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How the North Texas Telemedicine Revolution Began

Dallas-based Teladoc was a catalyst in the expansion.
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When I woke up that weekday morning, the frontal sinuses above my eyebrows felt as if they’d fossilized overnight, like amber. There was no way my brain wasn’t smashed against my skull, and my nasal passages were impassable; breathing involved gulping mouthfuls of air. I knew immediately: Sinusitis—a sinus infection. The sniffles, with an agenda. Mild headache, pressurized forehead; these symptoms had emerged two days before. I’d muted them with ibuprofen until I couldn’t. Now I needed a doctor. The green mucus had arrived.

I sighed, rolled over, and dialed my primary care physician. The assistant asked for my name, my insurance, my symptoms. Then, I don’t think we have any available times today. Let me check again. I glanced at my insurance card—urgent care, $45, more than double the cost of an office visit. I sighed again. And then she told me they’d had a cancellation at 3 p.m.

This tiny victory made me forgive the drive to the doctor’s office, the day off work, the hour wait for the pharmacist to fill the prescription. I only spent nine minutes in front of the physician assistant and the doctor. He felt my lymph nodes, stuck an otoscope in my ears, pressed above my temples, amplified my deep breaths with a stethoscope, peered down my throat—verifying my claims that I did not, in fact, feel pain below my neck or in my ear canal, verifying that I didn’t have any fluid in my lungs, verifying whether my uvula was stained Kool-Aid red. And then I had the scrip, a goodbye wave (handshake is too risky), and a debit card receipt.

Teladoc bills itself as the oldest and largest telemedicine company in the country.

Those nine minutes cost about seven hours in wait and travel time. Could I have dialed or video-conferenced with a physician at 9 a.m., when the symptoms began in earnest, from my bedroom? Almost 15 years ago, a pair of entrepreneurs launched a telemedicine company in North Dallas that tried to monetize that very concept. Teladoc targeted large employers, offering bridge services to employees when they couldn’t get into the doctor’s office for their cold or urinary tract infection or pink eye. Last year, Teladoc became the only telemedicine company to be publicly traded on the New York Stock Exchange. It posted annual revenue of $77 million in 2015, a year-over-year increase of 78 percent.

But there’s a broader public health question, as well. Of Texas’ 254 counties, 185 lack a psychiatrist. Thirty-five have no practicing family physician, and 80 have five or fewer, according to research by Irving recruitment firm Merritt Hawkins. And this situation is growing more severe by the year. Like I’d asked as my sinuses pulsed: What could we do with our phones to make healthcare easier and more available? And how should it be regulated?

Pie-in-the-Sky Possibilities

The American Telemedicine Association defines telehealth as “the use of medical information exchanged from one site to another via electronic communications.” That core philosophy, using technology to reach remote patients, has existed long before Alexander Graham Bell fathered the telephone in 1876. For instance, military physicians in the Civil War used the telegraph to order medical supplies and perform consultations.

And, the pie-in-the-sky possibilities have been around for a while, too. The magazine Radio News in 1924 published a cover with the headline “THE RADIO DOCTOR—Maybe,” showing a child with his mouth opened wide and a physician peering into it from inside a bulky radio. By 1948, a doctor had successfully transmitted radiologic images from West Chester, Penn., to Philadelphia, a distance of 24 miles. According to the National Institutes of Health, this is the first reference to telemedicine in accepted medical literature. The government has used telemedicine to consult with astronauts and active military members and even Native Americans sequestered on a hard-to-reach reservation.

Since launching its own program in 2002, the U.S. Department of Veterans Affairs has garnered more than 2 million telehealth patients. Also in the early 2000s, some large health plans began testing small pilot projects using crude telemedicine services to electronically connect their clients with physicians. And in the employer segment there was Teladoc, a nimble startup based in the northern reaches of Dallas. It was founded by a former NASA flight surgeon named Dr. Byron Brooks and serial entrepreneur Michael Gorton, who, two years before starting Teladoc, sold an internet service provider that developed the world’s first DSL connection in a deal worth $122 million.

f_teladoc_illustration_2bTeladoc bills itself as the oldest and largest telemedicine company in the country. When it launched in 2002, there were no other companies targeting employers in the same way. Teladoc’s business model was built on subscriptions: Employers paid a monthly fee to use the service, wrote it into their benefits package, and allowed employees to access it when they got sick but couldn’t make it to their doctor’s office. In addition to the subscription, the patient typically paid a flat fee for the consultation—about $35 to $40—and was randomly connected to a board-certified physician in the state where they lived. The Teladoc doctors had an average of 14 years’ experience; today, the average is 20 years. The physicians have never prescribed narcotics or lifestyle drugs like Viagra, and refer patients to the emergency room or their primary care physician if telemedicine is inappropriate.

Teladoc launched nationally in 2005. By the end of 2007, it had attracted about 1 million members, including large employers like AT&T, which still uses the service. After Teladoc’s national launch, a few competitors popped up. American Well was formed in Boston in 2006 and has gone after hospital and insurance plan contracts the same way that Teladoc has pursued employers. (Teladoc recently won a lawsuit filed by American Well alleging patent infringement.) Another rival, Doctor on Demand, offers patients the option to talk with a physician for 15 minutes for $49, targeting both employers and individual consumers.

While these companies were getting off the ground, a 40-something insurance-plan executive on the East Coast was getting familiar with telemedicine, too. In 2002, Jason Gorevic was the chief marketing officer at New York’s Empire BlueCross BlueShield. The leadership team grew the health plan rapidly. During Gorevic’s four years in the C-suite, Empire posted annual earnings-per-share growth of 15 to 20 percent and grew its market cap by 300 percent in the three years after it conducted an initial public offering.

WellPoint Inc.—which is now Anthem Inc., the largest Blue Cross Blue Shield managed-care company in the country—scooped up Empire in 2005 and quickly made Gorevic president. But one particular initiative at Empire had made an impression on him: In 2003, the company had implemented a technology known as Relay Health, which allowed its insureds to electronically interact with physicians. Even though medical supplies company McKesson bought the segment from Empire in 2004, Gorevic considered Relay Health a failure overall, because there was no mechanism to make sure the doctors were responsive when patients needed them. And, there was nothing that vetted whether the physicians were meeting quality goals. Gorevic left WellPoint in 2008 and, contemplating his next move, spent about six months in Europe with his wife and children, who were then 3 and 4 years old. Later that year, Teladoc called.

“I thought the time was right for telehealth and that it could make a big difference,” says Gorevic, who has been Teladoc’s CEO since 2009. “I was looking at all of the big trends around healthcare reform, the shortage of primary care physicians, the cost trends in healthcare. I thought that telehealth was the right solution to a lot of these problems.”

A Devastating Blow in Texas

In 2012, just 7 percent of large American employers offered telemedicine services as part of their benefit packages. By 2017, the National Business Group on Health anticipates, 90 percent of these same employers will provide it. (The association based its findings on a survey of 133 large employers representing about 15 million American workers.) It’s a particularly appealing cost-saver in the age of high-deductible health plans; if employees or their children become sick in the night, they can try to avoid an ER visit by using telemedicine, saving everyone money in the process.

“The train left the station on telemedicine a long time ago,” says Dr. E. Andy Clark. The longtime Texas pediatrician and urgent care doctor is a contractor for Teladoc and has made statements supporting it to state medical boards and legislators. “Texas needs to get on board,” he says.

Early on, the company was met with raised eyebrows from state medical boards, particularly in Texas. Teladoc was disruptive and foreign. Some were concerned that the company was attempting to replace the primary care physician, a contention that Teladoc has always unequivocally denied.

“A lot of states didn’t have anything in their statutes. What they did have went back to the mid-’90s when they were grappling with pill mills,” says Claudia Tucker, Teladoc’s vice president for government affairs. “They were trying to make sure a prescription could not be given over the phone or through electronic technology that would allow an individual to give controlled substances.”

f_teladoc_illustration_3In most states, the concerns melted away as Teladoc met with legislators and regulators. It has developed more than 100 proprietary clinical guidelines that its physicians must follow. Doctors are not allowed to participate without five years of experience. The patient fills out a detailed medical history before each consult, just as they would in a doctor’s office. They also can upload high-definition photos. The system doesn’t allow physicians to proceed with the visit until they verify they’ve read the entire history. The doctor then gets the phone number of the patient and dials it to begin the consultation. Teams of nurses review at least 10 percent of each physician’s visits on a monthly basis. In 2015, Gorevic says the company performed more 60,000 chart reviews.

Teladoc currently has 15 million members and 6,000 employer-clients and, after more than 1.5 million total patient consults in its history, the company has never had a malpractice suit filed against it or its physicians. Teladoc now operates its full suite of services—high-definition video, phone call with high-def photos, and a phone call by itself—in 48 of the 50 states. The two holdouts are neighbors: Arkansas and Texas.

The Texas Medical Board spent four years drafting and amending a rule on how to wrap its arms around telemedicine, ultimately passing a devastating blow to Teladoc’s business model in 2015. The board ruled that a physician and a patient must have a face-to-face meeting before the practitioner could diagnose an ailment or prescribe drugs remotely. The Texas Medical Association, which represents about 48,000 state doctors, stood in support of the rule. Teladoc’s business model, based on the random appointment of a board-certified physician to a patient, would be gutted if the rule remains. Its chief legal officer told the board that it would immediately lose more than $15 million, mainly from the loss of revenue from partners with strong Texas ties like PepsiCo and Domino’s.

Teladoc sued in federal court, alleging the state rule violates antitrust laws because the medical board is made up of physicians who, the company argues, passed the rule out of concern for how telemedicine could eat into their revenue streams, not because of patient safety. The rule is stalled while a federal appeals court considers the challenge, freeing Teladoc—but not its competitors—to operate in Texas in the interim.

Last November, I dialed up a family physician who practices in a federally designated Health Professional Shortage Area. Dr. Douglas Curran, a family physician in the tiny East Texas town of Athens, told me what he thought of the Texas rule: “You know,” he said, “I’ve been doing this over 30 years, and I don’t feel comfortable—even with my own patients—seeing them over the phone if I can’t see them the next day.”

“We are seeing them adopt it at a very rapid rate.”

David Hildebrand AETNA

Whether physicians share Curran’s concern or not, it’s clear that Teladoc has the money on its side. Employers, the Texas Association of Business, health plans, and consumers are voting with their dollars. In September, the Federal Trade Commission filed a brief in support of Teladoc’s legal challenge, berating state health officials for not vetting the rule to determine whether it was written to protect physician incomes or to safeguard patients.

Global auditing firm Towers-Watson in 2015 took a whack at telemedicine’s cost-savings potential, finding huge opportunities for companies that doubled down on it. According to the analysis, the country’s large employers could save $6 billion if all their employees used telemedicine instead of getting the same care at more expensive ERs or urgent care centers. In 2011, the Health Affairs journal researched the impact Teladoc had on California’s enormous public retirement system, discovering that Teladoc patients actually were less likely to incur a follow-up visit than those who sought care at an ER or primary care office. While it didn’t analyze specific cost savings, the study declared that it was “highly likely that Teladoc visits are less expensive for payers, compared to visits to physicians’ offices and the ER.” (It was unable, however, to determine how many of those patients had conditions that would’ve “resolved themselves without interventions.”)

Aetna rolled out the service to its fully insured members in Florida and Texas in 2011. Teladoc is now part of benefit packages for all of its self-insured customers—and most of its fully insured—in all 50 states. Aetna’s partnership is responsible for getting the service into the hands of more than 6 million of its members nationwide.

“If they did not find value in it, customers would not pay for it, [employers] wouldn’t offer it, members wouldn’t use it,” says David Hildebrand, head of network product strategy at Aetna. “We are seeing them adopt it at a very rapid rate.”

Income Opportunity

It’s Friday afternoon when Dr. Clark, the Texas pediatrician, answers his phone. He’s sitting in an RV parked outside Baylor University’s McLane Stadium in Waco, about six hours before his alma mater’s opening game of the football season against Northwestern State. It’s overcast outside, and he’s passing the time waiting for his family to arrive by doing telemedicine consults.

Clark did about a dozen in the first half of the day. Teladoc pays him $25 per visit, the same amount it pays every physician who works for the company as an independent contractor. Teladoc counts about 650 total employees (up from 75 in 2013), but has more than 3,100 board-certified physicians in all 50 states. Of those, 176 are board-certified in Texas. Some of them are like Clark—doctors who no longer practice in a traditional care setting. But most of them, Gorevic says, are active physicians who log into the service to fill in gaps in their days.

It’s become a cliché to compare a healthcare technology company to the rideshare service Uber, but the two really are quite similar. Just as patients can dial up a doctor from wherever they are, Teladoc physicians can see them from wherever they are. Clark says there’s no time limit on the calls—no glut of patients in a staid waiting room watching the minutes tick-tock past their scheduled appointments. Clark says it’s been rewarding in a way he didn’t foresee, so much so that when Teladoc sued the Texas Medical Board, Clark volunteered to be a plaintiff.

“I looked at it, truly, as an income opportunity,” Clark says of Teladoc. “But as I got into it …  it was dawning on me that I had the same sort of personal satisfaction in telemedicine that I used to have in 1979, when a distraught mother of a child is crying and telling me about her kid, and I’m consoling her.”

There are still hurdles ahead for telemedicine, though. Medicare, the government insurance program for the elderly, still only reimburses for remote services provided to rural beneficiaries that are offered in a hospital, a clinic, or a physician’s office. Teladoc, too, has had its own challenges beyond the regulatory environment. As its employees crammed into its break room in July of 2015 to watch on TV as Gorevic rang the opening bell on Wall Street the day the company went public, its stock sailed to $28.50 a share, up from the expected $19. Then, just three months later, health insurer Highmark declined to renew its Teladoc contract. Teladoc shares tumbled to a low of $16.23, a skid that continued through April, when it dipped below $10. (The company’s market value dropped despite the fact that Highmark represented only about 1.5 percent of Teladoc’s 2015 revenue.)

Although shares are back up nearly to the projected launch value, it’s clear that Teladoc’s market value is tied to the revenue it generates from subscription fees.  As a result, Teladoc has spent the year since going public aggressively expanding, adding services as well as acquiring smaller competitors. In addition to small, acute ailments, it has launched segments for dermatology, behavioral health, and sexually transmitted infections. Its mental health service line has been so successful that it has pushed back a planned expansion into chronic care, which will likely see the company partnering with hospital systems instead of employers.

Advertising the behavioral health segment to new consumers caused the company to miss its revenue projections in the second quarter of 2016, Gorevic said in an earnings call. And while it’s operating at a loss since going public, the company has increased its revenue each quarter and remains on track to break even by the end of 2017. It also has boosted its members and visits each quarter—up 34 percent and 59 percent year-over-year, respectively—partially propelled by the acquisition of the middle-market telehealth company HealthiestYou. Valued at about $125 million, the company is Teladoc’s largest acquisition to date.

Dr. Larissa O’Neill, a family medicine practitioner, began working with Teladoc three years ago. Now she can take care of her children, ages 10 and 12, while seeing patients. And she believes she’s helping address the access issue more effectively, perhaps, than she did during the two years she spent working as a rural physician at a hospital east of Austin. There, she’d occasionally have to moonlight as a dermatologist, psychiatrist, and counselor, simply because her patients couldn’t arrange to meet with such specialists. She’d faced the same challenges working at her own family-practice clinic in Round Rock years earlier.

Despite being skeptical about telemedicine at first, O’Neill was sold on the concept after a veteran phoned in one day. He was suffering from a post-traumatic stress disorder episode, she learned, and had nowhere else to turn. (This was before Teladoc launched its behavioral health service line, and the vet had been unable to schedule an appointment with a psychiatrist.) So, O’Neill listened until the man became calm. “That was a big eye opener,” she says. “He’s a veteran, and he can’t get in. What’s he going to do? Who is going to see him?”

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