The Telehealth Revolution: How Technology Companies are Bridging Quality and Efficiency in Medicine

Healthcare is playing an increasingly central role in consumer spending as regulatory changes in reimbursement start to manifest themselves at both the government and provider levels. Tradeoffs between cost, quality, and accessibility have moved to the forefront of both political discussions and patients’ minds; as a result, incentives to find alternative solutions to brick and mortar facilities have risen. The telehealth industry has emerged as a promising complement to traditional healthcare services and as an intriguing investment opportunity in a technology-driven world.

Telehealth is broadly defined as remote health-related care, advice, and administration through the use of advanced technological communications. In 2013, the U.S. telehealth industry generated $240 million of revenue through three main modes of care: store-and-forward, scheduled real-time, and emergency real-time. Store-and-forward services are wide-ranging and include the storage of patient information, such as photographs or blood pressure records, for later use by a physician. The other two modes are typically time-sensitive, and include the use of videoconferencing technologies for scheduled physical examinations and emergency consulting from specialists, respectively. With these technological advances and growing general acceptance, the industry is readily scalable. According to analytics company IHS, the telehealth market is poised to grow at a 56% cumulative annual rate to $1.9 billion in 2018. That implies that the number of patients using telehealth will grow from 250,000 in 2013 to 3.2 million in 2018.

Growth in the telehealth industry is being driven mainly by major trends in legislation as well as by other key factors. The passage of the Affordable Care Act has changed compensation from a fee-for-service model that rewarded volume of procedures to compensation based on quality. In addition, hospitals with high incidences of 30-day readmission of patients will be penalized a portion of their subsidized reimbursements. As a result, facilities that previously tried to game the traditional fee-for-service system are now incentivized to realign their interests with those of their patients.

Though telehealth service still faces limited reimbursement, many doctors have started turning to telehealth in efforts to bridge quality and efficiency. For example, the U.S. Department of Veteran Affairs used telehealth in 2012 to provide care for over 480,000 patients, many of whom lived in rural areas and had limited access to healthcare. They concluded that the use of telehealth resulted in a 53% reduction in bed days, a 30% decrease in hospital admissions, and savings of about $2,000 per patient per annum.

Moreover, fewer practitioners coupled with the rising demands of a growing population have compounded the need for additional healthcare solutions. According to the Association of American Medical Colleges, the U.S. will have a shortage of over 63,000 doctors by 2015 and 130,600 doctors by 2025, as Baby Boomers retire and a shortage of residency programs limit the ability to certify new physicians.

A key advantage of telehealth is its ability to leverage technology to improve information. For example, patients can use self-monitoring programs, termed daily living applications, on their computers or smartphones to create extensive health records far more detailed than traditional clinical records. These types of applications provide doctors with a wealth of information with which to more accurately diagnose patients and monitor long-term diseases.

It comes as no surprise that private investors have sought to capitalize on the growing demand for telehealth solutions. According to a report by Mercom Capital Group, venture capital invested $493 million in the telehealth industry in just the first quarter of 2013 and $858 million in the first quarter of 2014. Practice management and data analytics companies garnered the most money as they are best positioned to capitalize on the growing number of people with chronic diseases. According to Centers for Disease Control and Prevention, 45% of Americans have at least one chronic disease. In fact, long term conditions account for 75% of healthcare spending through 81% of hospital admissions, 91% of all prescriptions filled, and 76% of all physician visits. Telehealth analytics companies allow physicians to quickly leverage their technologies to both encourage wellness by treating diseases before they develop into serious, costly problems and to manage chronic diseases over time.

One high profile company in this space is MDLIVE, which attracted $23.6 million of second round investments in January 2014. MDLIVE offers around the clock time-sensitive services remotely through its 2,000-physician network. Investors in the company include large healthcare network Sutter Health and Heritage Healthcare Innovation Fund, which represents large healthcare organizations such as Tenet Healthcare, Intermountain Healthcare, Trinity Health, Community Health Systems, Cardinal Health, and Memorial Hermann Healthcare.

Other notable investments in the telehealth space include real-time information company MedHOK’s $77.5 million raise from Bain Capital Ventures and Spectrum Equity, healthcare software company Dedalus Group’s $89 million raise, and health insurance communications company Clarity Software Solutions’ $41.4 million raise from North Bridge Growth Equity. Also worth highlighting is HealthSpot, a company that builds telehealth kiosks for supermarkets and pharmacies; it has raised a total of $23 million from investors who realize how important infrastructure will be to the telehealth industry’s growth.

Investors are also evaluating and directing capital into screening and diagnostic companies revolutionizing the health industry. These companies could provide even greater yields if they manage to gain widespread acceptance by physicians and patients, although regulatory and interstate legislation may present challenges. For example, genomics testing company, 23andMe, has received $118 million despite ongoing scrutiny by legislators and practitioners. The FDA is hesitant to allow genetic reports to be sent directly to consumers, because the results can be easily misinterpreted without consulting a doctor, and lead to unnecessary elective treatments. Another revolutionary company, Theranos, has drawn in $400 million in investments due to its potential to reach mainstream adoption by the U.S. market. Theranos offers over 200 emergency-speed blood diagnostics tests that are relatively painless and easy to administer, requiring microscopic amounts of blood.

It is through innovations in telehealth that our society can adequately care for our aging population and continue to improve the quality, accessibility, and affordability of healthcare services. Investors are playing a key role in catalyzing these innovations and are likely to see outsized financial gains in return. With capital pouring in, the telehealth industry continues to evolve, not as a replacement to brick and mortar facilities, but as an enhancement to traditional healthcare here to stay.

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