Converging business models - A deeper understanding on what is driving strategy in the health-tech space in India
In a recent report by Practo, the company claimed that 5 crore users transacted online in the 3 months from March 01, 2020 to May 31, 2020. The company witnessed a 500% increase in online consultations during this period of which 44% tele-consultations were from non-metro cities. These statistics reinforce the recent acceptance of telemedicine in both metro and tier 2 & 3 cities in India.
While the benefits of telemedicine are unquestionable especially at addressing the doctor-patient divide in India, as a sole business segment, telemedicine is not financially lucrative. While almost every health-tech start-up in the country is currently trying to ride the telemedicine boom, the volumes needed to make the segment profitable are quite high.
In fact, the segment has become crowded vis-à-vis the current size. To elaborate, typically an online doctor-patient telemedicine platform has two revenue models - a technology fee charged on a per consultation basis i.e. % of consultation fees from hospitals or a flat platform fees charged on a monthly basis from individual doctors to use the platform and connect with patients. Using rough numbers - for a platform charging an average of ~10% of the consultation fees per consultation at an average consultation fee of INR 300, a monthly volume of at least ~ 3 lakh tele-consultations per month would be required to generate a meagre monthly revenue run rate of INR 1 Crore per month. Similarly, typically on a subscription model, doctors pay a monthly fee in the range of INR 500 – 1000 per month to get access to patients using the technology platform. In India, there are a total of ~10 lakh allopathic doctors and ~ 6 lakh Ayurvedic, Unani and Homeopathic doctors according to the Ministry of State for Health and Family Welfare. Assuming a very optimistic scenario in that 50% of the total doctors will use telemedicine and pay the platform fees on a monthly basis, the maximum revenue potential for these platform players would be in the range of ~ INR 40 Crore to INR 80 Crore per month. Upon further adding the possibility, that doctors will possibly list their services on multiple platforms, for example, on average ~ 2 platforms, the maximum revenue potential would be in the range of ~ INR 80 Crore to INR 160 Crore per month – a number what at least 100 serious platform players are fighting for. The actual market size of telemedicine, which depends on a host of other factors, may very well be much larger but whether a viable share is available for most players is questionable. Moreover, the competition further intensifies due to two additional factors.
Firstly, most well-funded platforms are allowing majority of the doctors to list for free vs. the smaller players who do not have the financial capacity to do so. If one compares these numbers to the cost of acquiring a doctor to the platform, the unit-economics are not favourable.
Secondly, hospital networks as compared to individual doctors typically do not want to use these “public platforms” and subject their patient base to competition. A mid-sized hospital would not want to list its doctors on such a platform only to realize that the hospital’s patient has now found an alternative in a doctor from a big-sized hospital like a Max or an Apollo. While platforms will claim that it helps to open a revenue stream for new patients, hospital networks want to ensure patients stay within their own ecosystem of services. As a result, many solutions providers have now pivoted towards a SaaS model with “white-labelled” services to help hospitals transition into “Smart Hospitals” under their own brand name without inviting competition.
However, despite the intense competition and un-favourable unit economics, tele-medicine has been adopted at a rapid pace in the past few months even by health-tech companies who actually have different core interests. E-pharma players like 1mg & Medlife, Fitness & wellness players like Curefit, Insurance providers like Bajaj Finserv, Homecare companies like Portea, big conglomerates like Tata through Tata Health have all started tele-consultation services. Why?
The fundamental premise behind this strategy for health-tech players is to increase the affinity of patients to online transactions. Once patients start consulting doctors online and start getting e-prescriptions, they are more likely to order medicines prescribed by the doctor online (online medicine sales typically have ~25% gross margins) or even order a lab-test at home (again higher margins). In fact, it allows various companies to sell their core products (pharmacy, homecare, insurance, wellness, SaaS etc.) with the idea to meet the end to end requirements of the patient. Covid-19 has seen the emergence of a “three segment revenue model” i.e. tele-consultation, e-pharma (including allied e-commerce products) and home lab-tests. This system has become ubiquitous amongst almost all health-tech players who actually have very different core interests. For most players, telemedicine acts as an enabler and conversion to other services is what will drive profits. Similarly, hospital networks themselves do not want to lose out on the sales and the possible conversions into their core interest – IPD (Surgeries) and have set-up shop in this market.
Ultimately, the business models seem to have converged without a Unique Selling Product. What does the future hold?
Consolidation and further revenue diversification are the two strategies that seem to be paving the way for these businesses.
Consolidation may seem likely between big e-pharma players with large funding in addition to strategic players (Reliance, Cipla etc.) looking to enter the segment. Further, platform providers are also looking to merge their doctor directories in order to get a larger share of the market.
Diversification into SaaS seems to be another strategy being adopted by major health-tech players. With the recent acceptance of smart hospitals, solutions providers are looking to provide important services like Electronic Health Records, OPD management tools, AI based inventory management, Patient Data Analytics tools amongst a host of other services aiming at digitizing hospitals and cutting the operational in-efficiencies that exist within these hospitals. While currently there are niches in most of these segments, the bigger health-tech companies are increasingly looking to build these services either organically or through acquisitions in order to provide end to end services to patients, doctors and hospitals.
In terms of future strategy, the next big step of diversification for health-tech will see the rise of preventive healthcare & chronic care management into mainstream healthcare and has potentially the biggest future of all. The west also points towards the same with the recent $ 18 Billion acquisition (the largest digital health deal of all time) of Livongo, a specialist in chronic care management by Teledoc, the world’s largest virtual care service provider. In India’s case, citing a simple example - the country is home to ~77 million diabetic patients (second highest in the world) with only ~600 diabetologists. Further, the number of diabetics is further expected to grow 2x in the next 5 years. Yet, the lack of awareness of symptoms and risk factors, especially in rural areas, poses the greatest difficulty for managing the disease. While the market for IOT devices, wearables, patient vitals monitoring and other preventive systems has already started maturing in India and is even slowly hitting the tier-2 & 3 markets, which has the biggest potential of all, there is still a long way ahead in terms of acceptance, awareness & affordability. Sooner or later, we will see more doctors not only writing prescriptions with medicines but with devices to monitor the health of life-style disease patients.
What has been the silver lining amidst the recent pandemic has been the belated realisation that the technological transformation of the healthcare system is what will drive a healthier India. Success in the space involves a collaborative business model which adopts the successful sensitization of communities (both patients and doctors) and not the over-reliance on technology itself. It is the balance of empathy and technology which is the Holy Grail in the health-tech sector.
