A Checkup on the Consumer Healthcare Opportunity.

Healthcare is being redefined by the consumer, particularly as Americans shift to high deductible plans. New models and venues of care are emerging to serve customers better. This has spawned companies like Hims, Modern Fertility, and Ro. Major DTC Healthcare companies have leveraged telemedicine services, data and machine learning, medical-grade wearables, and subscription models to better serve new customer needs. 

The consumer healthcare opportunity is compelling. Total U.S. healthcare spending is $3.5 trillion annually. Most healthcare products have naturally high retention and margin structures; Pfizer enjoys EBITDA margins of 35-45%. Patients are now customers, so latent demand exists in most status quotes. These developments coincide with changing consumer consciousness with wellness. Healthcare is no longer just sick care, but preventative care. 

There has been a lot of activity in consumer healthcare recently, but many opportunities remain. Besides more consumer brand startups, most of the early market activity has been with at-home diagnostics and monitoring and virtual primary care. Critical parts of primary and specialized care have not received as much attention. These opportunities all feature specific challenges around scalability. 

Tech monopolies see a clear opportunity in consumer healthcare. They are leveraging their expertise and advantages in nurturing consumer relationships. The pursuits of GAFA in this space are low-risk and high-reward. They remain mainly focused on primary care and geographic arbitrage. It’s unlikely GAFA will interfere substantially with startup activity but will empower it with their infrastructure and funding.

For instance, Google has backed Oscar Health. Their bet is around whoever owns the entry point of healthcare will have the most leverage in the value chain, particularly over providers.  Oscar’s bet is that virtual primary care will outcompete both traditional primary care., The focus is on building a great brand, excellent user experience and an incentive with the customer to optimize for CLV. 1 This is not just a great opportunity, but a fundamental good that should be happening with healthcare insurance.

As engagement increases, unit economics can eventually scale to overcome incumbent insurers. Throughout this process, structured insurance claims data correlated to patient-reported behavior, biometrics, and communications with providers would significantly amplify one of Google’s spinoffs, Verily. However, keep in mind Oscar has had incredible, patient investors. Most team compositions are also not as proven or well-networked as their founding core.

Competition in the consumer brand side of things with healthcare is omnipresent with new startups and incumbents with large bank sheets. Existing manufacturers and distributors tied with legacy distribution channels will be commoditized if they don’t partner or acquire new DTC brands. It’s unclear which startups can vertically integrate at scale like Oscar has and become an enduring company.

There are also a few network effects in the consumer brand market. I’m skeptical of defensibility with brands albeit I recognize consumer trust is very important in health. If incumbents are particularly aggressive with the opportunity, this can explode acquisition costs, churn, and other problems.  I also believe regulatory capture is another hurdle in this area. Most startups need to partner with regulated channels like the FDA. Some of the risks to the opportunity can become moats for the best teams.

Overall, there is a lot of innovation and whitespaces left for consumer healthcare. However, it’s important for investors to be cognizant of the critical risks ahead for startups, something omitted in the DVNB hype only a few years back.