Navigating Business Models for Mental Health Tech
Choosing a business model is one of the most important decisions for a mental health startup. After several years of working at early-stage healthcare startups and speaking with colleagues across the industry one thing is clear: mental health business models are complicated. It is critical to choose the right one(s), and many founders, product managers, and business teams wish they knew more about them.
In fact, the importance of business models applies far beyond just mental health tech, and much of what’s described here applies to the broader health tech industry. This article shares what I’ve learned to maximize one’s chances of success.
We’ll cover 5 business models:
Self-insured employer benefits
Most mental health startups target multiple revenue models simultaneously. For example, starting with employer benefits, before adding in fee-for-service and value-based reimbursement, with the ultimate goal of achieving device-like reimbursement. Let’s dive in.
In this model, the mental health startup sells directly to consumers, generally as a monthly subscription fee. Direct-to-consumer (D2C) is often the first business model that mental health startups try because it offers a fast path to revenue and the ability to quickly gain product feedback to iterate. It’s also particularly attractive for those who have come from consumer-tech backgrounds and want to apply their skills to a meaningful problem-space.
There are two categories of mental health products that have worked at scale with a D2C business model: meditation apps and telemental health platforms. Meditation apps such as Calm and Headspace have been very successful using a D2C model. These have largely been successful because they are non-medical. Consumers are willing to pay out of pocket for meditation because they view it as a general wellness and relaxation expense — akin to a massage or a gym membership — rather than a medical product, which they expect insurance to cover.
Several telemental health platforms have also been successful with D2C, namely Talkspace and BetterHelp. These have been successful because people recognize that it is very difficult to find an in-network therapist (i.e. one that their insurance covers), and are therefore open to paying out of pocket for more affordable face-to-face therapy alternatives. Even so, both TalkSpace and BetterHelp are both pursuing B2B revenue through employer benefits to supplement their consumer businesses.
Long-term, many startups run into difficulties with D2C models because consumers generally expect their health care costs to be covered by insurance or their employer. Startups also often find that the economics of D2C marketing is far more expensive than originally anticipated. Many consumers want their healthcare products to be prescribed by their providers and directly integrated into their existing healthcare services, making them resistant to products externally marketed to them. It is largely for these reasons that the majority of mental health companies that start with a D2C business model end up pivoting to some variant of B2B. This trend applies throughout the health-tech industry, with a Rock Health survey showing that 61% of digital health companies that start with a D2C business model ultimately pivot to B2B or B2B2C.
Despite its challenges, D2C can still be a great place to start. It enables early revenue opportunities, and gaining product traction and engagement data can make it easier to transition into B2B opportunities. In mature mental health tech companies, however, D2C generally only comprises a small portion of total revenues.
Self-insured employer benefits
In this model, mental health startups sell to a self-insured employer that offers the product as a benefit to their employees. Services are generally paid for on a per member per month (PMPM) basis. There are many variations of this, with some models requiring payment regardless of usage, while in other models the company only gets paid for active users in a given month.
Many of today’s high-traction mental health startups obtain a large portion of their revenue through employers. These include Ginger, Big Health, TalkSpace, Livongo, Omada, Lyra Health, and Modern Health, to name just a few. This traction is possible because mental health has arisen as one of the top concerns of employers. Companies are eager to trial new solutions, which is not surprising given the impact of mental health on productivity and retention.
Selling to employers is attractive because it offers a faster sales cycle than selling to health systems and insurance plans, and employers are known to have a greater willingness to try less proven solutions if they can see a positive ROI. This makes it easier to get a mental health product in-market without long, drawn-out pilots and contracting processes (commonly known as death by pilot).
One hidden difficulty of the employee benefits model is the ‘second sale’. In most cases, a company will only get paid if an employee uses the service. Therefore it is not enough to get the employer to offer the service (the first sale) — a secondary sale is needed to activate each employee and drive usage. This is generally achieved by directly mailing or emailing employees, putting flyers and advertisements in places of employment, or attending employee health and wellness fairs.
Working directly with health systems and payers
This section is divided into fee-for-service, value-based payments, and device-like reimbursement.
Fee for service is the traditional business model in healthcare. In this model, the insurer pays an agreed-upon rate for a service. For example, a payor might agree to pay an in-network therapist a $75 fee for a 50-minute therapy session.
Fee-for-service billing is generally done using a CPT (Current Procedural Terminology) code. CPT codes are standardized codes for specific services that are published by the CMS (Centers for Medicare and Medicaid Services). While the codes themselves are standardized, each insurer contracts individually with a provider to set a rate for each code.
Billing an insurer using a CPT code is particularly suitable for telemental health providers because established CPT codes for telemental health are already accepted by most insurers. Many health systems simply do not have enough clinicians within their network to service demand. They partner with telemental health startups to service this excess demand and pay for the services based on established CPT codes at contracted rates.
To bill using CPT codes, a startup must be a healthcare provider with a national provider identifier number (NPI). Many mental health startups take this approach. For example, Ginger, Ableto, MindStrong, and Omada are all health care providers with NPIs and are therefore able to bill with CPT codes. It is also possible to obtain a new CPT code, a process managed by the AMA. While it is a long pathway, new codes have been created for digital health solutions. For example, CPT codes were created for CDC-recognized digital diabetes prevention programs, a development that contributed to the success of companies such as Omada and Livongo. Future establishment of CPT codes for standalone (non-telehealth) digital mental health treatments would be a major boon for the industry.
Another option is to directly contract with a payor to receive a specific rate for app usage. This often takes the form of a set payment per active member per month or an annual license fee. This structure is suitable for software vendors that are not healthcare providers or who offer a service that is not already covered by an established CPT code. Standalone mental-health platforms such as myStrength (now owned by Livongo) and SilverCloud Health are known to use this model.
Digital formularies are a recent development in the fee-for-service model. CVS launched its digital formulary in June this year — which they call vendor benefits management (VBM) — and Express Scripts quickly followed by launching its digital formulary earlier this month. Both formularies vet digital health offerings based on clinical efficacy, user experience, and cost-effectiveness, and allow payors, such as health systems, commercial insurers, and self-insured employers to opt-in to agreed-upon financial terms. BigHealth, Livongo, SilverCloud Health, and Learn to Live, are among the first digital mental health solutions to be offered through these digital formularies. Expect digital formularies to quickly become a major distribution channel for digital mental health products, similar to how pharmacy benefit managers (PBMs) are the major channel to market for traditional therapeutics.
The next model for working with health systems and payors is value-based reimbursement. In this model, the mental health startup is paid based on cost savings from reducing overall healthcare utilization. Value-based reimbursement for mental health has become a hot topic because of data showing that mental health conditions, when comorbid with chronic illnesses, lead to large (2–3x) increases in overall healthcare costs.
Although value-based reimbursement seems like an attractive model, it can be difficult to administer because it is hard to directly attribute cost savings to a specific product. To address this, it is common to use proxy metrics like reductions in ER visits or symptoms. This approach is similar to that used by diabetes prevention companies, which get paid based on pounds of weight loss or reductions in A1C, a marker of diabetes severity. Unlike overall healthcare utilization, these metrics are much easier to measure and attribute to the product.
It’s also common to combine value-based payments with fee-for-service payments. For example, a health system might pay for telehealth at a contracted rate based on a CPT code while also providing bonuses for hitting certain quality levels, such as a reduction in ER visits.
The FDA recently began clearing Software as a Medical Device (SaMD). Whereas, previously, the FDA cleared software in physical medical devices (e.g. a smart glucose monitor), SaMDs are standalone software (e.g. an app that operates on a standard smartphone). SaMDs are often referred to as prescription digital therapeutics (PDTs), although there are subtle differences in their definitions. The clearance process is similar to that of traditional medical devices, and generally requires rigorous safety and efficacy data from randomized controlled trials (RCTs).
FDA clearance enables companies to make medical claims and pursue device-like reimbursement. The goal is to obtain a dedicated CPT or HCPCS code. HCPCS codes are similar to CPT codes but are generally used for medical devices or non-physician services that are not otherwise covered by CPT codes.
A small number of mental health products have received FDA clearance. The most notable of these are RESET and RESET-O by Pear Therapeutics, which are both cleared for the treatment of substance use disorders. However, the path from FDA clearance to reimbursement is still uncharted, and many are looking to Pear to see how it will be achieved. FDA approval does not automatically lead to reimbursement by insurers. The conventional wisdom is that the Centers for Medicare and Medicaid Services (CMS) make a coverage decision based on clinical efficacy and cost-effectiveness, and then commercial insurers follow suit. However, analyses show that CMS and commercial insurers only make the same coverage decisions in about 50% of cases. Many startups were looking to partner with pharmaceutical companies to facilitate SaaMD commercialization. However, a slew of recent partnership terminations between digital health startups and pharma has thrown this model into question.
Most digital health startups pursue FDA clearance to obtain a long-term, defensible competitive advantage, while simultaneously pursuing shorter-term revenue models to reduce company burn. It takes many years and significant funds to obtain FDA approval, and even longer to obtain device-like reimbursement. In the past, some investors were willing to float long prescription digital therapeutic cycles. Some startups achieved valuations in the $100s of millions with zero revenue because of the expectation of swift commercialization post-FDA clearance, similar to pharma. However, the commercialization difficulties of companies such as Pear, and more recently, Proteus Digital Health, have led to a greater emphasis by investors on generating revenue and market traction earlier. Thus, it is more important than ever for digital health startups to capture revenue through alternative business models in order to survive.
Making “Cents” of It All
There is no one-size-fits-all answer to choosing the right business model for mental health startups. From D2C and employer benefits to fee-for-service, value-based care, and prescription digital therapeutics, multiple approaches can work. One thing is clear, however: understanding the pros and cons of each, choosing the right ones, and in the right order, will have an outsized impact on the success of any mental health startup.