A lot is riding on whether or not digital behavioral health operators will be able to solve the challenge of high customer acquisition costs.
Last year, investors poured $5.5 billion of capital into digital operators’ coffers. Yet high customer acquisition costs remain a largely unresolved concern that could limit digital behavioral health’s promise of speeding up access to care and alleviating local provider shortages.
Many of the big players in the space, including Teladoc Health Inc. (NYSE: TDOC) and Talkspace Inc. (Nasdaq: TALK), face a heavy cost burden in advertising costs associated with customer acquisition, driven by the rapid expansion of digital health companies generally following years of elevated investment.
“I would say that we strongly attribute [higher customer acquisition costs] to smaller private competitors who have been recently well funded with a rash of venture capital money flowing into that space and making what we would consider to be economically irrational decisions,” Jason Gorevic, Teladoc CEO, said during the company’s Q1 earnings call.
All the while, the COVID-19 pandemic has upped the stakes around solving behavioral health care access challenges.
The onset of COVID precipitated a three-fold increase in the prevalence of Americans reporting depressive symptoms in 2020 compared to 2019, according to research by the University of Chicago and Boston University. Follow-up research finds that the rate increased from 27.8% in 2020 to 32.8% in 2021.
Separately, overdose addictions have ballooned since the onset of COVID-19 to total more than 109,000 in the 12-month period ending in March.
Fostering additional innovation around technology and health care requires the development of responsible and profitable digital behavioral health models, Project Healthy Minds CEO and co-founder Phillip Schermer previously told Behavioral Health Business.
“Just lighting a lot of marketing dollars on fire and hoping that in a decade you’ll figure out your business model isn’t really a durable business,” Schermer said.
Customer acquisition costs strongly tied to community
Traditional behavioral health operators have the benefit of being more innately tied into a local health care environment. These local communities have several forces that naturally create patient movement in a local market.
As a result, time combined with proactive marketing efforts by operators leads to lower customer acquisition costs, Nick Jaworski, CEO of the behavioral health-focused marketing firm Circle Social Inc., told BHB.
“Where that lower acquisition cost comes in is the cumulative community communication and reputation that happens,” Jaworski said. “What really drives down [customer acquisition costs] is the invisible community conversations that are happening.”
This cumulative community conversation can happen irrespective of whether or not the provider operates in a virtual or physical environment if they are otherwise tied into a community.
Jaworski said a Circle Social client in the Seattle metro area conducts nearly 90% of its visits via telehealth today. Pre-pandemic, this client operated only in brick-and-mortar facilities.
“They were very involved in the community and had a reputation before COVID hit,” Jaworski said. “So that cumulative advantage still works in their favor because everyone knows them, and there are those conversations that are happening even though they’re pure telehealth. …
“The national players aren’t doing that. They’re trying to be everywhere all across the board. They can’t build that reputation very well.”
The lack of a cohesive national community requires digital behavioral health operators to make up the difference in elevated marketing.
What the data show
A handful of high-profile publicly traded companies illustrate the wide gulf in marketing costs for digital behavioral health companies or other digital health companies with a mental health element.
Scottsdale, Arizona-based LifeStance Health Groups Inc. (Nasdaq: LFST) spent about $11.7 million on advertising and marketing in 2021, accounting for about 1.2% of the company’s total expenses.
LifeStance co-founder and then Chief Growth Officer Danish Qureshi said that the company was trying to drive down its marketing costs to less than 1% of expenses during the Q&A portion of the company’s Q1 2022 earnings call.
“Again, this is not an acquisition model that is heavily based on bidding on keywords or non-sustainable kind of referral patterns,” Qureshi said.
LifeStance Health relies heavily on community relationships with area health plans, referring providers and organic online self-referral, Michael Lester, the founding and now-departed CEO of LifeStance Health, said during the Q1 earnings call
“We are not and never have been dependent on direct-to-consumer paid marketing,” Lester added.
Customer acquisition costs and other marketing data from public facility-based behavioral health companies can often be opaque.
Acadia Healthcare Co. Inc. (Nasdaq: ACHC), the largest pure-play behavioral health operator in the U.S., and acute and behavioral health facility operator Universal Health Services Inc. (NYSE: UHS) do not report marketing, advertising or similar expenses in their public filings with the Securities and Exchange Commission.
UHS seemingly hasn’t struggled with patient-acquisition costs since it actually has more patients than it can handle.
For several consecutive quarters, UHS’ leadership has talked about the company’s inability to meet much higher-than-normal patient demand due to staffing shortages. UHS has been able to use this as leverage with payers that pay lower rates than what the company wants to see.
Both UHS and Acadia Healthcare declined to comment on this story.
“In a figurative way, we’ve got patients lining up outside our door whose payers or insurers are willing to pay us more,” UHS Chief Financial Officer Steve Filton said at the Goldman Sachs 43rd Annual Global Healthcare Conference in June.
On the other hand, many of the troubles of the embattled virtual mental health provider Talkspace Inc. (Nasdaq: TALK) can be tied to overspending on marketing and failing to convert digital traffic into paying customers. In 2021, Talkspace spent $100.6 million on sales and marketing, about 63% of all expenses, according to its annual financial report.
The company is trying to rein in that spending, Talkspace Interim CEO and Chairman Doug Braunstein said during the company’s second-quarter earnings conference call. Over the last three quarters, the company has halved its media spend but has also seen a drop off in its revenue which is largely centered on direct-to-consumer sales.
Teladoc’s Gorevic has blamed disappointing results of its mental health subsidiary BetterHelp on well-funded private companies driving up marketing costs.
Jaworski is dubious of claims of heightened competition in digital marketing driving up costs to unusual levels.
“Google ads, Facebook, Twitter — they all operate off of a similar [auction system and] monetary model,” Jaworski said, adding that increasing competition does increase costs. “But, frankly, it’s generally not overly significant.”
Teladoc Health doesn’t break out specific costs for BetterHelp. The overall advertising and marketing costs for the New York-based digital health company was $416.7 million or about 18.1% of its total expenses in 2021, according to its public annual financial filing with the SEC.
Like Talkspace, Teladoc is looking to curb its marketing and advertising spending as away to rationalize its customer acquisition costs.
“You’ll see we’re not going to go to zero on the advertising spend in the fourth quarter, but it is a significant reduction because of the greater expense per advertising impression,” Gorevic said during a Q3 earnings call.
BetterHelp is driving most of Teladoc Health’s revenue growth.
Public digital health companies Hims & Hers Health Inc. (NYSE: HIMS) and American Well Corp. (NYSE: AMWL), better known as Amwell, have a mental health bent as well. Amwell spent $66.2 million on sales and marketing (15.3% of 2021 expenses) while Hims & Hers Health spent $136 million on marketing (42.5% of total expenses).
The blessing and curse of brick-and-mortar providers
Quince Orchard Psychotherapy has become one of the fastest-growing behavioral health companies in the U.S. by embracing marketing efforts that are focused on its specific market.
The company effectively does no marketing and has very low customer acquisition costs, Carrie Singer, the founder and owner of the Rockville, Maryland-based group therapy practice told BHB. Rather, it simply lists itself on an online therapist directory, Psychology Today, and makes it a point to be in-network with area health plans.
Word-of-mouth referrals and insurance networks drive many of the company’s new patients to Quince Orchard Psychotherapy.
Since its founding in 2015, the practice has grown to include 40 providers and annual revenue of about $7 million. It was noted on the Inc. 5000 list for growing revenue by 87% from 2018 to 2021.
“If we were not taking insurance, I think it would be a different story because people have a lot more options,” Singer said.
Large portions of the therapy segment do not operate in-network with health plans for a handful of common reasons. Among them, insurers often pay a lower rate per session than what a therapist would otherwise charge if it operated on a cash-only or out-of-network basis. Further, many therapists avoid the administrative burden of working with insurance companies.
A study by Milliman found that behavioral health companies have seen a growing disparity between the rates at which behavioral health is provided on an out-of-network basis compared to physical health services.
Singer has observed that other practice owners that don’t operate in-network with payers are forced to focus significant time and effort on things as far separated from care such as “the lighting of the photos of their therapists” on their websites.
“If we were not taking insurance, I think it would be a different story because people have a lot more options”
Carrie Singer, owner/founder of Quince Orchard Psychotherapy
However, the challenges become actually meeting a community’s needs. Quince Orchard Psychotherapy has a long waiting list.
Operators closely tied to communities are also limited by those communities. This is especially true from a workforce and provider perspective.
The Health Resources and Services Administration (HRSA), a part of the U.S. Department of Health and Human services, found that some regions have more mental health providers than needed while others have far fewer. Those trends are projected to worsen in the future.
In 2016, the Northeastern region had a surplus of about 5,700 mental health counselors while the Midwest, South and West had deficits of 10,100, 20,400 and 3,200, respectively.
In 2030, a mental health counselor surplus in the Northeast is expected to shrink to 2,700 while the deficits in the Midwest, South and West are respectively predicted to deepen to 13,300, 22,000 and 7,500.
By facilitating convenient connections between providers and patients, digital behavioral health has the potential categorical benefit of overcoming the inequitable distribution of and access to providers.
“The problem now is just being seen by anyone in my town. You could be seen by anyone who’s allowed to practice in your state,” Singer said. “But how are you going to find someone who might live in a different state but is listed in your state who is the best fit for [the patient.]
“That’s how these digital health companies do it — they aggregate these segmented markets to make it easy to have just one place to search.”