Coronavirus has ushered in the digital revolution in medicine. How investors can play it.

  • By Daren Fonda,
  • Barron's
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David Newman no longer wears a tie to work. That hasn’t been necessary since his medical practice went virtual. A physician in Fargo, N.D., he now uses telemedicine to manage patients’ diabetes and thyroid conditions, whether through his hospital’s video system or FaceTime or Snapchat. “We thought that telemedicine would be a burden, but it hasn’t been,” says Newman, 39, an endocrinologist at Sanford Health.

The coronavirus epidemic is catapulting telemedicine from the outskirts of health care to its core. With the crisis giving millions of Americans their first taste of virtual medicine, this may be the catalyst that pushes online care to the mainstream.

“We were waiting for lightning to strike and, sadly, lightning struck,” says Roy Schoenberg, CEO of American Well, one of the largest private telemedicine companies.

Investors have a few choices to ride the digital health wave. One of the biggest beneficiaries has been Teladoc Health (TDOC), the largest publicly traded telemedicine company. Medical-technology companies, including Livongo Health (LVGO), Masimo (MASI), and iRhythm Technologies (IRTC), may also benefit.

A telemedicine revolution won’t happen overnight. Emergency measures that have relaxed federal regulations allowing more virtual visits would need to be made permanent. (Legislation is in the works.) States have varying requirements for telemedicine, including rules that doctors be licensed in the state and see a patient in person before an online visit. Many states waived some telemedicine rules during the crisis, but they would need to be harmonized and loosened permanently.

The biggest hurdle may be financial incentives that favor health-care providers seeing patients in person. “Economic incentives have largely been developed to support and reinforce a face-to-face model of care,” noted a recent article in the New England Journal of Medicine. Telemedicine has been hamstrung by “heavy regulation and sparse supportive payment structures.”

Indeed, an estimated 12 million virtual visits were conducted last year, amounting to just 2% of the 600 million “addressable visits,” according to PlushCare, a concierge online doctor service. Telehealth totaled just 0.2% of all medical claims filed in 2019, reports the independent nonprofit group FAIR Health.

Limits aside, the technology puzzle is coming together: Video chat and remote monitoring devices are being integrated with electronic medical records, cloud-based analytics platforms, and clinical workflow processes.

The revenue potential looks vast. The U.S. telemedicine market, which includes software, medical devices, and hardware, grew at a 25% annualized rate from 2015 to 2020, reaching $2.6 billion in revenue, according to research firm IBISWorld. Teladoc projects that the addressable U.S. market for telemedicine may be as large as $30 billion, including virtual physician services.

At the Cleveland Clinic, virtual care has jumped to 60,000 visits a month from just 3,000, says Dr. Matthew Faiman, an internal-medicine physician with the hospital. “It will become the new normal when we rethink our practice,” he says.

At Sanford Health, one of the largest rural health-care systems, more than 1,600 patients a day now use telemedicine, up from an average of 50 a day in February.

Sanford is also encouraging patients to take a crash course in nursing at home. Patients are being shipped accessory kits made by a company called TytoCare. The kits include a mobile device and diagnostic supplies to check their throat, hearing, and heart rate; patients then transmit the data to the hospital, avoiding a trip.

“This is the Midwest, and we value a hearty handshake,” says Jeremy Cauwels, a physician and senior vice president at Sanford. “But people are discovering they don’t always need face-to-face medical care.”

Remote monitoring is also giving telemedicine a lift. Livongo members, for instance, receive a diabetes-monitoring kit that includes lancets, test strips, and a touch-screen meter to check their blood glucose; they get digital coaching and alerts on their smartphone if their condition changes.

“My care team knows instantly if something is wrong,” says Greg Schuette, 43, a bank branch manager in St. Louis who uses the system.

Yet if there is a revolution, it will be gradual. One obstacle is a patchwork of federal and state regulations. Medicare previously paid for telemedicine only in rural areas or a medical setting. Those restrictions were lifted under emergency measures, and visits are now covered under broader circumstances. A few states, including New York, have waived licensing requirements for out-of-state doctors to practice virtual medicine. Congress would need to make these changes permanent, as would many states.

Regulators are stepping up. The Food and Drug Administration issued guidance in March to fast-track approval for monitoring devices, and telemedicine recently became eligible for Medicare Advantage reimbursement. At least 29 state Medicaid programs now reimburse for live telemedicine in a patient’s home, up from seven in 2013.

Private insurers, wanting to reduce health-care costs, sound eager to promote telemedicine. “We are seeing an unprecedented increase in consumers utilizing virtual care related to the Covid-19 pandemic,” a spokesman for Anthem (ANTM) wrote in an email to Barron’s. Studies indicate that telemedicine cuts down on unnecessary emergency-room visits. Teladoc says that employers save 28% on health-benefit costs, including a 35% reduction in visits to medical facilities.

Yet telemedicine is primarily used for things like dermatology, behavioral health, and basic diagnostics. There have been concerns it opens the door to more billing fraud and malpractice lawsuits. Cost savings may be negated if tens of millions of people start logging on to Zoom to check in with a doctor 24/7.

And consumers aren’t convinced they will get better care online. According to a 2019 survey of 1,000 consumers conducted by J.D. Power, 49% believed the quality of care is lower online than with a doctor’s visit. Just 6% believed that the quality is higher.

Even then, a major obstacle may be economics. Medical offices typically bill every time a patient is seen. Billing codes have been expanded for online health care, but they remain a tiny fraction of the thousands of nuanced codes used for in-person treatment.

“The higher the complexity of the treatment, the more you’re reimbursed by the insurer, but that’s usually not the case with telemedicine,” says Dr. Hillary Lin, an internist in New York City with PlushCare.

Only 33% of specialists see definite advantages in telemedicine (versus 40% of primary-care doctors), according to a 2019 survey of more than 1,300 physicians by the American Medical Association. Lin sees patients a few hours a day and works on a start-up in her spare time. “I would say that 99% of my colleagues won’t do this,” she says, referring to telemedicine.

A few companies are likely to capitalize from the digital-health wave after the pandemic is contained. But the stocks already reflect high expectations, and none look cheap.

Teladoc reported a 100% increase in virtual visits in April, compared with the first week of March. The company said total visits are expected to exceed 1.8 million in the first quarter, up 70% from a year earlier. It anticipates a 40% increase in quarterly revenue, to $180 million.

Teladoc charges subscription fees to health plans, including more than 40% of Fortune 500 companies, which offer it as a health benefit. The company also licenses its platform to physician and hospital groups, and is growing through mergers, including the recent purchase of InTouch, which provides telemedicine between hospitals.

Teledoc generated $32 million of operating cash flow last year, on revenue of $553 million, but earnings per share are likely to be nonexistent in the next couple of years as the company invests in the business. The path to profitability should come as expenses fall relative to revenue, and as the business scales. Teladoc says its platform can handle 50,000 visits a day, up from 10,000 in 2019, and has capacity for 100 million members, up from 36.7 million in 2019.

Shares currently trade on the growth in membership rolls, utilization of the system, and operating profit margins, says Canaccord Genuity analyst Richard Close, who maintains a Buy rating, even though the stock, at a recent $170, has blown past his price target of $130. “The current situation has accelerated adoption and awareness of telehealth, and that is likely to lead to greater utilization,” he says. “The stock isn’t necessarily overvalued.”

But Teledoc faces pressures, too. Online visits may decline because of rising unemployment.

Livongo recently raised its revenue guidance for the first quarter to a range of $65.5 million to $66.5 million from $60 million to $62 million, and said it added a record 620 clients (such as corporate health plans), taking individual membership rolls to 220,000 people. “This isn’t a short-term bump,” founder Glen Tullman tells Barron’s. “It’s people making multiyear commitments.”

The company has expanded beyond diabetes care to manage hypertension, weight management, and behavioral health. And it is signing up many more clients, including a recent deal with Kaiser Permanente.“They’re seeing a significant uptake in new clients,” says Canaccord’s Close, who has a Buy rating and a $46 price target on the stock, up 20% from recent prices. Livongo trades for 12 times 2020 sales.

Livongo is also at the mercy of employment trends. Lower payrolls may mean fewer employees and paying members.

Masimo makes respiratory- and pulse-monitoring devices, and sells primarily to hospitals and clinics, but the company is also introducing an oxygen-and-pulse-monitoring wearable for home use that was originally designed to monitor patients on opioids. Regulators gave Masimo the right to market it in record time. “Because Covid is a respiratory disease, it has been a huge boon to our business,” says aCEO Joe Kiani.

Hospitalized patients need oxygen monitoring after they go home, he adds. Remote monitoring is just 5% of sales now, but “it could be a major part of our business,” he says.

At a recent $205, Masimo trades at 52 times forward earnings, well above its five-year average of 34 times. Revenue could soften near term because fewer patients are undergoing elective procedures.

BTIG analyst Marie Thibault has a Neutral rating on the stock because of the valuation, but sees it as a long-term winner. “They’ll continue to benefit from higher hospitalizations due to respiratory distress and should benefit when we see a return of surgical volumes,” she says.

Thibault sounds more positive on iRhythm Technologies. Its Zio heart-monitoring platform includes a wearable patch to detect arrhythmia (a warning for stroke or heart attacks). It is less intrusive than older technologies; patients can wear the patch for 14 days, and it takes continuous readings, so doctors can analyze large sets of data, including analytic reports from iRhythm. The company said recently that it has seen “significantly increased” uptake of its Home Enrollment program, although iRhythm withdrew guidance for the year, partly because hospitalizations have declined.

Thibault rates the stock Buy. The technology’s “remote-monitoring function works well for this environment,” she says. Inpatient monitoring should recover as the pandemic winds down, and the company could break even in 2021 on a cash-flow basis.

Insurance reimbursement for the device remains an overhang, however. A decision is due from the federal government in July. And studies are under way to determine whether monitoring leads to better medical outcomes, with results due from a large study in November.

One unknown is whether Americans will focus more on health and preventive medicine once the pandemic ends and the population becomes inoculated or immune. Whether we go back to business as usual may well determine if the stocks continue to rise.

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