What happened to Teladoc?

In 2020, we thought it was going to take over the healthcare world

It was April 2020. There were a lot of unknowns about the virus, its severity, and which populations were at risk of severe complications. All we knew was that in NYC there were field hospitals getting set up and hospital ships en route.

Telemedicine quickly became top of mind for policymakers, clinicians, and investors as clinics shut their doors to prevent the spread of disease. At the time, despite over a decade of availability, telemedicine was not yet commonplace or even a part of the collective psyche.

Naturally, the stock prices of Teladoc and similar direct-to-consumer telemedicine companies began a significant upward trend (Figure 1, below). The increase for Teladoc was driven by, among other factors, the Livongo acquisition and the thesis that the pandemic would create a $200+ billion market for telemedicine essentially overnight. As lock-downs drove patients to the internet for care and the disease began to spread rapidly through the population, it seemed that the time for telemedicine had finally arrived.

Figure 1: Teledoc (TDOC) Stock Price Overtime

It makes sense—the thesis is: if it’s unsafe for patients to go into the clinic due to a highly transmissible virus, then why not offer services at home via telemedicine. In areas where there is a lack of healthcare services, then telemedicine providers like Teladoc could be an option for millions of Covid-19 patients, or during non-covid-19 times, patients in rural areas. Then, it follows that once patients tried it the first time, they would come back after realizing how simple it could be to access a physician from the comfort of their very own living room. This thesis turned out to be correct, but with a few key nuances and time delays.

In particular, this thesis was all too true for Teladoc—whose competitive moat was, unfortunately, not as wide as expected. The meteoric rise and fall of Teladoc’s stock price, revenue, and brand awareness are almost entirely attributable to competition resulting from rapid market entry (the Livongo acquisition was extremely overvalued, so that impacts the valuation situation as well).

Covid-19 acted as both the dramatic catalyst and a nail in the coffin for Teladoc. The same factors that drove the demand for Teladoc telemedicine visits, also drove powerful brick-and-mortar health systems to accelerate their own telemedicine strategies and rapidly implement virtual visit capabilities. These health systems are the same ones that dominate payor contracting, drive most health policies in Washington, and are a necessary stable in any insurance network.

Brand Awareness and Patient Relationships

Teladoc has always had two problems with its business model. The first is that they have to pull patients away from their existing means of primary care. The second is the limited scope of practice deliverable via telemedicine in its simplest form (i.e., the addition of IoT devices, home lab testing, and other add-ons make telemedicine more advanced than simple audio-visual communications technology).

Most patients with existing primary care relationships fall into one of the following buckets: 1. long-term primary care physician in private practice, 2. a major health system outpatient clinic 3. CVS, or local urgent care, and 4. have no long-term relationship (~25%). Teladoc’s messaging to potential new patients is “we are available almost any time, on-demand, from your home—you should come to us for a set of very specific purposes within our scope of practice.”

Thus, to grow, Teladoc has to either appeal to the urgent care and the no-relationship crowd to swing them over to use Teladoc when needed for low-severity care (see my previous article to break down the scope of clinical care for telehealth) OR they have to pull patients away from existing, often deeply rooted, relationships with their traditional providers. To do this, Teladoc relies on digital marketing and the convenience factor of telemedicine to attract patients. The digital acquisition channels also further limit their potential patient capture due to large portions of the population lacking either fundamental or functional (e.g. challenges navigating) access to digital marketing channels. The scope of practice issue also comes into play here as Teladoc’s model up until 2020 was largely driven by the low-severity acute episodes of care (i.e., rashes, sinusitis)—further limiting the potential patient capture based on the incidence of these conditions in the population.

Importantly, many of the patients who utilize healthcare services at high volume, which is good for business, also have more severe conditions (typically, multiple chronic comorbidities)—thus, Teladoc has an uphill battle to acquire new and recurring users. Sicker patients are often those with strong existing provider relationships, lower digital marketing channel utilization, and a lack of technology literacy.

For patients that have existing, deep-set relationships, removing them from a relationship is a challenge to do digitally. For younger, less sick, patients, Teladoc is a breath of fresh air—who wants to sit in the waiting room. The business model is excellent, however, is the market size big enough to justify the competitors and does it limit growth potential? Yes.

When digging into marketing even further, Teladoc has a real challenge when it comes to competing with major healthcare brands. Primary care practices owned and operated by major regional and national health systems benefit from the deacades of powerful, brand, reputational, and recognition marketing that has been performed and funded by these systems.

Does the average patient living in Dallas trust Baylor Scott & White or an internet-based company they hear of for the first time online named Teladoc?

Does the average patient living in the region serviced by Massachusetts General Hospital choose to seek care from MGH or Teladoc?

Does the average patient living in Palo Alto trust Stanford Health or Teladoc? This group of patients would arguably be more likely to accept and adopt telemedicine given the role of technology in the community, but this is where it, once again, comes down to existing relationships and the severity of an episode of care.

For conditions like sinusitis, it may be easier to go to Teladoc online for someone living in Palo Alto, but if there is a concern about hypertension, diabetes, weight, cancer, heart disease, high cholesterol, or overall health; it is arguable that same person may choose to make a trip to their local Stanford Health primary care clinic. In many cases, patients with newly diagnosed conditions will especially want to sit in a room with a healthcare provider and have a single clinician track progress. Is this always the case? No. But, in many cases, this is both a natural phenomenon (i.e., 25% of the population does not care, but they may not yet have a significant diagnosed condition) and encouraged by the insurance companies. Many insurers and HMOs require the designation of a PCP—Teladoc does not count in most circumstances due to PCP requirements in payor policies.

Up until this point in my argument, I have been comparing Teladoc as a telemedicine provider to other traditional brick-and-mortar clinic options. This was a moat that was believed to be reasonably strong. But, fast forward to 2022, this is where Teladoc’s doctor-online via audio-visual technology is at serious risk. During Covid-19, as I mentioned previously, a significant percentage of the brick-and-mortar healthcare providers launched their own telemedicine capabilities by leveraging any number of the inexpensive SaaS software platforms. At this point, the scope of practice, reputation power, relationship power, and convenience factors have now all begun to favor traditional healthcare delivery providers.

I suspect that something like this occurred throughout the country:

“I like this doctor in my living room thing, but now Dr. Johnson, who I have been seeing for 5 years offers it. I think I will just get it from her rather than switch to this new Teladoc thing.”

The Hybrid Approach to Telehealth

The traditional brick-and-mortar clinics that launched telemedicine represent the final nail in the coffin for Teladoc’s original “transactional telemedicine” business model. The same tailwinds that propelled Teladoc’s stock price also propelled a sleeping giant of competition. Now, the patients that want the at-home convenience, once only offered by a few (i.e., Teladoc, Amwell, MDLive), can access it from their local, or existing healthcare provider.

The truth is that about 20% of healthcare services can be delivered virtually. Though, we are currently sitting somewhere between 6% and 20% as of 2022. Another 10-15% are likely to become virtual in the next 5 - 10 years as technologies advance and care models utilizing virtual concepts reach acceptance. We are still in the early innings of the virtualization of care processes and there are necessary enablers required to grow the percentage to the additional 10-15%. By my estimate, in about 10 years, we should expect a $200 - 600B market for virtual care services across a wide range of patient populations and indications.

Patients will always still need to go into the clinic for some physical exams, for new, serious diagnoses to be delivered, for labs (for now), and for certain procedures (i.e., bone marrow biopsies, spinal taps). But, having a telemedicine option or even standardizing the use of telemedicine is good for patient experience and access.

The story I use to describe one of the benefits of virtual care services is one experienced by my mom and family. At a critical juncture during her battle with leukemia, her physician in Atlanta recommended that we try to travel all the way to MDAnderson in Houston just to be seen for a visit with the top leukemia physician in the country, if not the world. After an eight-hour drive and much difficulty, it was determined that the 30-minute visit could have easily been done remotely. It was a painful journey for someone who had been inpatient for several months prior and had undergone an intensive round of chemotherapy. Sure, it was possible that, upon arrival, she would have been quickly enrolled in a clinical trial that required in-person care—that was part of the reason for going. But, it really could have been a phone call or even an email (telemedicine was not likely reimbursed for this type of care back in 2017). A little bit of patient experience planning on the front end could have prevented a good deal of suffering—in many circumstances telehealth-based consultations are the right thing to do for very sick patients.

What are Teladoc’s Options?

Build new business models or die. Teladoc purposely acquired Livongo Health in order to add additional services for patients with chronic diseases. Livongo is a health coaching and RPM company designed for the highly prevalent conditions of diabetes and hypertension. The valuation at the time of acquisition was set somewhere around 18.5B which was something like ~60X revenue. The thesis was that the $200B+ market size had arrived and that a Teladoc/Livongo combination would be able to seize significant market share quickly. Livongo’s capabilities and distribution would both provide new sales opportunities for Teladoc to offer services to the self-insured employer market and would help expand its scope of practice—turning Teladoc into a self-proclaimed patient-centered virtual primary care clinic.

The same tensions still exist for the Teladoc-Livongo combination as Teladoc alone. Can they convince patients to build long-term lasting relationships? And, perhaps more importantly, can they convince employer groups to contract with them to care for employees in a less expensive and more effective manner than the traditional insurer ASO relationships? Do Teladoc’s clinical model and experience provide better value to the employer than Cigna’s stuffy old provider network? This is yet to be proven, but if Teladoc can succeed in these areas as Gen Z and Millenials begin to acquire chronic conditions, then in 10 years, the original thesis may play out in a big way.

With Amazon’s recent acquisition of One Medical, Teladoc faces renewed stiff competition in the self-insured employer market and may feel the pressure to open brick-and-mortar locations to compete. Amazon’s AWS B2B relationships derived from their overwhelming cloud market share will likely be a driving force behind Amazon Care and One Medical’s growth. This is where I believe brand will play a core role in who will succeed in the market. Traditional, firmly-rooted health systems are also pushing hard into direct employer contracts to build out Teladoc and One Medical-like experiences. The catch is that these large acute care facilities will have one thing that Teladoc and Amazon do not—hospital beds. We should not be so quick to misjudge the power of the acute care facility in winning favorable payor relationships and leverage with employers who spend significant amounts on acute care each year.

Time will tell who will win, but regardless, virtual care experiences are here to stay and will likely become the norm rather than the exception in 10 years. Let us also not forget that healthcare is a massive market ($3.2T) and there is room for a number of players to succeed in a major way.

Physician and Clinician Workforce Competition in Virtual Care

Equally as important as the clinical and business models will be workforce issues. I recently discussed nursing workforce issues in this article here. It is a well-established fact that people like to work from home. Clinicians have historically not had the opportunity to do so.

With virtual care companies entering to compete with traditional employers of clinicians, the competition for physicians, nurses, and other healthcare professionals will be an absolute battle. Physicians who have previously worked virtually providing care through Teladoc will be presented with the opportunity to work from home providing telemedicine care through their local health system or another virtual care company. State licensure law will provide physicians and other healthcare professionals with significant power to command salaries and benefits.

Workforce attraction and recruitment functions will be essential to the business strategy of any new clinical operation. Working from home will become a core benefit used to attract in-demand specialties.

Where do we go from here?

Virtual care will continue to grow as new contracting methods will lead to significant changes in the healthcare delivery space. Companies will look to adopt traditional, typically non-healthcare business strategies to gain scale, improve margins, and win customers. Market segmentation, which has historically been absent in healthcare services, will now begin to play a role. One thing will remain true, however, patients prefer to get effective, cost-efficient care in their homes. Health does not happen in the physician’s office, but rather in the home and the community—our system should reflect that.

Time will tell if Teladoc can convince employers and patients to choose them over other options. Regardless, looking at the big picture healthcare markets are tightly linked to government policy changes and legislation—where any one bill or regulation could fundamentally shape the future of care.