Musculoskeletal Digital Therapeutic Companies
Orthopedic Business Review
written by Will Kurtz, M.D.
January 07, 2023
This OBR article (11 minute read) discusses whether the success of musculoskeletal digital therapeutic (MSK DTx) companies like Hinge Health is due to their technology, their business strategy, and/or their lack of regulation. We will also discuss how the success of these MSK DTx companies may change as regulations are applied to them and as MSK providers lean into technology and value based MSK care.
MSK DTx vs. RTM Companies
Before we get started, I need to categorize things. I group virtual health companies into three buckets: musculoskeletal digital therapeutic (MSK DTx) companies, non-MSK DTx companies, and remote therapy monitoring (RTM) companies. Many non-MSK DTx companies are solving important health issues like mental health, women’s health, and diabetes. We will not be discussing these non-MSK DTx companies, and our discussion about MSK DTx companies is not transferrable to these non-MSK DTx companies.
MSK DTx and RTM companies use similar technology to provide virtual MSK care but have two completely different business models. As we will discuss, I am bullish on virtual MSK care, but have concerns about the MSK DTx business model.
The three biggest MSK DTx companies are Hinge Health, Sword Health, and Kaia Health. There are some differences between them, but I will lump them together as one DTx company for this article. As a background, Hinge Health has the largest valuation at $6.2 billion dollar valuation and covers 24 million eligible lives.
By contrast, RTM companies (a.k.a. virtual physical therapy) like Recovery One, Limber Health, OrthoLive, and PT Genie have a collective valuation of under ~$300 million and cover ~5 millions eligible lives.
MSK DTx Companies’ Technology
The technology used to deliver virtual MSK care is the same in MSK DTx and RTM companies. Ten years ago, the technology started as live video chats between patients and health coaches/physical therapists and utilized sensors/trackers to monitor patients’ movements during the PT session. These sensors have now been replaced by computer vision to track patients’ movements without hardware. Computer vision is readily available from AWS, Microsoft Azure and Google Cloud. Patients just need a smart phone. Most RTM and MSK DTx companies offer computer vision tracking technology or soon will. In short, all DTx and RTM companies utilize the same technology to deliver a similar core product but have very different value propositions and go-to-market strategies.
The MSK DTx companies have excelled in patient acquisition technology, namely enrollment marketing. When a patient who is eligible for a MSK DTx program sees their PCP or a MSK provider, the healthcare provider submits a claim with a MSK diagnosis code to the insurance company. The insurance company creates and sends a trigger file to the MSK DTx company with the eligible patients’ contact information. The MSK DTx company can then contact the patients in the trigger file to inform them about their “free”, in-home, digital care program instead of the expensive MSK providers’ care. Enrollment marketing is similar to surveillance capitalism and definitely needs regulatory oversight.
MSK DTx companies have excelled in marketing. Their true customers are CFOs at self-funded companies. Faced with ever growing healthcare spend, these CFOs often find it easier to lower their healthcare spend than to grow their sales (i.e. Pacific Steel). MSK DTx companies have hired sales reps to call on these CFOs. Because these DTx companies do not get paid if they do not lower the company’s MSK spend, these CFOs have no reason to not trying these DTx services. While MSK providers are swamped seeing more and more patients, these DTx companies use sales teams and marketing software to capture patients in new ways that providers have never tried. Most Fortune 500 companies are contracted with one of these MSK DTx companies. Many insurance carriers have also embedded these DTx companies in their fully insured plan models.
MSK DTx companies have created virtual triage algorithms to determine which patients should be treated with a DTx digital care program and which patients need an in-person MSK provider. An obese, depressed patient with chronic pain may be best treated by a digital care program. If this patient is referred to an in-person MSK provider, they may receive inappropriate tests and procedures. An athletic patient with an acute injury would likely be best treated by an in-person MSK provider. If this patient is referred to a DTx digital care program, they may have a delay in receiving an appropriate diagnosis and accumulate more unnecessary missed work days. As patient data improves these triage algorithms, these MSK DTx companies will increase their value as a gatekeeper to MSK care and further solidify their position at the top of the funnel.
The internet has obviously improved the distribution and lowered the cost of care delivery for these DTx companies. Physical therapists and health coaches can be more efficient because they can simultaneously service multiple patients with asynchronous communication and do not have to be physically present with the patient. Health coaches are obviously less expensive to employ than MSK providers.
RTM business strategy
Virtual physical therapy has been around for 10-15 years, but never gained widespread popularity because of the payment restrictions on virtual care. The federal government relaxed these restrictions during Covid and with the 2022 remote therapy monitor (RTM) laws, which have helped these RTM companies build their businesses on traditional healthcare payment rails. These RTM companies might submit 3-5 CPT charges for ~$100 over a few months to an insurance company. RTM can produce revenue of $~300-500 per episode with ~50% margins. Some RTM companies (PT Genie) license their software to MSK providers and require the MSK providers to submit the RTM charges. Some RTM companies (Limber/Recovery One) provide the RTM therapy independently and submit their own charges. These RTM companies are operating within the existing healthcare system to improve the patients’ experience. They are bound by the same rules and regulations as MSK providers (state licenses, patient co-pays, insurance denials, etc.).
MSK DTx business strategy
MSK DTx companies use the same technology but have a different business strategy. They do not submit CPT charges to insurance companies. Instead, they sell surgical avoidance directly to employers. They claim every MSK patient treated by a MSK provider will cost the self-funded employer ~$5,000 on average. The MSK DTx companies charge ~$1000 per episode and have ~70-80% margins. If the MSK DTx company can prevent just 20% of their patients from engaging with a MSK provider, then the DTx company can lower the employer’s MSK spend. These MSK DTx companies go at “full risk” with the self-funded employer which means the DTx company does not get paid if they do not lower the company’s MSK spend. If they can prevent more patients from being treated by MSK providers, then they can justify charging more than ~$1000 per episode for their digital care program.
In short, RTM companies work within the existing healthcare payment system and oversight. They sell virtual PT at ~$300 per episode. Their customers are patients, and they have no financial incentive to not refer patients to in-person MSK providers. DTx companies work outside the existing healthcare payment system and oversight. They sell surgical avoidance at ~$1000 per episode. Their customers are CFOs of self-funded companies, and they have a financial incentive to not refer patients to in-person MSK providers. They serve as a gatekeeper to MSK care and get paid to keep the gate locked as much as possible.
Fig. 1
Selling surgical avoidance only works if MSK providers continue to capture more value than they create by performing inappropriate tests and/or surgeries and selecting expensive sites of service. Fortunately for these DTx companies, many MSK providers do not see the harm in performing unnecessary MRIs and surgeries which provides an opening for these DTx companies to offer employers more cost-effective MSK care. As shown in Fig. 2, the employer who is buying the MSK care wants to maximize value creation and minimize value capture (i.e. the shortest arrow from the diagonal line). When MSK providers are further away from this diagonal line (i.e. inappropriate care), they are vulnerable to disruption. MSK providers will always be necessary for advanced MSK care but may not be the most cost effective option for chronic, low acuity MSK care. The question remains who is going to control this sorting process.
Fig. 2 - Value from DTx Company vs. MSK Provider
Regulation
Regulation is often a bad word in business. Regulation can stifle innovation. Regulatory capture can hurt society by allowing incumbent companies to squash a start up company even when the start up company has a more effective product. Regulations are necessary though to protect important sections of our society from unchecked capitalism. Every sector has had their regulatory lapses, followed by massive societal harm, followed by the creation of more regulations:
2001’s Enron accounting collapse => Sarbane Oxley Act
2008’s Lehman Brother’s/mortgage collapse => Dodd Frank Act
2022’s FTX collapse => FTC regulation to come.
The road to becoming a physician
Our society has created many hurdles to becoming a physician. 4 years of college, 4 years of medical school, 3-5 years of residency, and 1-3 years of fellowship all act as a gauntlet that weeds out anyone who knows the word “quit”. Each step builds on the trust and scrutiny conveyed through finishing the previous step. The college degree is necessary to enter medical school. Medical school diploma is necessary for the medical licensing exams (USMLE) and a residency program. The medical licensing exams and residency allow physicians to apply for the specialty boards and a state medical license. The specialty boards and state license then allow a physician to apply for hospital credentials and to join an insurance network. An insurance network allows a physician to get paid for their work. Lastly, physicians must entrench themselves in their community, create referrals from other physicians, and lease a clinic space. There are no short cuts. The time and effort to complete all of these steps is the largest barrier to offering MSK care.
What does it take to become a health coach?
To become a health coach, you need to watch 20-120 hours of online videos to get a certificate from a private organization. Health coaches are not licensed by most states. An undergraduate degree is not required but recommended. A criminal record does not automatically disqualify you. A hair dresser has more regulations than a health coach.
Who oversees a physician?
Here are a list of all of the entities regulating a physician’s practice:
State’s medical board
Hospital’s medical executive committee
Specialty and sub-specialty societies
Other physician’s in the community
Patients through Google’s & Healthgrade’s review site
CMS’s provider score card
Insurance company’s managed care - Evicore
Healthcare Bluebook / Embold Health / data aggregators
Mal-practice attorneys
Friends and family referrals
Passing judgement on the quality of physicians’ practices is a robust industry.
Who oversees a MSK DTx company?
This is easy; no one regulates Hinge Health, Sword Health, or Kaia. There is no oversight on what they are doing from anyone other than the company’s internal review boards.
Their health coaches do not have state medical licenses. They are not credentialed with insurance companies or hospitals. They do not submit claims or clinic notes to insurance companies or referring providers, so no one has any insight to what they are doing or saying. Their health coaches are not required to take any medical or specialty licensing exams. Their teaching material and decision algorithms are considered proprietary and not publicly available or peer reviewed by outside physicians.
These DTx companies may utilize some licensed physical therapist who interact with patients weekly, but the day to day check-ins are with health coaches.
These DTx digital care programs curate articles that support non-operative care and ask patients to read and answer questions about these articles. These articles seem to be selected based on their cost savings and not the patient outcomes, but no one can be certain because these DTx companies are not transparent about their patient education.
These DTx programs identify patients with anxiety and depression and appropriately try to help these patients with their mental issues. When they deliver cognitive based treatments with health coaches, are the unlicensed health coaches practicing medicine?
There are no review sites on these companies. Hinge Health has 24,000,000 eligible lives but only 172 Glassdoor reviews for a 3.5/5 star rating and zero Google reviews from patients. I, Will Kurtz MD, sees 3000-4000 patients a year and have 377 Google patient reviews for a 4.9/5 star rating. These MSK DTx companies fly under the radar when it suits them. I can rate my Uber driver or my Airbnb host, but patients have no insight into quality or training of their DTx health coach who is advising them on their MSK care.
If a patient wants to bring legal action against a physician, they know the physician’s first and last name and where they work. They can file a complaint against a physician with the hospital, insurance company, state licensing board, the medical specialty board, their PCP and/or plaintiff attorney. How would a patient bring a complaint against a DTx health coach? Are health coaches practicing medicine when they opine about a patient’s need for surgery? Does a virtual clinic visit with an unlicensed health coach create a provider/patient relationship? Does the health coach have a responsibility to put the patient’s interest ahead of the DTx company’s financial interest?
All 50 states have criminal laws against unlicensed individuals practicing medicine. Most states consider this a felony with a minimum of 1 year in prison. If getting paid to guide patients through their MSK care is considering practicing medicine, who would be charged, the MSK DTx company or the health coaches? I would imagine these MSK DTx companies have better lawyers than the health coaches and that the legal liability stops with these “1099 contracted” health coaches.
My Prediction on the future of MSK DTx Companies
Before we get started with my silly predictions, realize that I am pragmatic. I don’t believe in conspiracy theories and am just having fun. Second, I am a technophile. Digital therapeutics are the future. My concerns about MSK DTx is not the technology, but the business model. These MSK DTx companies are using digital therapeutics as a smoke screen to achieve their true goal which is to avoid regulation through a new business model that utilizes unlicensed provider and avoids regulation.
The Sorting Hat
The question remains, who is going to control the top of the funnel? Who decides if a patient should see a MSK provider first or get treated by a MSK DTx company first? What criteria does a DTx health coach use to steer a patient to more expensive in-person care? What criteria does a MSK provider use to steer a patient to cheaper virtual care? Who is going to control this sorting hat that decides where patients go for their MSK care?
DTX Requirements for Prior Authorization
These MSK DTx companies want to become the new MSK gatekeeper or sorting hat. When a provider orders an MRI on a patient, they must submit a prior authorization (PA) to the insurance company that then sends the patient’s record to a medical review company like Evicore. Evicore often requires a peer-to-peer call before they authorize the MRI.
These MSK DTx companies are developing filtering algorithms to determining which patients are best suited for DTx digital care programs. Soon these same algorithms will determine which patients are most appropriate for a specific test or procedure. In the future, when a MSK provider orders an MRI or operate, the insurance company may require 6 weeks of a MSK DTx program before they approve the surgery. Can you imagine how frustrating MSK providers will be when a DTx health coach tries to talk a patient out of a procedure that the MSK provider recommended?
The positive effects of DTx companies on Value Based MSK Care
I must acknowledge that these MSK DTx companies have created competition in providing value based MSK care. I do not think MSK providers would be embracing value based MSK care, trying to eliminate inappropriate MSK care, and changing the site of service to less expensive facilities if it were not for these MSK DTx companies.
Competition among DTx companies will highlight their financial incentives
Warren Buffett and Charlie Munger
“Show me the financial incentives, and I show you the outcome. “
- Charlie Munger (vice chair of Berkshire Hathaway)
A self-funded company will evaluate MSK DTx companies in two ways: the cost of their virtual bundle (~$1000) and the MSK DTx company’s money back guaranteed cost saving. If one MSK DTx company wants to compete with another MSK DTx company and win a deal, then they may promise the self funded employer more cost savings (i.e. lower your MSK spend to 50% of last year’s spend). These DTx companies will claim to have a superior algorithm that eliminates more inappropriate care and thereby creates more appropriate cost savings. When a DTx company takes on more financial risk by promising more cost savings, they will be pressured to ration patients’ MSK care. There are good reasons why insurance companies outsource their medical appropriateness review to Evicore. Evicore is not financially incentivized to ration patients’ care. Evicore gets paid per chart review and not based on the outcome of the review.
MSK Providers partnering with DTX companies
These MSK DTx companies want to work with MSK providers to build a referral network, but they are trying to disrupt traditional MSK providers by becoming the gatekeepers of MSK care. They aim to control the top of the funnel, evaluate every eligible MSK patient virtually, enroll a majority of patients in their digital care program, and then refer patients who fail to improve to a local MSK provider for in-person care.
When MSK providers are trying to decide if they should partner with a DTx company, they should consider the short term and long term implications of this partnership. In 2017, Nike partnered with Amazon to become a first party seller on Amazon’s marketplace but quickly exited in 2019 when Nike realized they could not differentiate their premium products when Amazon controlled the customer experience. Nike sells luxury products that are in high demand, so they need a direct relationship with their customer. A commoditized Chinese shoe company without brand recognition may sell inexpensive shoes on Amazon because they need Amazon’s marketplace. Amazon aggregates consumer demand, squeezes suppliers, and thereby captures most of the value in the value chain (i.e. Ben Thompson’s aggregation theory). MSK providers need to decide if their surgical skills are a luxury product in high demand or a commoditized shoe that needs a marketplace. There are short term gains by working closely with DTx companies, but whomever controls the “sorting hat” will capture the value.
MSK providers offering condition based bundles
The ultimate endgame for MSK providers will be condition-based bundles or capitation. These MSK DTx companies may provide lower cost of care for non-operative MSK care, but they lose their strategic advantage when patients need in-person care.
Fig. 3 - DTx Bundle for non-operative care
In a traditional model, if all 6 patients went to a MSK provider at $5000 per episode, then the employer’s MSK spend for these six patients would be 6 x $5000 = $30,000.
As shown in Fig. 3, if the MSK DTx company offered their DTx virtual care at $1000 per episode, sent the patients who needed in person care to a random MSK provider, and two of the six patients in the DTx bundle need in-person care, then the employer’s MSK spend for these six patients would be 6 x $1000 + 2 x $5000 = $16,000.
If the MSK DTx companies contracted with a MSK provider who would accept $3,500 for the in-person care, then the employer’s MSK spend would be 6 x $1000 + 2 x $3,500 = $13,000. This would be a race to the bottom for MSK providers as more competition would lead to lower reimbursement. Quality would not matter.
If MSK providers could offer a condition-based bundle for operative and non-operative care for $2,000 an episode (Fig. 4), then the employer’s MSK spend would be 6X $2,000 = $12,000. If the MSK providers continue to deliver their MSK care in the same way as they did with fee for service at $5,000/episode, then the MSK providers will lose $18,000 on these six patients (paid $12,000 and delivered of $30,000 of MSK care). If the MSK provider offers the appropriate virtual MSK care and appropriate in-person care, then the MSK provider can profit handsomely.
Fig. 4 - Provider led condition based bundles for all MSK care
As MSK providers take on more financial risk with condition based bundles and capitation, the same financial incentives that I warned would cause MSK DTx companies to ration MSK care would exist for MSK providers. Our society has always put their trust in licensed providers over corporations to deliver the appropriate amount of patient care because providers live in the community and are accountable to the patient. Providers have to look the patient in the eyes and explain why a test or procedure is not valuable. Thirty states have laws against the corporate practice of medicine because many corporations will put profits ahead of patients.
Conclusion
MSK DTx companies have stumbled into a brilliant business strategy to avoid healthcare regulations. This business strategy is only applicable to MSK care because MSK treatment is more physical and less medicinal which would obviously require a licensed provider. MSK care also has less serious consequences when care is delayed or denied compared to primary care medicine.
The immediate growth prospects of these MSK DTx companies are excellent, but their success and financial incentives will lead to rationing of patient care and regulations of their services.
The DTx bundles may have a cost advantage in non-operative care delivery over MSK providers, but MSK providers could gain the ultimate advantage if they bundle their operative and non-operative care together in condition-based bundles or capitation. If MSK DTx companies can develop a network of MSK providers to deliver their necessary in-person MSK care, then these MSK DTx companies may win. If MSK providers can package a triage algorithm, virtual non-op MSK care, and their operative care into a cost-effective bundle, then these MSK providers will win.
Carve outs:
The Relentless Health Value podcast (Stacey Richter) is an amazing resource to learn about our healthcare system. I recommend starting with the episode on PBMs.
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