and data sharing technologies.
- Medical licensing – healthcare providers are licensed by the jurisdictions in which they practice (typically the state). If the patient is physically in a different state than the provider then it presents a challenge for current licensing laws. Also, if the provider is in an alternate location (e.g., seeing patients from home in a different state) then this also runs counter to current licensing standards.
- Providers resist change – Many providers have a set routine which they find efficient to see patients. Most providers are accustomed to face-to-face interactions with patients, which allows them to get a direct sense of the patient’s overall health. Interposing a layer of technology between the provider and the patient disrupts the traditional patient encounter. Older providers are often technology averse and work against roll-out of these new technologies.
- Payer reimbursement restrictions – To manage reimbursement to providers, certain payers have restrictions on “originating site” locations, i.e., the location where a patient physically receives services via telehealth services.
The impact of COVID-19 on healthcare has forced regulators, payers, and providers to adapt with unprecedented speed. A public health emergency declaration was issued by the US government and a host of temporary measures and policy waivers have been instituted. The effect has been to relax the restrictions on licensing, privacy, and reimbursement mentioned above. Faced with critical staff shortages in some locations/specialties and critical patient shortages in other locations/specialties, providers have jumped on the telehealth bandwagon.
Given the rapid adoption of teleservices in healthcare, and the obvious utility for patients, investors have jumped on the bandwagon as well. Valuations for telehealth companies, particularly those that have a recurring revenue model, are exceeding 10x adjusted EBITDA.
It is indeed a seller’s market, but will it last?
To many of us who have lived through the pandemic, it seems that life will be forever altered. The pandora’s box of virtual work environments has been well and truly opened. But vaccines will eventually contain the impact of COVID-19 and the public health emergency will be lifted.
The short-cuts and workarounds that regulators and payers allowed during a time of crisis may no longer be accepted. Will this cause an inevitable contraction in revenues, EBITDA, and valuations for telehealth and telemedicine companies?
The definitive answer to those questions will only come with time. This situation poses the most significant risk for Telehealth and Telemedicine investors. While these companies are experiencing a classic speculative bubble in valuation, there is reason for optimism in the long term.
The pandemic disrupted artificial barriers to technology adoption in healthcare service delivery. While there is likely to be a short-term period of correction once the public health emergency is lifted, consumers, providers, payers, and regulators have all seen the utility of teleservices and are unlikely to be able to close Pandora’s box.
The transition from public health emergency to business as usual is likely to have some bumps for teleservices in healthcare but pent-up demand is likely to deliver strong revenue opportunities over the longer term.
What Investors Want
• Scalability – a predictable growth path that can be accelerated with a capital infusion.
• Recurring Revenue – customers who pay monthly, or on a regular periodic basis.
• Sticky Customers – high customer satisfaction, difficult conversion challenges, or extended contracts which make it unlikely for customers to leave.
• Barriers to Entry – intellectual property, accumulated subject matter expertise, or other factors which make it difficult for competitors to enter the market.