More technology startups are embracing the healthcare industry’s increasing willingness to pay for products based on how much they improve health.
One of the latest examples comes from Medisafe, a Boston company that has developed an app-based system intended to help patients manage their medications. The company offers both a free and a paid version of the app, but most patients use the free version, a spokesperson says. Medisafe generates revenue primarily from pharmaceutical companies, such as Merck (NYSE: MRK) and Boehringer Ingelheim, who fund the app’s usage in order to receive anonymized data that could help them understand patient behavior, the spokesperson says. Pharma customers can also use the app to interact more with patients, such as by sharing news about their meds or offering discounts on prescriptions.
To date, the six-year-old company has charged companies a flat annual fee for its products. But last week, it launched an additional payment option for its pharmaceutical customers that is based on the value Medisafe’s products deliver.
In this new revenue model, customers will pay a lower base fee than the annual subscription, with additional payments tied to whether use of the startup’s products results in an increase in the number of patients consistently following their treatment plans, as measured by prescription refills. Medisafe says lack of drug adherence has been linked to poorer health outcomes.
“If you want to be perceived as a partner, you need to be able to be sharing the upside and downside,” Medisafe co-founder and CEO Omri Shor says in a phone interview. “We are going to be held accountable for what we can produce.”
While more healthtech startups are adopting these kinds of “value-based” or
“risk-sharing” pricing models, they come with new challenges for small companies, such as delayed payment and figuring out how to quantify the value of a product to patients. “Every company in this space has a value-based pricing model they’re prepared to discuss,” says Flare Capital Partners partner Michael Greeley, whose Boston-based venture firm invests in healthcare technologies and services. “The reality of it is it’s harder to implement.”
Medisafe’s mobile app helps patients keep track of the medications they’ve taken, whether they’ve taken the correct dosage, and how many days they consistently follow their treatment regimens, Shor says. It also sends patients reminders when it’s time to take a dose; alerts the user if there is a potentially dangerous interaction between their various meds; and provides educational materials about drugs and health conditions. Patients can also log health measurements in the app, such as their blood pressure and weight, and can designate a relative or friend to receive alerts if a patient forgets to take his or her meds. The app generates progress reports that the patient can share with doctors and other caregivers.
In a recent study with IQVIA, Medisafe says it found that hypertension patients using its app stuck to their treatment plan for much longer than a control group. The company says its product has also been shown to boost medication adherence for HIV patients.
“If you are confident about those outcomes, why wouldn’t you be open and interested in showing those positive outcomes for your partner?” Shor says.
The backdrop is that the federal Centers for Medicare and Medicaid Services, driven in part by the Affordable Care Act, is increasingly tying healthcare reimbursement to performance, such as a reduction in the number of patients being readmitted to hospitals for previously treated conditions. Private insurers are also introducing more “value-based” payment models.
And such agreements are spreading to digital health as well. Another example is Omada Health, which uses software to deliver behavioral counseling to patients with conditions such as type 2 diabetes and heart disease. San Francisco-based Omada sells its service to employers and health insurers, and the company says it only gets paid if patients enroll in the program—and when they achieve results.
“I think this [revenue model] has actually become quite prevalent,” Greeley says. “Now, I think the better digital health companies are prepared to take risks.”
Greeley, who isn’t involved with Medisafe, says the company’s choice of tying its payments to prescription refills “makes a lot of sense, as it is easily measurable.”
But such outcomes-based agreements could get more complicated if the healthtech vendor’s payments depend at least partly on whether its products and services improve patients’ health, Greeley says. It can be difficult to accurately attribute the cause of a patient’s improved condition; it might be due to a drug, a change in diet, a switch to a different doctor, or some other factor, he says.
And as the use of so-called “digital therapeutics”—where an app or software-based service is prescribed by a doctor as part of the treatment plan—grows, when does the digital product deserve credit?
“The reality is what value creation looks like is not always straight forward,” Greeley says.
Plus, health benefits might not reveal themselves for months or years, Greeley says—meaning the digital health startup might have to wait a long time to realize the full value of the deal. That could put an unsustainable squeeze on a startup’s already-tight budget.
But customers of healthtech startups are increasingly pushing for these kinds of deals, Greeley says. It means a lower upfront cost for them, and they only pay for success. It also tends to better align the priorities of the tech startups and their customers, he says. Lastly, it’s a “crowded market” in healthtech right now, and buyers have a lot of choices.
“They’re pushing hard on these vendors to see if they can get better commercial terms,” Greeley says. “I don’t know what choice a lot of these digital health startups have but to explore value-based models.”