Equity

Research

Health Care IT & Distribution

Telehealth: Bringing Health Care

To Your Fingertips
February 20, 2015
Telehealth is evolving towards a
broader means of delivering healthcare
services in an on-demand, consumercentric manner that could change
healthcare delivery.
We estimate the market opportunity for
conditions currently treated by
telehealth at $5.7B, with another $12.5B
from expansion into additional
conditions.
Telehealth is already part of many
public companies strategy, including:
ATHN, HUM, KND, MDRX, RAD, UHS,
UNH, and WBA.

Charles Rhyee
646.562.1376
charles.rhyee@cowen.com
James Auh
646.562.1352
james.auh@cowen.com
Zachary Wachter
646.562.1353
zachary.wachter@cowen.com

Please see addendum

of this report for important
disclosures.

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February 20, 2015

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Industry Overview

February 20, 2015

Health Care Technology & Distribution:
Health Care IT
Health Care Technology & Distribution:
Drug Retailers
Charles Rhyee
646.562.1376
charles.rhyee@cowen.com
James Auh
646.562.1352
james.auh@cowen.com
Zachary Wachter
646.562.1353
zachary.wachter@cowen.com

Telehealth: Bringing Health Care To Your

Fingertips - Ahead of the Curve Series
The Cowen Insight
Telehealth has been around for awhile but is about to break into the mainstream
as a confluence of regulatory and technological change has enabled telehealth to
benefit from the fast evolving healthcare landscape. We see a multi-billion dollar
market opportunity driving strategies of public companies and fostering new company
formation, particularly in the area of on-demand healthcare services.
Telehealth is benefiting from the changing healthcare landscape
We are seeing an evolution of telehealth towards a broader means of delivering
healthcare services in an on-demand, consumer-centric manner that we believe
will change the way healthcare is delivered. Recent regulatory and technological
disruptions are driving the evolution led by: 1) health reform, which represents a
positive tailwind as millions of new lives are added to an already cost-burdened
system generating demand for lower-cost services; 2) recent legislation making
telehealth a more viable option for providers by relaxing regulations against its use
and improving licensure standards and reimbursement; and 3) technology which has
evolved to the point where smartphones are ubiquitous, enabling services such as
healthcare to be delivered to consumers fingertips at a moments notice.
Significant market opportunity for on-demand healthcare services
We estimate the total addressable market for outpatient spending on conditions
currently treated by telehealth is approximately $57B. Furthermore, we see an
additional $125B in the total addressable market for conditions telehealth could
address in the future, including the management of chronic diseases. Assuming a
10% penetration rate, this would put the market opportunity for currently treated
conditions at $5.7B and the additional potentially treatable conditions at $12.5B.
Successful telehealth players need to provide an engaging consumer experience, but
more importantly they need to provide a compelling business case to providers, payors
and employers, who are the primary purchasers of telehealth services. For example,
we believe telehealth can help providers extend their brand and acquire new patients
without significant increase in costs.
Investors should begin to pay attention, as telehealth has already become
embedded in the strategy of many companies
While there are limited direct investment ideas for investors today, except perhaps in
the area of remote patient monitoring (ex., possibly MDT and DXCM), investors should
begin to pay attention as we expect telehealth to not only be directly investable in
the near future, but also to play an important strategic role for other constituents in
healthcare. For example, UNH currently works with 16 telehealth partners. HUM has a
pilot program for seniors enrolled in its MA plans using in-home sensors and remote
monitoring. ANTM recently launched LiveHealth Online, in partnership with American
Well, which it expects to roll-out nationally. UHS provides general telemedicine
services to ERs and SNFs in Georgia. CYH and THC are investors in MDLive. WBA
recently partnered with MDLive to offer virtual consultations through its app. And
RAD is piloting HealthSpot's telehealth kiosks in some of its Ohio stores.

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Investment Summary
The terms telehealth and telemedicine are often used interchangeably, but both
describe the use of medical information exchanged from one site to another via
electronic communications to improve the patients health status. In this report, we
look at the evolution of telehealth towards a broader means of delivering healthcare
services in an on-demand, consumer-centric manner. We believe telehealth is about
to break into the mainstream as a confluence of recent regulatory and technological
disruption has enabled telehealth to benefit from the fast evolving healthcare
landscape. In particular:
Health reform represents a positive tailwind as millions of new lives are added to an
already cost-burdened system generating greater demand for lower-cost services
such as telehealth.
Recent legislation has made telehealth a more viable option for providers by
relaxing regulations against its use and improving associated licensure standards
and reimbursement in its favor.
Technology has evolved to the point where smartphones are ubiquitous, enabling
services such as healthcare to be delivered to consumers fingertips at a moments
notice.
As the U.S. health system transitions from a fee-for-service model to a fee-foroutcomes model, we see telehealth being embraced by providers, payors, employers
and consumers. Further, we believe the recent push into telehealth from all
stakeholders is part of the wider digital health movement encompassing clinical
analytics and Big Data, consumer engagement technologies, wearables and
biosensing, and population health management. While there are limited direct
investment ideas for investors today, except perhaps in the area of remote patient
monitoring (ex., Medtronic and possibly Dexcom), we believe investors should begin
to pay attention as we expect telehealth to not only be directly investable in the
relatively near future, but also to play an important strategic role for other constituents
in healthcare, including medical device, diagnostics, managed care, providers and
drug retailers.
In this report, we largely focus on the delivery of healthcare services in an on-demand,
consumer-centric manner. We see the larger near-term opportunity for telehealth
companies geared more towards general practice over specialist care. Leading
telehealth service companies, such as American Well, Teladoc, and MDLive, remain at
the forefront of this movement to on-demand, consumer-centric healthcare. We
estimate the total addressable market for outpatient spending on conditions currently
treated by telehealth is approximately $57 billion (Figure 2). Furthermore, we see an
additional $125 billion in the total addressable market for conditions telehealth could
address in the future, including the management of chronic diseases. Assuming a 10%
penetration rate, this would put the market opportunity for currently treated conditions
at $5.7 billion and the additional potentially treatable conditions at $12.5 billion. In
general, we think successful telehealth players will be able to deliver on two broad
characteristics:
A strong consumer experience thats able to deliver the right care at the right time.
Higher out-of-pocket costs will make consumers more selective of how they
purchase healthcare services.

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A compelling business case to providers, payors and employers, who we see as the
primary purchasers of services from telehealth companies. Successful telehealth
players will be able to demonstrate strong ROI in the areas of brand extension,
market reach, and customer acquisition and retention.
We have already begun to see telehealth become a part of the strategy of companies
inside and outside our coverage universe, including:
Health plans: UNH currently has 16 telehealth partners they work with outside
physicians offices, and is already managing upwards of 350,000 telehealth
consultations a day including 20,000 people remotely monitored in their homes.
HUM has a pilot program for 100 seniors enrolled in its Medicare Advantage plans,
whereby through the use of in-home sensors and remote monitoring technology
elderly patients can remain in their homes longer on their own. ANTM recently
launched a new online service, LiveHealth Online in partnership with American
Well, which it expects to roll-out nationally to its 33 million members.
Providers: As early as 2009, UHS implemented a telemental health program at
Anchor Hospital near Atlanta to reach the behavioral needs of remote communities
nearby, which has now expanded to general telemedicine services for hospital ERs
and nursing homes throughout Georgia. KND uses remote monitoring for a number
of its home-care patients, who have seen readmission rates consistently below state
and national averages. CYH and THC are members of a consortium of healthcare
companies that founded the Heritage Group, a VC firm that led a round of
investment in MDLive in early 2014.
Drug retailers: WBA recently announced a partnership with MDLive, which will offer
virtual consultations through Walgreens smartphone app. WBA also recently
announced a partnership with WebMD to offer a virtual wellness-coach. RAD has
formed a partnership with HealthSpot to pilot its telehealth kiosks in some of RADs
Ohio stores. CVS has been piloting telehealth in some of its MinuteClinic locations.
Traditional Healthcare IT: MDRX was one of the first major HCIT vendor to integrate
telehealth capabilities into its EHR when it announced a partnership with American
Well in 2012 enabling providers to document online voice and video telehealth
interactions into the EHR. Privately-held Epic has partnered with AMC Health to
integrate its telehealth solution into Epics EHR.
What Is Telehealth?
According to the Center for Connected Health Policy, telehealth is defined as a
collection of means or methods for enhancing health care, public health, and health
education delivery and support using telecommunications technologies. Telehealth
has the potential to provide better quality and more appropriate care for each patient,
as well as more efficient use of healthcare resources by potentially reducing the need
for expensive hospital care. Or more simply, telehealth expands access to care at
lower cost. While the definitions of the various categories within telehealth are very
fluid and sometimes cross borders, we would generally categorize telehealth into the
following domains:
Real-Time Interaction (Synchronous): Live, two-way interaction between a person
and a provider using audiovisual telecommunications technology. This can either be
done through traditional videoconferencing (more synonymous with traditional

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telemedicine), through traditional phone calls, or increasingly through mobile

devices and kiosks.
Store-and-Forward (Asynchronous): Transmission of recorded health history
through an electronic communications system to a practitioner, usually a specialist,
who uses the information to evaluate the case or render a service outside of a realtime or live interaction. Images can be captured using a smartphones camera or
through the use of specialized attachments, and then uploaded to a server to be
viewed by a specialist later.
Remote Patient Monitoring (RPM): Personal health and medical data collection from
an individual in one location via electronic communication technologies, which is
transmitted to a healthcare provider in a different location for use in care and
related support.
Traditionally, telemedicine/telehealth served as a means of improving access to care
to those in remote areas. For instance, with nearly 20 percent of the U.S. population
spread across approximately 80 percent of the nations countryside, telehealth
enabled providers to meet the healthcare needs of those in remote areas. Additionally,
there were other barriers for remote populations to obtain healthcare in a prompt and
timely manner beyond just proximity to care, including the ability to attract and retain
healthcare providers.
We would argue that health reform has compounded the issue of access to care.
Millions of people have gained insurance coverage through exchanges or Medicaid,
but there hasnt been a corresponding surge in new healthcare providers. Access to
care is no longer a rural issue but a national one. Recently, however, driven by
technological advances, government legislation and consumerism, telehealth has
evolved as one way to improve the access to care equation, thus increasing the
efficiency in the U.S. healthcare system by reducing healthcare expenditures and, at
the same time, improving overall patient health.
What Telehealth Is Not
While we believe that telehealth has the ability to change the way healthcare is
delivered today, it is not a replacement for the direct relationship between a patient
and his/her doctor. We see telehealth used as a supplement to a persons relationship
with his/her primary physician. We believe a risk for consumers is that they replace
their primary physician relationship for ad hoc usage of on-demand services, which
not only includes telehealth but other services like urgent care centers and retail
clinics.
Telehealth Needs To Be Consumer-Facing, But At Its Core A B2B Play
We think in order to build a successful telehealth business, companies need to adopt
B2B business models that partner with providers, employers and payors by providing
them incentives to deploy telehealth services given that they are the primary
purchasers of telehealth services. We think the use cases are compelling as telehealth
can in different instances help extend reach and brand, increase volumes, lower costs,
and improve patient engagement. At the same time, successful telehealth companies
will be able to provide an engaging consumer experience, which is critical as
consumers faced with greater out-of-pocket costs will become more selective in
buying healthcare services.

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Telehealth Is Going Mainstream And Pivoting Towards On-Demand Healthcare

Services
As mentioned earlier, telehealth is no longer simply about treating patients in remote,
rural locations or patients with certain chronic conditions. The need to improve access
to care, while managing costs is helping telehealth break into the mainstream,
pivoting towards virtual, on-demand, consumer-centric healthcare services. Given the
rapid rise in the adoption of smartphones, telehealth has essentially developed into
healthcare at your fingertips (Figure 1). In addition, as the U.S. health system
transitions from a fee-for-service model to a fee-for-outcomes model, we see
telehealth being increasingly embraced by providers, payors, employers and
consumers.
Figure 1 . Evolution of Telehealth

1870 1880

1890

1900 1910

1920

1930 1940

1950

1960

NOW

Source: Cowen and Company

Significant Multi-Billion Dollar Market Opportunity For Telehealth

While telehealth remains an emerging industry whose potential market is difficult to
appropriately size, particularly on the software side which is in the much earlier
innings than the device side, we still see a significant market opportunity. In
determining the market opportunity, we first look at total outpatient spending by
medical condition and then narrow it to conditions that are currently being treated
through telehealth and those that could be in the future. We estimate the total
addressable market for outpatient spending on conditions currently treated by
telehealth is approximately $57 billion (Figure 2). This group of conditions includes
among others: headache, flu, upper respiratory infections, skin disorders, and mental
disorders. Furthermore, we see an additional $125 billion in the total addressable
market for conditions telehealth could address in the future, including the
management of chronic diseases such as diabetes, COPD, asthma and hypertension. If
we assume a 10% penetration rate, this would put the market opportunity for currently
treated conditions at $5.7 billion and the additional potentially treatable conditions at
$12.5 billion.

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Figure 2 . Total Addressable Market for Current and Potential Telehealth Conditions, 2012
35,000
Current Telehealth Conditions
Potential Telehealth Conditions
Other Conditions

People who sought outpatient care for disease (thousands)

30,000

Hypertension
$13.4B

Osteoarthritis
$27.1B

COPD,
asthma
$14.1B
Acute
bronchitis &
URI
$6.6B

25,000

Mental
disorders
$24.2B

20,000
Skin
disorders
$17.3B

Diabetes
$13.2B

15,000

Back
problems
$22.4B

Heart
conditions
$19.2B
Cancer

Infectious
diseases

10,000

Flu
$0.8B

Upper GI
disorder
$5.8B

Otitis
media
$2.4B
UTI
$1.6B

5,000

Sexual
health
$6.3B

Thyroid
disease
Headache
$3.7B

Allergic reactions
Glaucoma $2.1B

Pneumonia
Intestinal infection
$0.8B

0
1

Cerebrovascular
disease

Stomach and intestinal

disorders $1.6B

Anemia

# of outpatient visits per patient per year

Source: Agency for Healthcare Research and Quality and Cowen and Company

This significant market opportunity has not gone unnoticed by the venture community,
which has poured significant dollars into telehealth specifically and digital health more
broadly. According to Rock Health, telehealth funding saw 315% y/y growth in 2014,
as licensing and reimbursement have become increasingly favorable for the industry,
to reach $285 million making it the fastest growing segment in digital health in 2014
(Figure 3).

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Figure 3 . Fastest Growing Categories of Digital Health From 2013-2014

Source: Rock Health Funding Database

The growth of funding for telehealth mirrors the broader growth in Digital Health
technology services, encompassing clinical analytics and Big Data, consumer
engagement technologies, wearables and biosensing, and population health
management. The overall space has seen huge demand, exhibited by the over $4.1
billion in venture capital funding received by U.S. Digital Health companies, of deals
over $2 million, in 2014. This is almost as much funding as the space received in the
last three years combined and represents 125% y/y growth in funding relative to 2013.
Funding in Digital health has seen a CAGR of 45% from 2011-2014 (Figure 4).
Figure 4 . U.S. Digital Health Venture Capital Funding From 2011-2014

Source: Rock Health Funding Database

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Not All Telehealth Is The Same

Telehealth is an all-encompassing term and as such there are numerous categories
within it. Below we outline some of the major forms of telehealth.

Telehealth (synchronous): The use of telephone or secure online

videoconferencing, via computer, tablet or smartphone, to provide 24/7 virtual,
on-demand patient consultations with Board Certified physicians for the
diagnosis and treatment of non-emergency or chronic medical conditions.

Telecardiology (asynchronous and RPM): The digital transmission between health

care professionals of information relating to electrocardiograms,
echocardiograms, angioplasty, and cardiac pacemaker monitoring.

Teledermatology (synchronous and asynchronous): The use of

telecommunications technologies, whether store-and-forward or full-motion
video, for the diagnosis, consultation and treatment of dermatological conditions
and tumors of the skin.

Teleneurology (synchronous and asynchronous): The use of telecommunications

technology for the consultation of neurological conditions, including headache,
dementia, epilepsy, stroke, movement disorders and multiple sclerosis, as well as
the viewing of medical images, such as X-rays, MRI and CT scans.

Telepathology (asynchronous): The transmission of pathology images and

associated clinical information for the purpose of diagnosis, education and
research.

Telepsychiatry (synchronous): The use of video conferencing technology to

connect patients to qualified mental health providers. It has also been used to
provide patients with second opinions in areas where only one psychiatrist is
available, as well as improve collaborative services between mental health
professionals.

Teleradiology (asynchronous): The transmission of radiological patient images,

such as x-rays, CTs and MRIs, from one location to another for the purposes of
diagnosing and sharing studies with other radiologists and physicians.

Telesurgery/Remote Surgery (synchronous): Surgery performed by a surgeon by

means of a computer or satellite link and robotic surgical system, which generally
consists of one or more arms (controlled by the surgeon), a master controller
(console) and a sensory system giving feedback to the user.

Teletrauma (synchronous): The use of telecommunications technology to evaluate

and triage patients in need of advanced trauma and emergency medical care
often in a critical setting, such as a major accident or natural disaster.

Competitive Landscape
Telehealth is very much an emerging and fragmented industry with numerous players
within various subsectors. In Figure 5, we outline largely pure-play telehealth
companies within their respective subsectors. While this outline is not all
encompassing, we believe it provides a general overview of the market.

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Figure 5 . Telehealth Competitive Landscape

Subse c tor
24/7 Virtual, OnDemand Doctor Visits

Teledermatology

De sc r iption
The use of phone or secure online video to
provide virtual, on-demand patient consultations
with Board Certified physicians for the diagnosis
and treatment of non-emergency or chronic
medical issues
The use of telecommunication technologies for
the diagnosis, consultation and treatment of
dermatological conditions and tumors of the skin

Telepsychiatry

The use of video conferencing technology to

connect patients to qualified mental health
providers

Teleneurology

The use of telecommunications technology for

the consultation of neurological conditions and
the viewing of medical images

Teleradiology

The transmission of radiological patient images,

such as x-rays, CTs and MRIs, from one location
to another for the purposes of diagnosing and
sharing studies with other radiologists and
physicians.

Re pr e se nta tive Com pa nie s

AmeriDoc
MDLIVE
American Well
Teladoc
Carena
Virtuwell
Consult A Doctor
Doctor on Demand
DermatologistOnCall
iDoc24
DermLink
YoDerm
Direct Dermatology
FirstDerm
Iagnosis
Arcadian TelePsychiatry
InSight Telepsychiatry
CloudVisit
JSA Health Telepsychiatry
C3O Telemedicine
My Psychiatrist
Encounter Telepsychiatry
Specialists On Call
FasPsych
C3O Telemedicine
InTouch Health
Krixi Corp
NeuroCall
Specialists On Call
Argus Radiology
Teleradiology Solutions
Horizon Radiology
USARAD.com
Imaging On Call
vRad
NightHawk Radiology
Rays

Source: Cowen and Company

Telehealth Isnt New By Any Stretch

Telehealth is not a new concept and has been in existence for over a century as a
means of delivering healthcare to populations in distant and/or inaccessible regions.
Throughout history, healthcare providers have utilized the most current
communications technology at their disposal to extend the reach of healthcare. The
earliest manifestation of telehealth can be traced back to the 19th century by means of
one of the earliest forms of communications technology: the telegraph. In 1874, Dr.
Charles Gosse, a South Australian surgeon, was able to provide instructions for the
proper treatment of wounded patients by transmitting a telegraph to Barrow Creek
Telegraph Station, one of the most isolated areas in and along the entire Overland
Telegraph line. This was followed by the transmission of electrocardiograms by a
Dutch physician named Dr. Willem Einthoven from a hospital to his laboratory 1.5
kilometers away via telephone cables in 1905, effectively the origin of telecardiology.
From the 1920s through the 1940s, physicians delivered radio consultations from
medical centers in Norway, Italy and France to patients aboard ships at sea and on
remote islands. By 1955, a remote clinic in Nebraska established a closed circuit
television connection with a hospital 100 miles away, essentially the first
videoconferencing consultation.

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Telehealth Helps Address The Needs Of Healthcare Reform

In recent years there has been mounting political pressure to cap healthcare
spending, which is ballooning towards 20% of total U.S. GDP (Figure 6). Healthcare
costs are expected to continue to grow faster than national income, which presents a
significant budgetary challenge going forward. Additionally, the Affordable Care Act
(ACA), which took effect in early 2013, is expected to add coverage to about 30 million
Americans who are currently uninsured or underinsured, adding further burden to the
delivery system. While healthcare reform is designed with incentives to trim excess
costs, by adding tens of millions of people to an already unsustainable system, reform
is actually expected to increase overall health spending by 2% by 2020. As a result,
many healthcare stakeholders have looked even more urgently to cut low-hanging
fruit from high cost segments, such as chronic and acute care.
While the healthcare industry must make cuts to maintain the sustainability of the
system, it must be careful not to sacrifice the quality of care. After all, sacrificing
quality could have the second-order effect of higher costs related to readmissions or
more courses of treatment than necessary. As a result, reimbursement models have
been changing to focus more on patient outcomes rather than on services rendered.
The ACA included a number of value-based purchasing provisions whereby hospitals
serving Medicare patients with common conditions will be reimbursed based on the
quality of care provided rather than quantity of services. A recent
PricewaterhouseCoopers survey of U.S. health insurers found over 80% were already
requiring evidence of cost savings or clinical benefits to include products on their
formularies. We see this push for outcomes continuing to expand over the coming
years with at-risk contracting becoming increasingly prevalent among providers
through ACOs and other new forms of healthcare delivery systems. We believe
telehealth can become an important tool for providers to extend their reach into their
markets to attract new patients and generate incremental revenue to offset the
expected drop in volumes tied to population management and at-risk reimbursement
models.
Technology involved in telehealth has become increasingly cost-effective and widely
available making adoption even easier today. We believe telehealth solutions can help
support value-based reimbursement by delivering care at lower cost, or by tracking
patient outcomes and aggregating data to display the impact of treatments. Remote
monitoring can track patient vital signs allowing healthcare providers to leverage
telehealth solutions to make treatment adjustments and early interventions based on
the data they receive. Additionally, these solutions can help improve adherence with
improved feedback mechanisms and easier access to care for patients. Telehealth
solutions are promising for their ability to supplement delivery systems that are more
patient-centric than traditional practices by using technology to simultaneously cut
costs and improve quality of care.

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Figure 6 . National Health Expenditures as a percentage of U.S. GDP

25%
Historical

Projected

20%

Percentage of U.S. GDP

15%

10%

5%

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

0%

1960

Equity Research

Source: CMS and Cowen and Company

Telehealth Has Already Demonstrated Clinical Efficacy On Both Cost And Quality
Two of telehealths most frequent use cases involve chronic and acute patient
settings, which make up a major portion of current healthcare costs that could be
better managed with telehealth solutions. A number of peer-reviewed clinical studies
have already demonstrated telehealths effectiveness in reducing healthcare costs,
while at the same time improving patient outcomes.
Cost Effectiveness Of Telehealth
A number of recent studies have concluded telehealth solutions save patients,
providers and payors money when compared to traditional approaches to care. In a
study done at Albuquerque, New Mexico-based Presbyterian Healthcare Services, the
Hospital at Home model taken from Johns Hopkins School of Medicine was applied
to provide hospital-level acute care to the home, in part through remote patient
monitoring. Patients in this study displayed comparable or better clinical outcomes to
similar patients treated in the hospital, as well as reported higher levels of satisfaction.
This program saved 19% for Medicare Advantage and Medicaid patients with
common acute care diagnoses over similar inpatients. Savings were generated mostly
from lower average length of stay and fewer lab and diagnostic tests than hospital
inpatients (Cryer, Shannon et. al, 2012).
In looking at how integrated telehealth could produce savings for Medicare patients
with chronic diseases, another study found integrating remote patient monitoring with
care management found significant savings. Against controls, these Medicare
beneficiaries using the telehealth tool realized savings of 7.7%-13.3% ($312-$542) per
person per quarter. This study suggests the ability to better coordinate care for
chronically ill patients via telehealth can be highly effective (Baker, Johnson et. al,
2011).

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Quality Of Care
Clinical studies have similarly proven that telehealth solutions that allow for remote
monitoring of patients with chronic diseases or help expand the reach of specialists
result in comparable or improved care. In a meta-analysis of 29 studies on the effect
of home telehealth on clinical outcomes, telehealth was found to have a moderately
positive and statistically significant effect on outcomes. More detailed analysis
indicated telehealth solutions had positive significant effects for treatment of heart
disease and psychiatric conditions (Dellifraine and Dansky, 2008). Overall the metaanalysis indicated telehealth positively impacted clinical outcomes across disparate
patient populations.
Additional Case Studies
The United States Department of Veteran Affairs (VA) is recognized as one of the
world leaders in telehealth, having developed a home telehealth program more than a
decade ago. In 2012, the VA specific Telehealth Applications provided care from 150
VA medical centers and 750 community based outpatient clinics to over 485,000
patients and completed nearly 1.4 million telehealth consultations. The VAs home
telehealth program reported a 53% reduction in bed days of care, a 30% reduction in
hospital admissions, a travel reduction savings of $34.45 per consultation, and savings
of $1,999 per patient on an annual basis. Interestingly, the VA also reported a mean
score of 86% in patient satisfaction.
The United Kingdoms Department of Healths Whole System Demonstrator program,
launched in 2008, generated favorable results as well. The 12-month study involved
179 general practices in three areas in England and 3,230 patients with diabetes,
chronic obstructive pulmonary disease (COPD), or heart failure. The study included
1,584 control patients and 1,570 intervention patients. Intervention participants
received a package of telehealth equipment and monitoring services for 12 months.
The results showed that intervention participants were admitted to the hospital less
often (42.9% of intervention patients versus 48.2% of control patients) and significantly
fewer of them died (4.6% of intervention patients versus 8.3% of control patients). The
intervention group also had 0.54 emergency admissions per head, compared to 0.68
amongst control group participants. Additionally, tariff costs per head were 188 lower
for intervention participants.
Telehealth May Help To Truly Engage The Healthcare Consumer
The rise of the healthcare consumer has been driven primarily by the increasing cost
of healthcare. Patients have been forced to become healthcare consumers as the
relative cost burden of healthcare has shifted from employers to employees through
the proliferation of high-deductible, consumer-directed health plans (CDHPs). These
allow employers to fix their healthcare contribution and reduce their risk exposure. But
while employers are shifting the cost burden onto employees, at the same time they
want to give employees tools to succeed in the new healthcare landscape. An
example would be Castlights transparency tool that empowers employees to make
more informed purchasing decisions. According to a 2015 survey by the National
Business Group on Health and Towers Watson, up to 2/3 of employers in 2014 began
to use incentives to reward or penalize employees based on whether they participate
in workplace wellness programs. We see additional pressures on employers to move
more employees towards high deductible plans in coming years, particularly as the
Cadillac Tax is looming on the horizon set to take effect in 2018, which will penalize
employers for having high-cost medical plans beyond certain thresholds.

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The net result of this shift towards CDHPs is that consumers are now paying 90%
more for healthcare than they did ten years ago. Data from the Commonwealth Fund
concluded that premium and out-of-pocket cost growth far outstrips the recent rise in
workers wages. As a result, high deductibles may lead many patients to forego care
and avoid filling prescriptions. According to data from the Kaiser Family foundation, as
many as one in four Americans skip some care due to the high cost they must bear.
As deductibles continue to rise, we think it incentivizes consumers to become more
price-conscious as well as more engaged in their care.
But for all the talk about the healthcare consumer and consumer-directed healthcare,
we have not seen meaningful consumer engagement with their health. This is because
in large part healthcare doesnt look like a consumer product, nor is it structured in a
format that is easy for consumers to engage. We believe todays telehealth solutions,
along other solutions such as mHealth and wellness platforms, could help improve
consumer engagement. Recent data suggests that consumers will increasingly use
telehealth solutions given their convenience and cost effectiveness. A recent Anthem
market survey found that 74% of consumers indicated they would use telehealth
services if available. We expect this number to increase as more baby boomers retire
and millenials become increasingly engaged in their healthcare. While many observers
see demand for telehealth primarily being driven by this older baby boomer
demographic most at risk for chronic conditions or others in rural locations with
limited access to care, we see a growing retail market for telehealth amongst
millenials who have grown up in the on-demand world of Amazon.
We see this further supported by a recent 2015 consumer survey from American Well,
which noted interest in telehealth was highest amongst 18-44 year olds, though
overall interest spanned across all age groups. The survey also noted that the primary
reason consumers would use telehealth was for convenience. Additionally, a report
from Salesforce.com called the 2015 State of the Connected Patient found that 60%
of millenials support the use of telehealth in place of physician visits and 71% would
like their provider to use an app to schedule appointments, review data and actively
manage their well-being. With new mobile device apps such as Apples HealthKit that
will integrate with Epics EMR recently coming out, we see millenials growing
increasingly engaged in their healthcare. In 2012, more than 13,000 mobile health
apps for consumers were available from the Apple App Store at an average cost of
just $3.21. Mobile apps such as American Wells AmWell app also give consumers the
ability to select which physician they would like to use from a number of options with
their credentials on demand (Figure 7). Based on American Wells consumer survey,
this is a valuable aspect of telehealth for consumers, as 88% would prefer to select
their physician rather than be randomly assigned.

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Figure 7 . American Wells Mobile Application Interface

Source: American Well

Telehealth can improve outcomes and efficiencies by managing care outside of the
traditional healthcare setting, such as hospitals and clinics. By monitoring and
communicating with patients between visits or post-discharge through remote patient
monitoring, telehealth consultations and consumer health engagement websites,
healthcare providers should be better informed to provide the most clinically
appropriate and financially viable option for the patient as well as drive efficiencies by
reducing clinical waste. This means of monitoring and engaging the consumer should
also enable healthcare providers to intervene when appropriate. Telehealth and
remote patient monitoring will find synergies with the tidal wave of inexpensive and
user friendly wearable devices, which will emit data to the cloud through which
healthcare providers can collect and analyze the data.
Furthermore, remote patient monitoring should also enable healthcare providers to
measure and manage the adherence of prescriptions, as well as ensure patients are
not experiencing harmful side effects. Not only is this critical given 30% of
prescriptions written in the U.S. are not filled, but it allows payers and providers to
demonstrate improved outcomes. Additionally, results from a recent American Well
survey suggest at least 70% of consumers would rather have an online video visit to
obtain a prescription than travel to their doctors office. In addition, consumer health
engagement websites and telehealth services should drive further healthier outcomes,

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as they provide a platform for patients to speak with healthcare providers outside of
the traditional healthcare setting.
Demand For Telehealth Is Growing From Major Stakeholders
As a result of the shifting healthcare landscape from reform and the demographic
shifts underway in the U.S., the use of telehealth is quickly becoming an imperative for
all healthcare stakeholders. We see demand for telehealth services coming from
various constituents in healthcare.
Payors
We believe the use of telehealth services will find meaningful interest from payors,
given the opportunity to lower costs through its use. For example, a problem of access
that telehealth helps solve is best displayed by misuse of the ER. According to a 2012
study by the American College of Emergency Physicians, 85% of Americans who
visited the ER said they couldnt wait to see their regular medical provider and 50%+
of visits were for non-emergency issues. Large payors, such as Unitedhealth, have
increasingly focused on telehealth solutions in order to bend the cost curve as the
nations healthcare system moves towards more performance-based reimbursement
over the next five years. UNH currently has 16 telehealth partners they work with
outside physicians offices. The company is already managing upwards of 350,000
telehealth consultations a day, adding up to billions of transactions per year. This
includes 20,000 people remotely monitored in their homes per day. While this is
meaningful progress for telehealth amongst payors, we note UNH is one of the more
progressive insurers leaving a large runway for growth in telehealth services.
Humana has discussed in the past how it sees technologies such as telehealth
flattening the healthcare delivery system by increasing the access points to care
along the care continuum, which enables the consumer to be both better educated
and receive a better care experience. HUM has an ongoing pilot program for 100
seniors enrolled in its Medicare Advantage plans. HUM notes the pilot will measure
the impact in-home sensors and remote monitoring technology have on improving
health outcomes and reducing frailty and fall-related hospital admissions for Medicare
members with chronic health conditions. HUM has also developed a larger scale
remote monitoring program for 2,000 elderly patients with congestive health failure in
33 states. In less than a year, this program has enabled HUM to reach remote patients
that would have otherwise gone unmonitored or treated. Encouragingly, 94% of these
patients found the platform easy to use and 93% said they would recommend it.
Anthem also recently launched a new online care service, LiveHealth Online, in
partnership with American Well, which it expects to roll-out nationally to its 33 million
members. This service is a 24/7 telehealth service available to anyone for $49 per
online visit and to many commercially-insured ANTM members for about $20. Early
users of the service have reported an average savings of $71 per visit, while also
saving most patients 2 to 3 hours per visit spent traveling to a physicians office. Other
insurers such as Aetna and Cigna have also started offering telehealth services, with
nationwide e-visits. AET has covered telemedicine services for most of the past
decade including all primary care physicians and about 30 specialties in its program.
CI also started offering the services on a broader basis more recently to self-insured
clients through a partnership with MDLive.
Employers have similarly noted the need to increase use of telehealth services to
contain costs as those who bear the risk of employee healthcare consumption seek
lower cost, more convenient alternatives to ER and urgent care visits. Additionally, the
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efficient, time-saving aspect of telehealth visits can improve employee productivity by

getting them back to work faster. A 2012 Towers Watson survey found 17% of
employers planned to offer telehealth in 2013 and another 27% were considering it for
2014 and 2015. An updated 2014 study from Towers Watson suggests as much as $6
billion will be saved through the adoption of telehealth and as much as 71% of
employers are expected to offer telehealth services by 2017.
Providers
Moving to value-based reimbursement comes with many changes including lower
volumes, which means providers must look for new ways to drive volume in order to
leverage fixed infrastructure costs. Data suggests providers are already starting to
move towards telehealth. In a 2014 survey by American Well, 90% of healthcare
executives reported they were developing or implementing at least one telehealth
solution. Furthermore, according to the American Telemedicine Association, almost
half of all hospitals already use some form of telehealth solutions today.
Telehealth offers providers the ability to extend their reach into the community and
drive greater scale by accessing patients who were previously out of reach but at a
lower cost. In this way, provider networks will be able to build scale even as traditional
inpatient volumes continue to shrink. Providers can also benefit from telehealths
ability to improve patient compliance via daily monitoring and early interventions to
address health issues before they become acute and more costly. Telehealth can also
help improve data sharing between providers and allow physicians and nurses to work
most efficiently in their particular fields of expertise. This follows the push for care
delivery to become more collaborative by centralizing available data and streamlining
tasks between multiple providers. As telehealth connects more effectively with data
repositories such as EHRs, the effectiveness for telehealth to help manage population
health will become more evident.
A number of publicly traded health systems are already involved in the telehealth
ecosystem. As early as 2009, UHS implemented a telemental health program at
Anchor Hospital near Atlanta to reach the behavioral needs of remote communities
nearby. This hospital uses live videoconferencing to assess and treat patients who
would not normally have access to care in these remote locations. Now, Anchor has
expanded to general telemedicine services for hospital ERs and nursing homes
throughout the state of Georgia. Kindred also uses remote monitoring for a number of
its home-care patients, who have seen readmission rates consistently below state and
national averages. CYH and THC are members of a consortium of healthcare
companies that founded the Heritage Group, a VC firm that led a round of investment
in MDLive in early 2014. This round of funding was completed to help MDLive build
out its cloud-based offerings and integrate a Second Opinion program for patients.
In a study done by Partners HealthCare that looked at a number of provider-toprovider use cases for telehealth including nationwide implementations in Emergency
Rooms, Correctional facilities and Nursing Homes telehealth was seen as providing
significant cost savings. In emergency rooms, hybrid telehealth technologies could be
used to avoid 850,000 transports with cost savings of $537 million a year across the
U.S. In correctional facilities, total annual cost savings would total over $270 million
and in nursing homes cost savings would total over $800 million.
Drug Retailers
Retail pharmacies such as Walgreens Boots Alliance, Rite Aid and CVS Health have
also realized the potential for telehealth adoption amongst its consumers. WBA
recently announced a partnership with telehealth provider MDLive, which will offer
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virtual consultations through Walgreens smartphone app. Additionally, Walgreens

recently announced a partnership with WebMD where the company will offer a virtual
wellness-coach powered by WebMD on Walgreens.com. Walgreens Balance Rewards
and e-prescription services will also be integrated into the WebMD mobile app to
track and reward healthy behavior as they look to improve consumer engagement.
Rite Aid is also getting involved in telehealth with its pilot partnership with HealthSpot
to trial its telehealth kiosks in Ohio. Meanwhile, CVS has been piloting telehealth in
some of its MinuteClinic locations. We see this roll-out of telehealth by retail
pharmacies as complementary to their overall clinic strategy that seeks to improve
consumer convenience while filling gaps in care left by the shortage of primary care
providers.
Traditional Healthcare IT Vendors
We expect traditional HCIT companies to look for partnership opportunities with
providers of telehealth services to integrate and share data to and from the EHR.
MDRX was one of the first major HCIT vendor to integrate telehealth capabilities into
its EHR when it announced a partnership with American Well in 2012. This offered
patients the ability to document their online voice and video telehealth interactions via
their EHRs, in order to allow for improved care coordination between providers. In
2013, Epic and Stanford Hospital & Clinics announced an integrated telehealth service
that allows web video visits via Epics EHR. Then in 2014, Epic announced that it would
integrate AMC Healths telemedicine product with its EHR. These partnerships
between EHR and telehealth companies allow clinicians increased access to biometric
data stored from telehealth visits in patients EHRs. Ultimately, we also think patient
portals such as MDRXs FollowMyHealth could also play a role here as patients are
able to maintain their own records of telehealth visits as they become increasingly
engaged in their care.
Legal and Regulatory Hurdles Are Easing
The complex legal and regulatory environment of the U.S. health system has been the
greatest impediment to the widespread adoption of telehealth. More specifically,
overcoming the differing laws and medical board standards from state to state have
been a significant challenge to fully unlocking the clinical and financial potential of
telehealth, especially with the current transition to a fee-for-outcomes-based
healthcare model. This problem is rooted in Article X of the U.S. Constitution, which
established that states have the authority to regulate activities that affect the health,
safety and welfare of their citizens including the practice of healing arts within their
borders with the intent of the state licensure authorities to ensure that healthcare
professionals are qualified. However, the Federation of State Medical Boards (FSMB)
has recently taken measures to address some of the issues.
FSMB Adopts Standardized Framework For Telehealth
Telehealth achieved a major milestone with the FSMBs adoption the Model Policy for
the Appropriate Use of Telemedicine Technologies in the Practice of Medicine (the
Model Policy) on April 26, 2014, replacing its 2002 Model Guidelines for the
Appropriate Use of the Internet in Medical Practice. Though state medical boards are
not required to adopt the Model Policy as it is non-binding, the Model Policy serves as
a standardized framework for state regulators as they consider the use of telehealth
technologies within their states and across borders. It addresses many of the concerns
of state medical boards in regards to telehealth, including establishing a physicianpatient relationship, continuity of care, referrals for emergency services, patient
privacy and prescribing medication based on a telehealth consultation. Notably, the
Model Policy outlines a direct-to-consumer approach to telehealth, whereby
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mandating that diagnosis and treatment of a patient using telehealth should be held
to the same standards of care as traditional, in-person interactions.
Licensure
This issue of licensure portability has also been a hindrance to the adoption of
telehealth, however this barrier may be diminishing. Currently, there are ten state
medical boards that issue special licenses or certificates related to telehealth. These
licenses allow an out-of-state provider to render telehealth services in a state where
they are not located, or allow a provider to render services via telehealth in a state if
certain conditions are met, such as agreeing not to open a medical office in that state.
Furthermore, on September 5, 2014, the FSMB released the final version of their
proposal of Interstate Medical Licensure Compact (Compact) language (Figure 8). The
goals of the Compact are to develop a comprehensive process that complements
exiting licensing and regulating authority of state boards, ensure the safety of patient
and enhance the portability of a medical license, while providing a streamlined
process that allows physicians to become licensed in multiple states. Amongst the
largest hindrance regarding licensure for telehealth providers is the length of time the
process takes to receive a license in another state. The Compact would modernize and
streamline medical licensing while maintaining state oversight, accountability and
patient safety, more specifically it would expedite the interstate licensing process by
streamlining some of the repetitive aspects such as having information such as
medical education and results of examinations not have to be primary source verified
again if the physician was already primary source verified by the principal state of
license (Figure 9). Recently, the legislative chambers of South Dakota, Utah and
Wyoming passed the Compact. We expect more states to follow as ten other states
have formally introduced the legislation in their legislative chambers and more than 25
state medical and osteopathic boards have publicly expressed support for the
Compact.
Figure 8 . FSMB Interstate Medical Licensure Compact Application Process

Physician files
application for
expedited license w/
board of state of
principal license

Board of state of
principal license
evaluated if physician
eligible for expedited
license & issues
qualification letter

Source: Center for Connected Health Policy

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After verification,
physician completes
interstate commission
registration process
for license of member
state (fees paid)

After receiving
verification of
eligibility & any fees
paid, member board
issues expedited
license to physician

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Figure 9 . States with Telehealth Licenses or Certificates

States with Telehealth Licenses or Certificates

States without Telehealth Licenses or Certificates

Source: The Center for Connected Health Policy

Reimbursement Landscape Is Improving

Limited reimbursement has been another significant barrier to the widespread
adoption of telehealth. However, many regulating entities are recognizing the benefits
and potential of telehealth, helping to drive an improving reimbursement landscape.
Medicare
Further enabling telehealths move towards mainstream adoption, the Centers for
Medicare and Medicaid (CMS) recently expanded its telehealth physician
reimbursement current procedural terminology (CPT) codes which included seven
new procedure codes in its 2015 Medicare physician fee schedule for telehealth
services. The seven new covered CPT codes for telehealth include psychotherapy,
services prolonged services in the office and annual wellness visits. Currently, CMS
recognizes 75 CPT codes for telehealth services.
While this sounds like a significant expansion, Medicares coverage of telehealth is
still quite limited. Medicare reimburses only for specific services when they are
delivered via live video. It also requires the beneficiary to be located in a designated
rural area and to receive the telehealth encounter within a facility setting. Store-andforward-delivered services are prohibited, except for CMS demonstration programs in
Alaska and Hawaii. We expect CMSs expansion of telehealth physician
reimbursement codes to serve as a catalyst for wider spread acceptance of telehealth
amongst commercial payors, as they typically follow CMS rules, even if the practical
application by Medicare remains rather limited for now.
Medicaid
The federal government does not mandate reimbursement for telehealth under
Medicaid, however states have the option to reimburse for Medicaid services provided
via telehealth. Currently, 46 states in the U.S. and the District of Columbia provide
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some form of Medicaid reimbursement for telehealth services. States categorize

telehealth services under Medicaid as video conferencing, store-and-forward and
remote patient monitoring (Figure 10). The most widely covered telehealth service
under Medicaid is video conferencing with 46 states and the District of Columbia
providing reimbursement. In contrast, only ten states provide reimbursement for storeand-forward telehealth services and 13 states reimburse for remote patient
monitoring.
Figure 10 . Telehealth Services Reimbursed by Medicaid

Sta te

Vi de o
Co nfe r e nci ng

Sto r e -a ndFo r w a r d

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

R e m o te Pa ti e nt
M o ni to r i ng

Sta te

Vi de o
Co nfe r e nci ng

Montana

Nebraska

Nevada

New Jersey

X
X

New York

Delaware

North Carolina

District of Columbia

North Dakota

Florida

Ohio

Georgia

Oklahoma

Hawaii

Oregon

Pennsylvania

Idaho

X
X

Indiana

X
X

X
X

Rhode Island
X

Iowa
Kansas

R e m o te Pa ti e nt
M o ni to r i ng

New Hampshire
New Mexico

Illinois

Sto r e -a ndFo r w a r d

South Carolina

South Dakota

Tennessee

Texas

Utah

Kentucky

Louisiana

Maine

Vermont

Maryland

Virginia

Washington

Michigan

West Virginia

Massachusetts
Minnesota

Wisconsin

Mississippi

Wyoming

Missouri

X
X
X

Source: Cowen and Company

Private Payors
While there is no federal law mandating private payors to provide coverage for
telehealth services, some states, recognizing the benefits, have passed legislation that
require private payors to provide plans that reimburse at least some form of telehealth.
Currently, 21 states and the District of Columbia require private payor reimbursement.
Some states mandate reimbursement equivalent to comparable in-person care,
while other states just require some level of reimbursement. Currently, 21 states and
the District of Columbia require private insurance plans to cover telehealth services
(Figure 11).
Furthering the momentum, New York recently passed legislation mandating that
private insurers provide reimbursement for telehealth services, effective January 1,
2016. In addition, other states, such as Indiana and Iowa, are considering passing
similar laws, while other states, such as Oregon, are advocating for legislation to
expand existing telehealth coverage. Oregon lawmakers are pushing for the passage

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of legislation that would provide health insurance coverage to patients who receive
telehealth services in any form and not just if it took place at a medical facility, as it
currently stands.
Meanwhile, some private payors are taking matters into their own hands and
providing reimbursement for telehealth services regardless of whether the state
requires it. For instance, Horizon Blue Cross Blue Shield of New Jersey announced the
creation of Horizon CareOnline, a telehealth service offering online video conferencing
to a physician 24 hours a day, seven days a week at no cost to its individual plan
members through American Well. Self-insured employers are deploying telehealth
solutions as well, recognizing its benefits.
Figure 11 . States with Medicaid and Private Insurance Reimbursement for Telehealth Services

Medicaid and Private Insurance Coverage for Telehealth

Medicaid Coverage for Telehealth
Private Insurance Coverage for Telehealth
No Required Coverage for Telehealth

Source: The Center for Connected Health Policy

Some Hurdles To Adoption Remain

Healthcare is an industry that historically has been known to be slow to adopt new
technologies or workflows that radically change the status quo. While much progress
has been made to overcome these hurdles and drive greater telehealth adoption, a
number of challenges remain to more widespread adoption.
Regulation And Reimbursement Challenges
Although telehealth policies have been evolving both nationally and state by state,
limited reimbursement and disparate state regulations remain major barriers to
greater adoption. The FSMBs recent adoption of the Model Policy for the Appropriate
Use of Telemedicine Technologies in the Practice of Medicine addresses many of the
concerns of state medical boards in regards to telehealth, however state medical
boards are not required to adopt the it as it is non-binding. In addition, the issue of
licensure portability has been a hindrance to the adoption of telehealth. Currently,
there are only ten state medical boards that issue special licenses or certificates
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related to telehealth, allow an out-of-state provider to render telehealth services in a

state where they are not located, or allow a provider to render services via telehealth
in a state if certain conditions are met.
Medicare reimbursement has a number of restrictions, including the patient must be
located in an eligible location with an eligible provider for a Current Procedure
Terminology (CPT) billing code. Medicare will then reimburse a small facility fee and
while a significant number of telehealth solutions are store-and-forward technologies,
Medicare only reimburses real-time services. Meanwhile, Medicaid covers telehealth
services in 46 states with some form of reimbursement, only ten states provide
reimbursement for store-and-forward telehealth services and 13 states reimburse for
remote patient monitoring. Private payor reimbursement is set by states, similar to
Medicaid, with 21 states currently reimbursing for telehealth.
Cybersecurity And Privacy Concerns Could Slow Consumer Adoption
A major part of the healthcare industrys reluctance to adopt technology is not only
due to organizational sluggishness, but also concerns over liabilities related to patient
privacy. Providers could fear legal repercussions for patient data leakage, while
consumers have their own concerns on the cybersecurity of any telehealth system.
These issues were compounded by changes to the Health Insurance Portability and
Accountability Act (HIPAA), which requires safeguards to ensure the confidentiality
and integrity of electronic protected health information (PHI). Additions to the Act
include increased scope of telehealth oversight, increased maximum penalty for
negligence, increased data breach notification requirements and new requirements
for providers around telehealth marketing. Recent government data also suggests
cyberattacks are increasingly targeting healthcare data stored on the cloud. Providers
looking to institute telehealth services must therefore establish stringent security
measures to reduce the risk of patient privacy breaches, which could increase their
costs to comply as well. At the same time, patient trust for these services must be
gained in order to drive greater consumer adoption.
Provider Liability Fears And Unwillingness To Change Workflows
Physician malpractice is a major concern amongst providers that may also limit
telehealth adoption amongst physicians. By not being able to see their patients faceto-face, providers may have less confidence in making accurate diagnoses and may
therefore be more concerned with potential malpractice suits involved in e-visits.
Additionally, if patients choose to use telehealth consults in lieu of real physician visits
entirely, it could lead to poor outcomes. Even major telehealth supporters such as
HealthTap CEO Ron Gutman have recognized the need to use telehealth as a feature
in the virtual care continuum, and not view it as a cure-all.
Different vendors handle the liability in different ways, as Teledoc covers the cost of
malpractice insurance per provider encounter. American Well takes a similar approach
where it covers all participating providers by integrating malpractice insurance into
their online care. Even still, physicians may be averse to changing the status quo of
their practices and adopting new workflows in a system known to lag in technological
development.
EHR Connectivity/Interoperability Remains A Challenge
There is widespread concern within the healthcare community over the
interoperability of many EHR providers. Many have limited data sharing capabilities,
which severely hampers the potential to effectively leverage patient data from
telehealth consultations across disparate providers. Clinical data interoperability is a

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challenge throughout all of healthcare as building effective HIEs is also a challenging

prospect. For providers looking for successful ROI, telehealth implementation will take
more than device installations and will more importantly focus on the network
infrastructure that is implemented.
Broadband Access Remains Limited For Those With The Greatest Need
Access to a broadband connection and speed of connection remain important issues,
particularly when most telehealth services will involve HD video-conferencing used for
consultations and diagnosis. This issue could be a challenge for some, particularly the
elderly and poor, who could benefit the most from telehealth services to manage
chronic conditions but may lack adequate broadband connectivity due to lack of
understanding or cost. According to the Pew Internet and an American Life Project
Survey, only 62% of adults with chronic diseases have internet access, while 81% of
those without chronic diseases use the internet (Figure 12). Overall, 74% of American
adults use the internet. This gap in connectivity access is something that may also be
an issue in location, as more rural locations lack adequate network infrastructure.
Additionally, many providers may be limited in their connectivity. In 2010 the FCC
reported that more than 3,000 small provider groups lacked adequate broadband
connectivity for telehealth use.
Figure 12 . Internet Access Is Relatively Low For Those With Chronic Diseases

Lung condition

68%

Cancer

62%

High blood pressure

57%

Diabetes

50%

Heart condition

47%

2+ chronic conditions

52%

1 chronic condition

68%

1+ chronic conditions

62%

No chronic condition

81%
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

% of adults with internet access

Source: Pew Internet, American Life Project Survey and Cowen and Company

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Ticker

Rating

Price*

Price Target

Ticker

Rating

Price*

Price Target

MDRX
CERN
MDAS
WBA

Outperform
Outperform
Outperform
Market Perform

$12.29
$71.26
$18.19
$77.10

$20.00
$76.00
$20.00
$74.00

ATHN
CVS
RAD

Outperform
Outperform
Outperform

$132.59
$102.62
$7.99

$172.00
$107.00
$10.00

*As of 02/19/2015

Valuation Methodology And Risks

Valuation Methodology
Health Care Technology & Distribution:
We use a five-year discounted cash flow analysis as our primary valuation method
to derive our 12-month price target. We generally assume a 10% discount rate
but may apply appropriate adjustments depending on company and/or industry
specific factors. We also assume a terminal growth rate that is dependent on our
long-term view of the specific sub-industries under coverage. We note our discount
rate assumption could be viewed as conservative relative to the actual weighted
average cost of capital, but we view our 10% assumption as reasonable over the
long run. Lowering our discount rate assumption or increasing our terminal growth
rate assumption would lead to a higher estimated value per share. As a secondary
measure, we look at the forward P/E multiple and EV/Sales ratio implied by our DCF
analysis and compare that to historical averages.

Investment Risks
Health Care IT:
There are potential risks associated with the HCIT space: (1) a significant amount
of spending on HCIT has been driven by government related programs (i.e., HITECH
Act), and any slowdown or cuts in such programs could negatively impact spending
on HCIT; (2) constrained hospital budgets could potentially lead to a decrease in
HCIT-related investments; (3) customer losses as a result of facility consolidation in
both the inpatient and outpatient markets could create challenges for a number of
vendors; (4) greater price competition in the HCIT industry; and (5) the current focus
on Meaningful Use incentives could delay purchasing decisions for non-EHR related
solutions and services.
Drug Retailers:
We see a number of risks associated with the drug retail space: (1) the industry
is highly competitive with retail drugstore chains, independent pharmacies, mailorder providers, as well as other retailers including grocery stores, mass merchants,
warehouse clubs and online stores all competing in the space which could further
pressure front-end sales and margins, (2) the current wave of drug patent expirations
and the positive impact on profitability derived from generics are expected to taper off
significantly over the next several years, (3) while specialty has provided a significant
tailwind for the most part we believe there could be some concerns around the
sustainability of high growth in this area, and (4) we believe the impact of PPACA
and the expected increase in volumes could be more subdued depending on the
implementation and execution.

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Addendum
Analyst Certification
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COWEN AND COMPANY RATING DEFINITIONS
Cowen and Company Rating System effective May 25, 2013
Outperform (1): The stock is expected to achieve a total positive return of at least 15% over the next 12 months
Market Perform (2): The stock is expected to have a total return that falls between the parameters of an Outperform and Underperform over the next 12 months
Underperform (3): Stock is expected to achieve a total negative return of at least 10% over the next 12 months
Assumption: The expected total return calculation includes anticipated dividend yield
Cowen and Company Rating System until May 25, 2013
Outperform (1): Stock expected to outperform the S&P 500
Neutral (2): Stock expected to perform in line with the S&P 500
Underperform (3): Stock expected to underperform the S&P 500
Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period
Cowen Securities, formerly known as Dahlman Rose & Company, Rating System until May 25, 2013
Buy The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points higher than the general market
return
Sell The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points lower than the general market
return
Hold The fundamentals/valuations of the subject company are neither improving nor deteriorating and the investment return is expected to be in line with the general market
return

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Cowen and Company

Equity Research

February 20, 2015

Cowen And Company Rating Definitions

Distribution of Ratings/Investment Banking Services (IB) as of 12/31/14
Rating

Count

Ratings Distribution

Count

IB Services/Past 12 Months

Buy (a)

461

60.50%

109

23.64%

Hold (b)

288

37.80%

14

4.86%

Sell (c)

13

1.71%

0.00%

(a) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLC's rating definitions. (b) Corresponds to "Market Perform" as defined in Cowen and Company,
LLC's ratings definitions. (c) Corresponds to "Underperform" as defined in Cowen and Company, LLC's ratings definitions.
Note: "Buy", "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in its ratings system and should not be construed as investment options. Rather, these ratings
terms are used illustratively to comply with FINRA and NYSE regulations.

www.cowen.com

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Cowen and Company

Equity Research

February 20, 2015

Points Of Contact
Analyst Profiles
Charles Rhyee

James Auh

Zachary Wachter

New York

New York

New York

646.562.1376

646.562.1352

646.562.1353

charles.rhyee@cowen.com

james.auh@cowen.com

zachary.wachter@cowen.com

Charles Rhyee is a senior analyst

covering health care IT and distribution,
which he has followed since 1999. He
joined Cowen in 2011.

James Auh is an associate covering the

health care IT and distribution sector. He
joined Cowen in May 2014 from Brean
Capital.

Zach Wachter is an associate covering

the health care IT & distribution sector.
He graduated with a BA in economics
from Dartmouth College.

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