Health-tech business models: why B2C is probably not the answer

Photo by National Cancer Institute on Unsplash

A health tech founder recently asked me: “should I prioritize appealing to institutional customers (such as payers and hospitals), or go B2C? “

Here’s my (de-identified) answer:

Defining your business model is the hardest thing for healthcare companies. These models are hard because of the multitude of stakeholders. You may need some model innovation (in terms of the interactions between some of the stakeholders, and the billing structure), especially if you're building in digital health.

Founders who understand this often attempt to circumvent the problem by going down the B2C route. Their assumption: you can sell premium health services to the high-end of the market. Those customers have a lot of disposable income, and should be willing to invest in their health – including paying out of pocket. They plan to start by selling to these customers, and demonstrate the value of their product or service. Later, they’ll find a way to sell to everybody else.

This assumption rarely works. The main reason is that people are just too used to getting their healthcare paid for by insurance. There are exceptions to this rule, but for your product to be appealing, it will have to be sufficiently differentiated and / or superior to alternative solutions to similar problems. At least initially, this is not often the case, so it's an uphill battle to get people to pay out of pocket for the unproven, uncovered, expensive product.Furthermore, healthcare investors know this dynamic. So often, you'll only be able to raise capital if you already have a reimbursement strategy (how you’ll get insurance to cover the cost of your solution).

That was my original answer – and if you’re a healthcare founder reading this, you may be wondering if you could be an exception. A guideline that may help figure that out – consumers are more likely to pay out of pocket for products closer to the “wellness” side (nutrition, fitness, stress management, sleep, etc.) than they are to buy uncovered therapeutics. Just be realistic in your evaluation – it’s easy to convince yourself that you’re an exception, but in practice there are very few.