3 Considerations for Telemedicine Companies Shifting Reimbursement Models

This article originally appeared in Entrepreneur on May 31, 2022, and is republished here with permission.

In what feels like an instant, telemedicine has gone from an emerging niche to a must-have. The pandemic created an opportunity for telemedicine providers to grow — rapidly — giving even more reason for venture capital and private equity firms to accelerate that growth and back many new entrants. With loads of capital supporting expansion, coupled with a material uptick in consumer use of ecommerce, the emphasis has been growth and market share. Many emerging telemedicine companies have prioritized planting flags and building a user base as quickly as possible.

The next chapter might not be as easy.

Recent volatility in the stock market, inflationary pressures and interest rate hikes, more competition for pageviews and online ads, and increased customer acquisition costs are leading entrepreneurs and investors to explore other tactics. Now, investors are starting to talk profit rather than just growth. And even for growth-focused companies, some are betting that cash/self-pay models can only take them so far.

For telemedicine companies with big goals — and big expectations from investors — the pool of available consumers willing to pay out of pocket will always be a fraction of what’s possible in the world of traditional insurance. This is particularly so for companies moving from virtual only into click-and-mortar models, which tend to have higher capital costs, offer a more fulsome scope of medical services and would require such a high retail price point that consumers would go elsewhere. In order to maintain a competitive out-of-pocket cost to attract consumers, many telemedicine companies are looking to health insurance as the answer.

But don’t get it twisted or let anyone tell you this transition is easy. The adage, “What got you here won’t get you there” is particularly applicable in a world where talented, tech-focused entrepreneurs suddenly find themselves in the unfamiliar jungle of healthcare bureaucracy and feeling pressure from backers. The administrative nightmare that is fee-for-service, third-party reimbursement can quickly increase operating expenses, require real revenue cycle management and move companies into a far greater degree of regulatory oversight and scrutiny.

The pitfalls are many, but the ultimate reward — a significantly expanded user base that pays less out-of-pocket to receive services — may make it worth the effort and investment. How do entrepreneurs, and the investors backing them, manage that transition? Here are three considerations:

1. Manage for your payer’s expectations

Merely signing a contract with a health insurance company is an accomplishment. But it marks the beginning, not the end, of your journey.

In a previous iteration, your only concern might have been to dial-in the right price on your subscription model to attract the optimal number of cash-paying patients. Now you also have to be aware of what the health plan expects, too.

What’s the plan’s fee-for-service reimbursement rate for what you have to offer? How do those rates, along with rates of members paying in cash, change when you start working with multiple health plans? What’s your overall patient-payer mix and how does that affect your ability to forecast profits? How do you operationalize benefit screening up front to best bifurcate between cash patients and insured patients (and to let potential patients know what their copay will be)? What is your official fee schedule versus what you accept from health plans (Hint: It’s less than your fee schedule) versus what you charge cash patients?

These are not necessarily problems per se. But they are requirements you must address and, for many telemedicine entrepreneurs — particularly those who came from a tech/ecommerce background and not a medical background — these challenges are new. Without the right guidance and a deliberate transition plan, these challenges will become problems.

2. Welcome to your new, rigorously regulated environment

Your new payer partners are intimately familiar with the byzantine world of state and federal health care regulation. Health plans wield so much power in the relationship because they control the money. They can easily slow down payment, place you on prepay review, saddle you with post-payment audits and overpayment demands, impose detailed documentation requirements, and claim you should have known about these rules before submitting a claim. (Wait: You didn’t read the 500-page provider handbooks published by each health plan?) Hopefully, you enjoy complexities, because it’s now your turn to learn the system.

In the world of cash pay healthcare, regulations are, relatively speaking, infrequently enforced. But that enforcement risk changes the moment you start contracting with a health plan.

Health plans have three primary obligations to their members: quality of care, timely access to that care, and managing the medical spend so there’s enough money to continue meeting the first two obligations. Plans meet these obligations by curating a contracted network of providers (e.g. telemedicine companies) to care for these members on a timely basis and at a cost-effective price. In other words, the provider is merely a means to an end. Time to get used to becoming a “vendor.”

When a provider has substandard practices or becomes an outlier on the plan’s data mining, the plan has significant and draconian resources they deploy for auditing and enforcement — both administrative and lawsuits. Dealing with a single patient who wants a refund is nothing like dealing with a health plan who has the knowhow, resources and strength of the law behind them.

Which is to say nothing of the need to understand and comply with fraud abuse, kickback and privacy laws on the state and federal levels. It’s one thing to remain in good standing with your health plans, it’s another to make sure you’re not running afoul of those who enforce the law.

3. You may be paid more, but when?

So you’re in-network, expanded your user base and you’re slammed with new patient volume. Your clinicians are working round the clock, investors are pleased with the hockey stick charts and you tweeted out a congratulatory press release about this new partnership. It’s great for optics, but what about your billing department? Cash pay makes billing and collection easy. Billing and collection with third-party insurers is difficult.

Many of the founders who created successful telemedicine companies, as well as the venture capital firms that back them, look at the health care industry differently, and that vantage point has been a huge asset to create something new and different. But many of those founders come from tech, not healthcare, and have probably never undergone a reimbursement audit. Their models for when and how much they’re going to be paid might not include an appropriate percentage of denied claims. They know about chargebacks and merchant accounts, but not about statistical extrapolation and how a $15,000 sample of 30 claims frequently becomes a demand for a $5 million overpayment.

Revenue cycle management is an afterthought when getting paid means simply swiping a customer’s card. It becomes an absolute necessity when those payments don’t arrive after 30 days, 60 days or sometimes, not at all.

The transition from cash pay to payer contracts is something many telemedicine companies are evaluating, including those in a growth phase. But for every problem, there is a solution, and entrepreneurs and their investors can take comfort knowing there are business models and solutions they can use to move from cash to insurance. As these three considerations demonstrate, navigating them carefully is essential for telemedicine companies that want to not just survive, but thrive.