One of the potentially thorniest issues that healthcare application developers should consider is what business model to employ in order to generate revenue, as this element of the business strategy has many facets and can be the difference between success and failure. This article explores several revenue models that healthcare IT startups have employed—freemium, licensure and insurance reimbursement—and the relative benefits and limitations of each. The current digital health industry has used these revenue models for different market segments: consumers/patients, providers (physicians, hospitals and other clinicians) and health insurers, as well as for different service objectives that include coordinating care among providers, providing consumers with health information for greater care compliance/adherence and enhancing clinical diagnostics and patient-provider communication.

Consumer Focus: The "Freemium" Model

The most common revenue models observed in the mobile health space are the early Internet models that are based on the "freemium" concept. In short, the company develops an application and beta-tests it for free, focusing on developing the necessary viral "buzz" to grow a user base. Most online games have employed this model. Through this user base, the developer refines the app, identifies what works and what does not work and offers enhancements and upgrades for fees. During the growth phase, the company's valuation may increase, even though it may not yet have revenue. Many early-stage investors are looking for these types of early-stage companies since healthcare customer acquisition on the Web is usually quite inexpensive and earnings can be attractive early in the growth phase.

Many of the initial mobile applications followed this model if their target market was the patient/consumer. Many of these companies, such as WebMD, offered the consumer medical information for free and ultimately generated revenue—mostly from advertising. The true currency for valuation purposes were "hits." As the product matured, the company offered different levels of service, including one level without advertising for which the customer paid a fee.

Some of the new mobile health applications that are consumer-based are using this model for several reasons. First, the customer understands it and is willing to use it and rate the company, providing inexpensive consumer feedback. Second, the investors understand it and can put a value on it. Finally, if the application is not too complex and the customer base is targeted and growing, advertisers are likely to want to pay to appear on the site. This is especially true for Big Pharma, which can use direct-to-consumer advertising to target prospective patients, at low cost, with medical problems that are addressed by their drugs.

Licensure: The Legacy Approach

However, the healthcare consumer/patient is not as easy to access as the user of a video game. While the sites that provide general information concerning medical conditions are popular and successful, they do not store, analyze or share personal health information. Many new mobile health apps that are consumer-focused are addressing care coordination between and among healthcare providers. This type of app requires consumers and their providers to input the patient's personal medical data and share this data so that all of the consumers' healthcare information is available for better, more coordinated clinical decision-making. A number of care coordination platforms for electronic health records are employing freemium models, where doctors are able to experiment with a patient portal for free and sign up their patients. Once the physicians enroll a certain number of patients, they have to pay an ongoing fee for additional services.

Given the complexity of the healthcare industry, "freemium" has not been the favored approach with many other digital health products. Those companies with mobile health apps that coordinate with existing legacy healthcare IT products have focused on more conventional licensure agreements. Licensing agreements have been the conventional approach, where the IT companies transfer the rights to the software for a period in exchange for a use fee. Licensing generates recurring revenue, which is easily valued by investors, but which is not as straightforward to employ for many digital health startups because of the pricing and sale of the product. Companies with existing installed users can more effectively employ this model.

Health Insurance: The New Opportunity

An emerging opportunity for revenue generation is health insurance reimbursement. Instead of focusing on patients or providers, mobile health apps could find a new revenue source from health insurers. Some mobile health apps that perform diagnostic tests that are currently performed by traditional devices will qualify for reimbursement under health insurance plans. AliveCor created a mobile ECG heart monitor that runs off of an iPhone. Once it was approved by the U.S. Food and Drug Administration (FDA), this device qualified for payment under health insurance similar to traditional ECG monitoring. A number of recent mobile health applications provide therapeutic services for diabetes, depression and other diseases. The FDA has recently required these apps to be prescribed by a physician. Once they qualify for the appropriate clinical codes or new codes are created, these mHealth therapeutics will qualify for insurance payments. This approach appears to be more costly, risky and time consuming than the freemium revenue model because it requires FDA approval and a strong marketing plan to convince physicians to order and prescribe the app. However, the benefit of this revenue model is that it generates a higher revenue per use than the freemium and licensure models.

Recently, the New York Times reported that WellDoc's BlueStar" app for diabetes management has been approved for health insurance reimbursement as "mobile integrated therapy." BlueStar" provides real-time health coaching, as well as management of diet and blood glucose levels, for diabetes patients. Based on that approval, commercial health insurers and many self-funded employers are likely to consider paying for these types of applications. This is one of the first prescribable and reimbursable mobile therapies, but more diagnostic and therapeutic healthcare apps are likely to follow. In fact, many recent commentators believe that mobile diagnostics and therapeutics apps are the solution to "bending" the healthcare cost curve.

In short, healthcare IT applications have applied numerous revenue models to attract customers and investors. In many cases, it is anticipated that some apps will use multiple approaches. Some may start with freemium models to develop a user base and shift to long-term licenses for recurring revenue. Others may start with a freemium model and convert to reimbursable applications over time as regulatory approvals are received.

Which Revenue Model Is the Right One?

Most of the business mistakes that are made by mobile health app companies involve matching the revenue model to the customer. Those unfamiliar with the nuances and operations of the healthcare system and who have experience in other online industries do not understand:

  1. how healthcare is purchased;
  2. that the consumer is hungry for information but, in some segments, may not be computer savvy or may not have confidence in the security of their personal health data;
  3. that many physicians resist any change from traditional approaches;
  4. that hospitals are slow, complex decision makers; and
  5. the significant role of employers in the healthcare decision-making process, especially those that are self-funded and do not purchase insurance for their employees.

For younger healthcare consumers, especially new families, mHealth will likely be easily and aggressively adopted and the freemium model would be most effective. In fact, this market segment could drive the whole mHealth revolution. More effort will be required to develop applications for the senior marketplace, which has the most impact on the costs of the healthcare system. The licensure model will likely thrive with hospitals and physicians that are revamping their legacy systems, as well as applications that are reimbursable through health insurers and from which hospitals and physicians can generate revenue.

Healthcare IT developers should be sensitive to the changing dynamics of the healthcare marketplace that is occurring in real time as a result of the implementation of the Patient Protection and Affordable Care Act. Many new opportunities will be created, many will fail, and those that find the right match of customer and revenue models will thrive.

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