Apps and video games are changing the way we treat diseases. Experts say they’re prime M&A targets for telehealth firms.

Pear Therapeutics  reSET-O digital therapeutics app
A patient uses Pear’s reSET-O app to treat opioid use disorder.

  • Apps and video games that can treat health conditions nabbed $1.2 billion in VC dollars in 2019.
  • Only a few commercial products have been launched so far, and they’re struggling to penetrate the healthcare system.
  • Experts say this field is primed for consolidation and could be a great target for telehealth firms.
  • This article is part of a series called “Future of Healthcare,” which explores how technology is driving innovation in the development of healthcare.

Pear Therapeutics is a leader in its field. But the announcement last month that it would go public in a $1.6 billion deal with a special purpose acquisition company, or SPAC, raised eyebrows.

Pear sells three apps designed to treat opioid abuse, substance abuse, and chronic insomnia. But it’s only expecting to make $4 million in revenue this year.

It’s emblematic of where the young field of digital therapeutics stands today. The technology is theoretically promising, but the business model is completely up in the air. Most health insurers don’t cover these products, nor are many physicians prescribing them.

Digital therapeutics are technologies like cell phone apps or virtual reality games that are designed to treat different diseases. In many cases, they target underserved mental health or neurological conditions like post-traumatic stress disorder and schizophrenia.

The plethora of small, young digital therapeutics companies needs a savvy business partner. Pharmaceutical and telehealth companies each stand out as prime options. But, it’s not clear which will truly engage with this new healthcare technology.

“Digital therapeutics, despite being around for a number of years now, it’s still in an early stage of market development. I think the next few years are going to be about what kinds of businesses are best to shepherd through any special clinical benefits,” Jeff Liesch, a consultant at Blue Matter Consulting, told Insider.

As this gets worked out, the digital therapeutics field is likely to see a wave of M&A.

“Consolidation will come, and we’re seeing it coming,” Liesch said.

Pharma giants like Novartis, Roche, and Sanofi have been exploring prescription apps

Digital therapeutics startups are getting their fair share of the investment dollars flowing into the healthcare industry. The amount of venture capital investment in digital therapeutics grew from $134.3 million in 2015 to $1.2 billion in 2019, according to Pitchbook. Another $709 million was invested in the first nine months of 2020, the most recent data available.

Pharma giants like Novartis, Roche, and Sanofi have expressed an interest in the field. Novartis partnered with Pear to launch a schizophrenia therapy, but dropped that project in 2019. It later acquired a digital therapeutics startup developing a 3-D video game to address lazy eye.

FILE PHOTO: The company's logo is seen at the new cell and gene therapy factory of Swiss drugmaker Novartis in Stein, Switzerland, November 28, 2019. REUTERS/Arnd Wiegmann
Pharma giants like Novartis are eyeing digital therapeutics.

Digital therapeutics, particularly those that are prescribed by a physician instead of released directly to consumers, play to pharma’s regulatory strengths while cutting down on the 10-plus years it can take to develop a chemical drug.

The prescription route is where the money is: the annual US revenue expectations for digital therapeutics range between $100 million and $300 million, according to a Blue Matter report.

Before agreeing to pay for them, insurers want to see long-term data showing how the benefits of these prescription apps or video games last. But, multi-year clinical trials are expensive and there’s a chance that at the end of it all, the technology will be outdated, ZS Associates Principal Pete Masloski said.

Even if the companies can get insurers to pay for their products, there’s still the barrier of getting physicians to prescribe them.

Eddie Martucci, the chief executive of digital therapeutics company Akili Interactive, said that thousands of doctors have reached out since the company got Food and Drug Administration clearance last year for an app to treat attention deficit and hyperactivity disorder. But its commercial sales to date are small.

Akili Interactive
Akili CEO Eddit Martucci, right, talks about Akili’s video game with the company’s director of data science in 2015.

At this point, less than 5% of physicians in the US are exploring and prescribing digital therapeutics, according to Masloski.

The next generation of digital therapeutics startups are building in telehealth options

As a young digital health company, is it even worthwhile to try to educate and convince thousands of physicians to prescribe your app? Masloski estimates that time may be better spent by teaming up with a telehealth company with a specialized focus – be it mental health, chronic diseases, or something else – and a pool of medical specialists at hand.

One telehealth firm, UpScript, has already begun offering consultations for Pear’s prescription digital therapeutic. Meanwhile, the next generation of digital therapeutics companies like Happify Health and Kaia Health are building healthcare support staffs around their products.

Kaia Health
Kaia Health’s app

A wave of M&A is just now hitting the telehealth and digital health space, with big names like Teladoc, Ro, and others acquiring smaller players. The digital therapeutics field may also get swept up in that, Masloski said.

“Digital health companies are looking more broadly at ways to expand their impact across different parts of the patient journey. They’re thinking in a platform way, how can I offer employers, for example, diabetes management, mental health services, all of these things?” he said. “They don’t want to work with 1,000 individual different providers. They want to work with platform companies, simplifying their world.”

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A new breed of health insurers is taking a page out of UnitedHealth’s book and providing care directly to patients, and it could reshape the US healthcare industry

Telemedicine online doctor appointment
A doctor sees a patient online.

  • Health insurer upstarts have made care delivery a core part of their business strategies.
  • Alignment, Bright, Clover, and Devoted all employ doctors and care for their directly.
  • They’re betting that doing so will help them lower costs and compete against industry giants.
  • This article is part of a series called “Future of Healthcare,” which explores how technology is driving innovation in the development of healthcare.

A new breed of health insurers is betting that providing care directly to patients will help them compete against industry giants and grow their footprints across the country.

These young insurers, like Alignment Healthcare, Bright Health, Clover Health, and Devoted Health have made employing doctors and delivering healthcare a core part of their strategies.

In some ways, they’re following a playbook etched out years before them by incumbents like UnitedHealth Group, which has worked for more than a decade to assemble a fleet of 56,000 doctors and counting by acquiring medical groups.

Humana, which deals in health plans for elderly people, has been buying and building out primary-care clinics for years. And Blue Cross Blue Shield insurers in Florida, Tennessee, and Texas have stood up dozens of retail clinics.

But while the big players have waded into providing care over time, the new-age insurers, which bank on using sophisticated technology to improve care and lower costs, have it in their DNA. Unlike the dominant insurers, they’ve largely steered clear of physical clinics, focusing instead on providing care virtually or in people’s homes.

It’s an approach that requires less capital, but still arms the upstarts with the tools needed give their members more ways to get care, and better control how much they spend on care.

“It gives us the reliability of making sure we can bend that cost curve everywhere we go without having to go into each market with a bunch of bricks and mortar,” Alignment CEO John Kao said. Alignment employs about 150 clinicians that care for the sickest plan members virtually and at their homes.

Alignment and Devoted are seeing patients online and at home

Alignment, the California-based Medicare Advantage insurer with 83,000 members, uses its technology to find the sickest, most expensive plan members who have chronic illnesses and frequent the hospital.

Alignment’s group of employed doctors, nurses, case managers, social workers, and behavioral health coaches care for 4,000 of these members, in partnership with their regular primary-care doctors. Being able to provide care itself is just more efficient, Kao said, and it helps save Alignment some money, which it can put back into better health benefits and attract more customers.

Waltham, Massachusetts-based Devoted, which had a little more than 20,000 Medicare Advantage members at the end of 2020, has its own medical group of employed doctors and other clinicians who provide virtual care to plan members at home.

Its services “wrap around and complement” the health care providers that Devoted partners with, so members get the best care at the right place and time, a spokesman for the company said in an email.

Clover is expanding its in-house home healthcare program

Meanwhile, insurer Clover Health also built up a home-healthcare program mostly run by employed healthcare providers.

The insurer, which had 66,300 Medicare Advantage members in March, uses claims data and medical records to look for people with multiple chronic illnesses, who are frail or home-bound, or visit the emergency department often. Its technology will then tell an eligible patient’s primary-care doctor that they might benefit from home visits, which are conducted by Clover’s internal care teams, Dr. Kumar Dharmarajan, head of Clover Home Care, told Insider.

Dharmarajan said the program increases access to care for older adults who don’t leave the house. It also allows Clover to get a picture of non-medical factors that could lead to worse health, like disorganized medications or fall hazards like electrical cords on the floor. An office visit wouldn’t reveal that kind of information.

In New Jersey alone, Clover expects to have between 3,000 and 3,500 Medicare Advantage members in its home care program by the end of this year, compared with just 200 patients in 2017, Dharmarajan said. It’s set to expand further as Clover starts offering home care to traditional Medicare enrollees that it’s managing through a federal program.

Bright is buying up medical practices

Most young insurers aren’t building clinics, but Bright Health is the exception.

Its CEO Mike Mikan, a former UnitedHealth Group executive, is following his former employer’s blueprint and buying up medical practices.

Bright, which provides health coverage to 623,000 individuals, families, and seniors, is tucking these acquisitions into its new care delivery business called NeueHealth. The business owns or manages care for 61 clinics, but it also works closely with outside provider groups and arms them with analytics and other tools to they can provide better care.

In both cases, the goal is for the insurer and provider to get on the same page and partner to improve patients’ health and lower costs under a payment model where each side wins when it works.

That’s different the old insurance strategy of restricting care, Mikan said.

“What we really want to promote is the healthcare system to move to a value-based model where you’re really rewarding performance based on the quality of the care they provide, not just the quantity of care,” he said. “Every consumer is better served when they’re part of an aligned model.”

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