COVID-19 has inspired massive growth and investment in the telehealth space. However, it is unlikely this market will continue to grow. The headwinds of the traditional healthcare model in the US still exist and are not going away any time soon. Here are a few predictions of what is to come:

(Note: The word “Provider” is used often in this post. In this case, I am referring to the Provider business and not individual physicians)

Traditional FFS providers will embrace telehealth and then throw it away when in-person volume returns; this is a bubble just waiting to burst

Over the past 4 months, we have seen the US healthcare system reinvent itself virtually (pun intended) overnight. While our physicians, nurses, and staff put themselves at risk each day to help patients fight for their lives, the provider industry has been engaged in a fight of its own: the battle of declining patient volume driving revenues through the floor.

The American Hospital Association estimates that US non federal hospitals alone have lost over $160B in revenue from March to June. Yes, that is 160 with a B. As a result, many are relying on the continued support of government bailout funds to keep them afloat - particularly in rural areas where the hospital business was already at risk. While these institutions have been instrumental in keeping the COVID-19 pandemic at bay (or trying their best despite the ignorance of our country’s leadership and general populace), the pandemic is highlighting the failures of the hospital business model more than ever.

Lucky for these institutions, the US government threw the industry a lifeline beyond bailout funds - increased reimbursement and relaxed requirements for telehealth visits. While these visits can not make up for the volume lost, they can help preserve enough profits for traditional players to stay in business while the world heals. But what happens when patients return to visiting these facilities in person? Do we believe that the traditional FFS provider will continue to offer lower margin telehealth services at scale? Is this something that works in the traditional provider business model?

How about no, Scott. Your traditional hospital will return to 100% in person visits as soon as they are able. These organizations are driven by maximizing reimbursement for the episode of care. While telehealth may be able to improve volumes, the reimbursement for those encounters is significantly lower than that of an in-person visit.

Pure telehealth businesses will find a niche in low-complexity care, but they will struggle to move upmarket to disrupt businesses that serve more complex patients.

Telehealth has a fantastic opportunity to deliver fast, convenient, effective care for a number of conditions. From minor, acute illnesses to mental health management, telehealth provides a means for individuals to rapidly connect with a physician who can help them manage their symptoms. The conditions treatable via telehealth rapidly expand if you layer in access to at home diagnostic devices like blood pressure cuffs and pulse oximeters.

With that said, I would be surprised if this high volume, low margin business would be attractive to large institutions reliant on FFS medicine. The operational costs of operating these practices within their current business models would require significantly higher prices that patients would be less willing to pay (and which will be undercut by competitive new entrants). As a result, I would expect that a series of startups focused on these specific services will continue to pop up over the coming years. Other organizations that may be able to make these services work are CVS, Walgreens, and Wal-Mart who are dedicated to low cost care. But, the reduced foot-traffic to their retail locations due to telehealth visits may strain the economics of this model.

Telehealth is here to stay for providers operating under most value-based business models - but it won’t be used in isolation

The natural fit for expanded telehealth is in the value-based care space - especially for primary care providers operating in these business models. Because the model is reliant on management of care rather than reimbursement for episodic treatment, the reduced cost of a telehealth visit for certain patients makes a lot of sense.

With that said, the “laying on of hands” remains one of the most powerful diagnostic tools that providers have; and, I would not expect anyone to move to a telehealth-only business as there are many conditions less treatable via this channel. The at-home device market, while growing, has not even scratched the surface of all that would be needed to effectively assess all patient needs virtually. The Tricorder doesn’t exist - yet. (Hypochondriacs would struggle if it did)

The problem is that most people view the clinical actions addressable via telehealth like this:

In reality, it is more like this:

Telehealth visits allow care teams with further insight into patient activities that are not traditionally evaluated in the clinical setting. While Telehealth can address only a portion of the activities that can be performed in person, it provides significant benefit by opening up other areas of information gathering instrumental to proper diagnosis and treatment. Does the patient live with a caregiver that we didn’t know about? Is that caregiver more capable of communicating on behalf of the patient? Does the patient live in a home that is unsafe or unkempt? Does the patient seem to misplace or lose things in their home often? So much can be gleaned from stepping into the patient’s daily world, even if it is just for the brief period of a telehealth visit.

The Bottom Line

The current shift to telehealth has been a massive boon for many Health IT companies, but this amount of growth is unlikely to be sustainable. Instead, we will see traditional FFS players abandon this new modality when in-person volume returns. Conversely, value-based providers will dive deeper into telehealth as its value to patient management and behavior change becomes more apparent.

TL;DR - Short Telehealth stocks

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