Health Tech | HealthcareAndy.com | 40K LinkedIn followers
Someone broke down the estimated costs of a $15 Sweetgreen salad. We need these cost graphics for digital health to help future founders. Especially for tech enabled cos, the greatest cost is labor. Much of the "value created" is in curation and matching, which means the gross margins are reliant on labor arbitrage. Pay someone $X, but get paid $X+Y% per visit. The challenge with healthcare is that you often have to pick one of two business models: 1. specialized, low volume, high cost, low gross margin % 2. generalized, high volume, low cost, high gross margin % I'd argue founders should focus on gross dollars over the lifetime of the customer (like Jeff Bezos said) instead of gross margin %'s, but we'll leave that for another time. The challenge is that many tech enabled digital health cos have high cost of goods sold (labor) and moderately high product, design, and engineering budgets. We must build differentiated solutions for patients, clinicians, and clients to be out incumbents, however, we're realizing that companies are ultimately valued on the discounted value of future cash flows. And the high SG&A costs at most organizations might be inbalanced to the unit economics of the business. I'm not sure the math pencils out for everyone unfortunately. But I'm just a guy on the internet, would love to hear the thoughts from those smarter than I (you!). Comment below. --- p.s. I have no idea the accuracy of the graphic and not an investor in Sweetgreen. Cheers. Credit: David Crowther
the biggest companies' models in the US actually do NOT work ... most are smoke in mirrors, false advertising, corporate corruption, etc. amazon, uber, doordash, etc, etc, etc, all work because they UNDER pay FMV for labor they don't win because of scale, they win because they cheat applying these to healthcare could be catastrophic
Dan Unger
2mo
I actually disagree with part of your statement. I do think labor is the biggest cost for health tech cos, but it's not a Cost of Revenue or Gross Margin issue (unless it is a services company pretending to be a tech company...which is far too common). Health tech co's spend a $hit load on S&M, R&D, Legal and other G&A. So the Gross Margins can be pretty solid, but the non-cost of revenue cost structures are super heavy handed and make profitability near impossible. Some of that is due to the legal complexity of healthcare, some of it is that it's enterprise sales that are hard to scale, etc...some of it is just wishful thinking (if you spend....it will grow). Look at Phreesia's financial statements as a good example: https://s24.q4cdn.com/837435241/files/doc_financials/2024/q4/f056457f-23c9-45df-b705-c3d84b1ac5b5.pdf 2024 Full Year $356 million in Revenue $61 million in Cost of Revenue 83% Gross Margin But now look at these NON cost of revenue expenses... $147 million in Sales & Marketing(!!!???) $112 million in R&D $79 million in G&A That's a looooot of cost to overcome to start making good money. Many health tech co's will need to figure out how to scale more without these massive investments in S&M, R&D and G&A.
King Yip
2mo
You are comparing a personalized service (healthcare) to something that is a product (a company that sells a set group of salads). We can probably build this for urgent care (a product), telehealth or otherwise. But healthcare as a whole would be difficult because you’re selling a service.
Kirk Kuli
2mo
Hate to be the wet-blanket contrarian here, but…huh? Your insights are typically intuitive; however this post seems more than a tad incoherent. Any labor component reflected in Gross Margin is highly dependent on how that labor is allocated to the revenue generated from the individual service. Most (if not all) modern practice management software can apply RVUs to calculate these allocations. On a P&L - any labor expense flowing into SG&A gets subtracted from Gross Profit in the maths yielding Operating Profit (and subsequently Operating Margin), so not sure you capture the totality of circumstance with your labor arbitrage point in regards to Gross Profit. Furthermore, how does the following basic scenario fit your 2 business models, presuming a specialized service would necessarily demand greater reimbursement.: Type Volume COST ARPU GR GP GM 1 100 100 110 11000 1000 9.1% 2 1000 10 11 11000 1000 9.1% I switched from pencil and paper to spreadsheets a long time ago, and I suspect so did most VCs; where certainly some “Pioneers” used a slide rule and 10-key in between.
Joseph Occhino
2mo
Andy, while the argument can be made all day long about what the components actually are for digital healthcare, including insurance, payor reimbursements, etc. my hope is that your model and premise is not missed here: this is absolutely how almost all businesses should break down net profit or loss as the various components are accounted for. It happens in SMB’s all the time. And digital health should not get a pass here. You can analyze the financial statements of publicly traded DH companies and get most of those costs. Sadly, privately held companies follow the same pattern and are burning cash, and promoting a solution that is losing money. When we look at the financials of such companies at the start of working with them, we see this often.
James Considine
2mo
Wouldn't disagree with your observations Andy Mychkovsky - it's a difficult challenge. On the one hand, outcomes and stickiness of a purely virtual solution (cheaper to operate) are often not quite as good as those that involve a person (more expensive to operate). The platform is a big lift, and without enough scale/patient volume, that cost takes a disproportionate place on the P&L. The other issue (I believe) is CAC - just like SaaS, SM costs are high making the CAC also high. Couple this with a lot of entrants driving prices down, and the unit economics don't really make for a sustainable business. As for valuations, it's hard to know if DCF is being used since so many of these firms are generating negative FCF (and therefore scrambling to find an investor, acquirer, or merger partner to stay alive)
Zach Davis
2mo
It's so hard to eat health these days. I would love to see the same visual for McDonalds. I would like to see where the differences are? Is it harder to run a healthy fast casual food chain or is SG just not operating efficiently.
Would love this graphic repurposed for digital health or any other form of healthcare delivery paradigm. Provides clarity in a sea of nuance.
Chief Quality Officer and Co-Founder at Confidant Health
2moInsurance makes the salad situation a little more complicated. While the company may charge $15 for the salad, you have the payers say "no, we will only pay you $10 for the salad" and you can now collect an additional $2 from the person who ate the salad a month ago. Or, the person buys the salad, eats the salad, and then gets a surprise bill for the salad even though they thought insurance was paying for the salad but, oops, they picked it up at the wrong location. Luckily there are a lot of elements on this equation that can be adjusted in healthcare. These are all fun challenges to solve for!