Digital Health: An Improving Environment for Investors

by McDermott Will & Emery

The integration of technology into health care delivery is exploding throughout the health industry landscape. Commentators speculating on the implications of the information revolution’s penetration of the health care industry envision delivery models rivaling those imagined by celebrated science fiction authors, and claim that the integration of information technology into even the most basic health care delivery functions can reduce cost, increase access, improve quality and, in some instances, fundamentally change the way health care is delivered.

These visions are difficult to refute in the abstract; the technology exists or is being developed to achieve what just a few years ago seemed the idle speculation of futurists. But delivering this vision in an industry as regulated as health care is significantly harder than it may seem. While digital health models have existed for many years, the regulatory and reimbursement environment have stifled their evolution into fully integrated components of the health care delivery system.

Recently, some of these barriers have begun to give way, and telemedicine—the treatment of a patient through electronic communication tools such as video-conference, and remote patient monitoring—is poised to firmly entrench itself in the health industry landscape.

Fundamentally, for a business venture to attract investors, it must have a viable financial model.  In health care, business models are complicated by the unique way we pay for health care services. Health care services are paid for in a variety of ways; but fee-for-service continues to be the primary and fundamental methodology, even as the health care payment system is undergoing significant change. This presents a challenge for many digital health tools, which, unless they are directly reimbursable under a fee-for-service model, are just an expense item. In this regard, telemedicine ventures have had an advantage that has increased over time. Telemedicine can be viewed as nothing more than a method of delivering care. Accordingly, it is a small conceptual step to extend reimbursement in a fee-for-service environment to telemedicine services. Over time, government and private payers have become increasingly receptive to telemedicine, and have evolved the business model from one relying on out-of- pocket expenditures to one that can take advantage of the third party payment system.

  • Private Payers. The majority of states and DC now have laws in place requiring health plans to cover and reimburse for telemedicine services. While many of these state laws require health plans to reimburse telemedicine services in the same manner and at the same rate as in-person services, others only require coverage of telehealth services and permit reimbursement at a rate that is less than the amount provided for in-person care. Regardless, states’ legal mandates are forcing payers to examine their existing telemedicine reimbursement policies and practices, providing new opportunity for telemedicine enterprises.
  • Medicaid. Almost all state Medicaid programs cover telemedicine services in some capacity. That said, no two states are the same in how they define and regulate telemedicine, which can create confusion for telemedicine providers, particularly those offering services in multiple states.  A number of states have efforts underway to develop clearer, more uniform Medicaid reimbursement policies, which will lessen this confusion and create additional opportunities for the providers of telemedicine services.
  • Medicare. While Medicare increasingly is covering various types of telemedicine services, numerous billing requirements (g., the patient must be located in an eligible location, at an eligible facility and seen by an eligible provider using eligible technology) limit the ability of providers to seek reimbursement from Medicare for such services. Recent attempts by members of Congress to waive or redefine certain reimbursement requirements indicate that Congress appreciates the value of telemedicine and its potential to effect changes called for in the Affordable Care Act.

One strong example of these efforts is the Creating Opportunities Now for Necessary and Effective Care Technologies (CONNECT) for Health Act (S. 2484 and H.R. 4442; introduced February 2, 2016), which proposes to remove certain barriers to Medicare coverage to increase the types of telemedicine services provided to Medicare beneficiaries—including remote patient monitoring services—and reflects the broader phenomenon of the gradual movement of digital health tools from the sidelines into every day care and a recognition that such tools are essential to achieving the goals of health reform.

Other digital health tools, such as mobile medical apps and big data technologies, do not have this benefit of falling squarely into the third-party reimbursement environment. Nonetheless, the reimbursement environment changes underway are creating a much more financially attractive environment for all digital health tools. The shift to value-based and episodic or population-based payment methodologies is making digital health tools—regardless of direct reimbursement—attractive for health care providers. The need for providers to deliver high quality care in an efficient manner makes digital health tools valuable.

This is true beyond the abstract as well. The Centers for Medicare and Medicaid Services has signaled its acknowledgment that telemedicine can be integral to new value-based payment models, providing waivers of specific payment restrictions under its Bundled Payment for Care Improvement Models and Next Generation ACO Model and proposing such waivers for its mandatory Comprehensive Care for Joint Replacement Model.  In addition the Medicare Access and CHIP Reauthorization Act (known as MACRA) ties payment reductions and increases to a variety of efficiency and value factors that clearly implicate the utilization of digital health tools—including a specific reference to telemedicine tools.

Certainly other regulatory issues make the environment for digital health tools challenging. The ever-stricter fraud and abuse laws, state-specific standards of care requirements and privacy requirements among other issues, make health care a challenging environment for implementation of digital health tools. Nonetheless, the changing reimbursement landscape is making the environment more attractive for investors.

Exploration of Investment Opportunities at Illinois Telehealth Law Forum

While legal and regulatory obstacles remain for telemedicine and other digital health companies, the development of more accepting reimbursement and regulatory environments is creating an environment for digital health ventures to succeed and scale—and providing investors with more confidence when considering a telemedicine investment.

At the final installment of the Illinois Telehealth Law Forum series hosted by the Illinois Telehealth Initiative [Registration], taking place on September 13, 2016, at McDermott Will & Emery LLP’s Chicago office and three other locations across Illinois, a panel of investors and legal experts, moderated by McDermott Will & Emery partner Dale C. Van Demark, will explore the risks and opportunities associated with investing in the telemedicine and, more broadly, the digital health space.

This discussion will build upon the presentation delivered at the first Illinois Telehealth Law Forum on April 6, 2016, by Ryan S. Higgins on “Investment in Telehealth” during which Ryan advised, “We can only expect greater investment in telemedicine equipment and software development, and provider-focused companies in the coming years given the strength of the drivers behind its use—ranging from alternative payment models to health care consumerism.”

Some of the key reimbursement, and legal and regulatory issues that will be explored by the panel at the September 13 Forum are touched on below.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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