Not so fast on the future of telehealth

The dramatic rise in telehealth has created many PE investment opportunities, but many of these changes won’t survive the pandemic.

For years digital health has appeared on the verge of greater adoption but has never quite met expectations. That all changed with covid, as public health officials looked to keep people out of hospitals to minimize the risk of infections and deliver whatever care they could via telehealth.

Growth in its use during the pandemic has occurred because of an unprecedented relaxation of regulatory requirements following the declaration of Public Health Emergency (PHE) in January. Federal and state regulators eliminated or suspended barriers to implementing digital health, resulting in dramatically increased usage. While the dramatic rise has created many PE investment opportunities in both traditional and digital healthcare, many of these changes won’t survive the pandemic, and it isn’t clear what future telehealth utilization will look like. Anyone thinking of sponsoring a digital health play will need to assess the permanence of these changes.


Jeremy Sherer, Hooper, Lundy and Bookman

We recommend focusing on several areas:

State law: Medicine is regulated on a state-by-state basis with each state board having technical rules around when and how technology can be used to deliver medical services, addressing issues like:

  • Technologies used to establish a “practitioner-patient relationship,” (g., in-person requirement vs. video, telephone, or online questionnaire);
  • The nature of patient consent required;
  • E-prescribing requirements, and,
  • What state-issued licensure is required.

During the PHE, state medical boards relaxed requirements to facilitate easier access to telehealth care from home, most commonly by allowing out-of-state physicians to treat their residents without a state-issued license. These changes enabled physicians to treat new patients via telephone only (vs. video chat) and temporarily eased certain e-prescribing requirements.

While we expect some of the progress gained in recent months to stay in place, we see regulatory relief around state licensure as unlikely, at least in the immediate future. This would hurt telehealth volumes post-PHE, when providers will once again be subject to state license requirements.  Investors should also ensure business associate agreements (BAA) were in place and firms were following all applicable rules so lenders don’t raise representations and warranties issues.

Secular shifts: While the pandemic initiated significant growth in digital health, brick-and-mortar healthcare facilities – particularly independent practices – are struggling.  According to the American Hospital Association, hospitals are expected to lose over $200 billion from March to June, almost twice the government aid issued to hospitals thus far, while over three-fourths of practices reported being under severe or near-severe financial stress. Though this is likely to create opportunities in distressed assets, several cautions should be noted.

Just as the pandemic has shifted attitudes and usage around digital health, so too has the fear of infection and ease of access impacted in-person utilization and reimbursement (more below). In addition, given approximately one-third of covid deaths occurred in nursing homes (a haven for PE investment) and patients’ greater comfort with virtual care covid may precipitate greater utilization among seniors – though considerable regulatory changes will be needed.  Lastly, with labor typically accounting for almost two-thirds of hospital cost, as well as the risk to healthcare workers from covid, healthcare providers may well face higher labor costs for a while.

Reimbursement: Under state law telehealth is subject to two kinds of parity, coverage parity (parity in insurance coverage for in-person and telehealth services) and payment parity (parity in reimbursement for in-person and telehealth services). While very few states required payment parity before the PHE, many states required commercial payers to observe payment parity for audio-visual and audio-only services during the PHE. Potential investors need to be aware that states could – and likely will – revert to their old policies post-covid, significantly changing the financial picture for telehealth companies.

Similarly, fee-for-service Medicare telehealth coverage is limited by narrow provisions that enumerate things such as originating site, provider & patient types that qualify. Pre-covid Medicare had only about 100 such codes for telehealth, during the PHE Medicare extended coverage to 80 additional codes. Consequently, PE firms should investigate what revenues are tied to specific codes and which are expected to survive when doing modeling and valuation. Finally, with over 27 million people losing employer sponsored health insurance and over half of those being eligible for Medicaid per the Kaiser Family Foundation, providers are likely to face additional stress from changes in payor mix. Investors should look at this as well as opportunities to leverage lower-cost digital tools to serve Medicaid populations as part of their analysis.

Conclusion.  There will be plays to take advantage of shifts towards digital health post-covid.  But success during the pandemic won’t necessarily translate to the post-pandemic regulatory environment. Moreover, some of these opportunities may have been created at the expense of the traditional healthcare delivery system and as a result, comprehensive modeling and diligence are going to be required.

Jeffrey Englander is the founder and principal of Healthcare Strategy Bullpen and has over 15 years of experience in healthcare strategy, market positioning, industry disruption and innovation at a number of Fortune 100 firms.  

Jeremy Sherer is an attorney specializing in telehealth, digital health and regulatory compliance matters.  He co-chairs the digital health practice at Hooper, Lundy and Bookman.