[TDOC] Teladoc

You can think of Teladoc as a router for clinical care, receiving patients and connecting them to the right physicians.  The doctors on Teladoc’s platform work as independent contractors and interact with members through: 1/ Teladoc’s app/website; 2/ CVS’ Pharmacy App, which white labels Teladoc’s technology; and 3/ hospitals/clinics, whose providers interact with patients remotely or in-clinic through Teladoc’s software. 

Most of the time, a patient accesses Teladoc as part of an employer sponsored insurance plan¹. That employers partly fund the healthcare bills of most Americans today is a precedent set in World War 2, when the US government, to mollify labor groups outraged by wage controls, induced organizations to cover healthcare benefits for their employees.  An employer can be: self-insured, meaning it assumes the burden of paying employee health claims as they arise; or fully-insured, meaning the employer pays premiums to a third party carrier like UnitedHealth or Aetna, who is responsible for paying the claims.  Under a self-insured arrangement – which covers ~2/3 of US employees and has been growing at the expense of fully-insured programs over the last 15 years, especially among enterprises with over 1,000 employees – an employer will enter into an Administrative Services Only (ASO) agreement with a third party carrier who administers (but is not responsible for paying) claims and grants employees access to its network of healthcare providers².

Following its mega-merger with Livongo, nearly 90% of Teladoc’s revenue comes from per-member-per-month (PMPM) fees, mostly paid by large self-insured employers.  The rest comes from visit fees, which consist of: 1/ fees from paid members who, on top of the PMPM covered by their employer, separately pay out-of-pocket to virtually consult a physician in Teladoc’s network; and 2/ “Visit Fee Only” (VFO) fees paid by non-member patients (someone who accesses a Teladoc physician through CVS’ mobile app³.

The benefits of remote clinical care are obvious enough.  According to the National Institutes of Health, some 37% of all Emergency Department visits are non-urgent.  Rather than driving to a hospital and sitting in the waiting room with other sick people, only to be given a cursory examination and a prescription or told it’s nothing, a patient can in many cases just run a videoconference session from the comfort of her living room.  The physician on the other side of the screen can devote more time to complex cases that require in-person visits while earning extra income during their downtime.  Employers and health insurers pay lower claims⁴. 

(Aside: That telehealth makes access to care so much more convenient would seem to present a special challenge to Teladoc’s clients, who pay visit fees on top of fixed monthly per-member fees: Teladoc must be used enough that employers deem it worth the cost but not used so often that visit fees burden the health plan with unnecessary costs.  On the other hand, the risk of overuse must be weighed against the benefit of pre-empting unnecessary and expensive emergency room visits and promoting preventative interactions with the healthcare system that otherwise wouldn’t have taken place.  Also, telehealth should enable greater employee productivity as I would guess that most in-person primary care appointments could just as easily be handled through a remote video session.  In any case, whether or not employers save money when all costs and utilization patterns are account for – I’m inclined to think they do – telehealth is one of those perks that employees and members now expect from their health plans.  

As far as the impact of visit volumes on Teladoc….well, in 2019 Teladoc realized $90mn in visit fee revenue but expensed $184mn in cost of revenue, which is “primarily” made up of physician payments, indicating that visits are only marginally profitable for Teladoc (if they are even profitable at all).  In some cases, mostly at the lower end of the employer market, a fixed number of virtual physician visits are bundled into the PMPM (in the last 12 months through 3q20, of the 4.6mn visits from US paid members, 2mn were from members who had visits bundled into their subscription plans).  And Aetna doesn’t pay a PMPM for its 4mn fully insured[1] members, only visit fees plus a share of the savings realized from fully insured members using Teladoc.  It’s pretty confusing.  I don’t think Teladoc would structure its business model in such a way that it it loses money on every doctor visit, so my best guess is that visit fees contribute to gross profits but dilute gross margins.)

And yet, telehealth has been slow to catch on.  Regulatory hurdles limited reimbursement for telehealth services and prevented doctors from treating out-of-state patients or patients that didn’t reside in remote rural areas.  Health plans had little incentive to adopt telemedicine because so few members seemed interested in using them, with utilization rates hovering around low-single digits.  But of course COVID-19 was a watershed event that dramatically accelerated adoption, as doctors and patients habituated themselves to Zoom and other forms of remote digital interactions.

Meanwhile, favorable regulatory changes that are piecemeal dismantling the formidable edifice of state and federal regulations restricting telehealth access by geography and limiting reimbursements.  The Centers for Medicare and Medicaid Services (CMS) lifted the requirement that telehealth only be available to beneficiaries residing in rural areas and last August proposed extending telehealth reimbursement for an expanded number of services.  The National Committee for Quality Assurance (NCQA), which provides widely referenced performance measurements for health plans⁵, adjusted its metrics to accommodate telehealth services.  Medicare and Medicaid reimbursement changes matter for Teladoc because private insurers take their reimbursement cues from Medicare and because the company licenses its telehealth technology to health systems (hospitals, clinics), who will get paid more than before for virtually treating Medicare/Medicaid patients.