In international relations, a proxy war is an armed conflict between two smaller groups each representing the interests of larger nations. Two recent examples saw the U.S. and Iran supporting opposing factions in Iraq in the mid-2010s and the U.S and Russia doing the same in Afghanistan during the early 1990s.
Although the stakes are not comparable, there may be similarities in how the telehealth industry takes shape over the next decade. Fast-growers Teladoc (NYSE:TDOC) and American Well (NYSE:AMWL) (recently rebranded as Amwell) are getting a lot of attention due to their recent transactions: an acquisition and an IPO, respectively. But technology giants Apple (NASDAQ:AAPL) and Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are taking up positions that may make telehealth players pawns in a larger battle.
The right place at the right time
The telehealth market is estimated to grow to $23 billion in 2025 from only $8.3 billion in 2019. Office closures and social distancing guidelines have only accelerated this trend, as patients are unable (or unwilling) to sit in a waiting room until the doctor can see them. Consulting firm Frost & Sullivan estimates the demand for telehealth will grow more than 60% in 2020.
As insurance companies and Medicare further establish the relationship between care outside the hospital and health outcomes, financial incentives will force clinicians to engage easily and often with patients beyond traditional visits. Periodic check-ins, health monitoring, and regular digital communication are likely to become the norm.
Follow the money
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Connecting patients and doctors is an important part of the healthcare system, but it is not the most profitable. Telehealth companies charge $49, $79, or $99 per visit for a few million patients per year, but electronic health records (EHR) systems are massive software platforms that sometimes cost billions of dollars just to purchase, not to mention additional costs for frequent upgrades and maintenance. It’s not the Teladocs of the world who will make today’s healthcare investors rich, but EHR system companies.
Duke University Health System recently paid $700 million for its Epic EHR. Kaiser Permanente paid $4 billion. Additionally, users of Epic systems reportedly spent another 40% to 49% of initial implementation costs in upgrades. Epic has the highest market share in the hospital market with 29%, while Cerner holds 26%. The opportunity of the EHR market is evident once we compare the revenues and gross margins of a few publicly traded players.