Looking into the industry of telemedicine: the listing documents for Teladoc

In addition to Fitbit, which I mentioned in a previous posting (the link can be found here), Teladoc, the first and largest telemedicine company in the U.S., was listed the NYSE. This means that just as Fitbit had done in the past, Teladoc must now reveal a significant amount of internal data.

Teladoc submitted its S-1 for its listing in the U.S. stock exchange at 4:53PM, Friday May 29th, in U.S. time. Those who work in relevant industries in the U.S. diligently studied these documents over the weekend and submitted their analyses on Sunday, May 31st (the relevant link can be found here). These analyses are acceptable but their content appears rather insufficient, so I made a study of the S-1 of Teladoc. The contents mentioned here may strike those familiar with the industry as obvious, but some points may be of interest to others.


What is the business model of Teladoc?

The main business model for Teladoc consists of making a contract with employers or insurance companies so that the employees or members can receive remote medical care. Therefore, it is a type of B2B2C model.

I thought that direct-to-consumer (B2C) model would be a significant part of their business but this does not seem to be the case. Of the companies included in the Fortune top 1000 list, 160 are customers of Teladoc and the number of members is estimated at 11,000,000 (this is the number of members affiliated with client companies).

Major clients include

Companies such as Accenture, Pepsi, Shell, T-mobile, Bank of America, General Mills

Insurance companies such as Aetna, Amerigroup, Blue Shield of California, Centene, Highmark, Universal American

Medical institutions such as Mount Sinai, Health Partners, Henry Ford, Memorial Hermann

Teladoc makes a contract with these client companies so that in exchange for providing remote medical treatment, it can bill clients for a regular subscription fee (a fee for the right to use the service for a certain period of time) and a separate fee every time a member actually uses the service. The company pays for the regular subscription fee while the additional fee per usage may be covered by the company or the individual member. The annual sales for 2014 was $43.5M, of which 85% consisted of regular subscription fees, while 15% consisted of fees per usage. The total number of remote medical treatment usage in 2014 was 300,000.

Also, Teladoc claims that the number of current (eligible) members is 11M but this supposedly includes only a portion of those affiliated with companies that made a contract with Teladoc. Therefore, this means that client companies are providing Teladoc services to only a part of their employees or members. Teladoc claims that the total number of members affiliated with client companies is 50M and that it will be able to continue growing just by maintaining its current clientele and ensuring satisfaction, which will lead to the extension of contracts.


What is the structure of sales and costs?



Above is the part of the Teladoc’s income statement. Sales increased from $19.9M in 2013 to $43.5M in 2014, by 119%. Recently, sales increased from $9.4M in the 1st quarter of 2014 to $16.5M in the 1st quarter of 2015, by 75%. This shows that the company is growing rather quickly. However, it continues to record significant losses.

What is interesting is that in 2014, approximately 300,000 cases of remote medical treatment were reported. In another section of the document, the cost per session of remote medical treatment was stated as $40. If you multiply 300,000 by $40, you get $12M. However, it was stated above that of the total sales from 2014, which is $43.5M, of which 15% comes from fees for remote medical treatment, but 15% of $43.5M only amounts to $6.5M. Therefore, the cost actually paid for by the users of remote medical treatment is estimated at just over $20 per case.

Of the expenses, the cost of revenue needs to be examined. This can be considered as the cost of goods sold (COGS) and includes:

#1 the amount paid to doctor

#2 the cost associated with operating the network, when a contract is made with a doctor via physician networks.

#3 the cost of operating a call cente

#4 insurance premium for medical malpractice insurance

The proportion of the COGS out of total sales was approximately 23% in 2014. Previously, it was mentioned that 15% of total sales consisted of fees from remote medical treatment. Thus, I may assume that the amount paid to doctors stand somewhere between 15 and 23 percent of the total revenue. This means that doctors receive at least all the fees from remote medical treatment and maybe a bit more.

Suppose that the doctors take all of the fees from the remote medical treatment. The total amount in 2014 would be $6.5M (15% of $43.5M). Since the number of medical personnel that made a contract with Teladoc (doctors + behavioral health professionals) is 1,100, if you divide the total amount by 1,100, you are left with approximately $6,000 for income earned per individual per year.

According to what Teladoc reported in its S-1, medical personnel who participate in Teladoc is capable of earning up to $150 per hour. According to the 2013 edition of Becker’s Healthcare Report, if you consider the fact that the hourly income of a doctor working full-time is $99, the amount earned via Teladoc exceeds this by more than 50%. Furthermore, some doctors working for Teladoc supposedly report an annual income of over $100,000 (in order to earn over $100,000, I guess that a doctor would have to be working almost full-time for Teladoc).

Another point that needs to be emphasized is that of the income earned by Teladoc, the amount taken away by doctors is smaller than expected. Approximately 15-20% is taken by doctors, and considering the fact that Teladoc only provides outpatient services without complicated lab tests, procedures and operations, one cannot help but remark that Teladoc pays doctors less than what I expected.


What about medical specialties?

Telemedicine companies including Teladoc usually deal with rather simple diseases that require immediate symptomatic treatment, like the common cold. In the S-1 document, Teladoc claims that it mainly treats upper respiratory tract infections, urinary tract infections, sinusitis and dermatologic diseases. It also provides treatment for anxiety and quitting smoking through behavioral health professionals.

However, mentioning future growth strategies, Teladoc states that it will expand into novel clinical areas. For example, these include standalone dermatology services, secondary medical opinions and treatment for chronic diseases like diabetes. Telemedicine companies like Teladoc used to avoid treating chronic diseases like diabetes and hypertension while claiming that these needed to be treated in a long-term relationship with a doctor. However, they are now showing a change in position.


Are customers satisfied with the services provided by Teladoc?

According to a self-conducted survey by Teladoc, 95% of users reported being satisfied, but it is hard to tell from this result alone. Thus, Teladoc has set forth another index called Annual Net Dollar Retention Rate. This is a type of growth rate in the number of long-term contract customers, and calculation is as follows:

You divide the total regular subscription charges of the customers who maintained a contract of over 12 months and divide this by the total regular subscription charges of all customers from the previous year. Teladoc claims that this value is 104%.

I can understand that Teladoc wants to secure the trust of the investor, but honestly, it is hard to imagine what sort of meaning is contained in this index. It appears as weak as the PAUs (Paid Active Users) set forth by Fitbit.


Points related to quality assurance of outpatient services and treatment

In the S-1, parts related to the remote medical treatment provided by doctors practicing telemedicine are also mentioned. Before every session, a doctor reviews the content of the EMR (belonging to Teladoc) for each patient and goes through a checklist. During and after treatment, the doctor utilizes over 100 clinical guidelines that are proprietary to Teladoc (these are called proprietary Evidence-based clinical guidelines, and how it differs from other guidelines eludes me). After treatment, the doctor shows personalized notes and educational materials to the patient, who is then able to pose questions to the clinical team through the Teladoc message center. The quality assurance team reviews 10% of all remote medical treatment and checks if the treatment and prescription were appropriate. Up until now, Teladoc alleges that it has not received a single medical malpractice claim.


Points related to reduction in medical costs

Teladoc provides services by making a contract with employers or insurance companies, and it is thus important to offer value to these clients. Teladoc emphasizes the fact that these companies can reduce medical costs through telemedicine. It has conducted studies on this through external organizations and the results are discussed in the S-1.

Two types of studies were conducted


1. Episode-based Analysis Methodology

: This is a study that compares first-time users of Teladoc to patients who visited outpatient services or the emergency room for similar diagnoses and conditions. The study targeted two client companies. Teladoc screened patients in both groups based on 16 characteristics, and claims that an objective comparison was thus possible. The results (as predicted) is that Teladoc is capable of reducing medical costs. For one client company, a Teladoc customer saved $1,157 per outpatient visit compared to the outpatient clinic or the emergency room (ER). In addition, Teladoc claimed that it yielded a $9.1 ROI (return on investment) for every dollar invested by the client company.

Another client company claimed that by using Teladoc, it saved $284 compared to using outpatient services and $2,419 compared to using the ER.

This result has the potential for generating controversy. One must take into account that currently, those who use Teladoc has mild diseases such as the common cold and allergies. It is possible that those primarily using Teladoc may not have had to visit the ER or the outpatient clinic and would have instead bought over-the-counter medication for the common cold or antihistamines, but this is not taken into account. If so, it is not that Teladoc allowed users to reduce medical costs by saving them a trip to the ER, but actually incurred further medical costs when in fact no costs could have been incurred, just by allowing access to remote medical treatment.


2. Per-Member-Per-Month Analysis Methodology

: This study targets a single client company and compares medical costs prior to May 2012, before it started using Teladoc, to costs after May 2012, after it started using Teladoc, and analyzes how they changed. To be more specific, based on medical expenditures and healthcare usage behavior over the course of 16 months prior to May 2012, it generated a prediction model and compared this to actual medical costs and healthcare usage behavior from May 2012 to December 2013.

In a study that targeted a single client company, a member (not someone who used Teladoc but who received the right to use Teladoc from the employer) saved an estimated monthly average medical fee of $21.30. When the entire company was considered, the monthly average healthcare cost was reduced by 9.8%.

The second study is difficult to evaluate because the exact research methods are unknown. Cost reduction up to 10% appears to be very attractive. Moreover, assuming that this result is true, the flaw pointed out from the results of the first study does not appear to be very problematic.


To sum up, up until the present, Teladoc has maintained a high growth rate and it seems that it will continue to do so for a while. However, contrary to expectations, the proportion of the revenue paid to doctors is rather low, so it is debatable whether Teladoc will be able to continue to secure excellent doctors. Furthermore, up until now, Teladoc has dealt with simple and easily treatable diseases such as the common cold and allergies. However, in the future, Teladoc claims that it will expand its target to chronic diseases like diabetes and hypertension. What kind of influence this will exert on the medical community in the days to come is of particular interest.



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