Episode 34: 5 Essential Steps in Building a Revenue Model for Your Healthcare Business
Discover how the leading healthcare innovation law firm in the US walks founders, investors, and executives through the revenue model process.
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In this episode, Carrie and Rebecca discuss:
What a minimum viable revenue model is
What 5 questions they ask every new revenue model client
Why healthcare business rules are different from every other industry
Why determining a revenue model must include designing a compliant business arrangement
What happens when your revenue model is noncompliant
Keep scrolling for a transcript of this episode.
Learn more from Carrie and Rebecca:
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Telehealth/Virtual Care Mgmt Update (biweekly LinkedIn newsletter)
Key Takeaways
The first question you must ask is, “what are you selling”? For example, a vendor of RPM is often selling software, devices, and clinical services in the form of management services.
Identifying who your customers are or what revenue streams you have available is a key step in figuring out what the available payment mechanisms are. You may have more options than you think.
In healthcare, designing a compliant business arrangement is key to capturing revenue without getting yourself in trouble. Noncompliance is a revenue risk.
Consider what documents you need to make the arrangement viable. There may be more than you think due to the complexity of the healthcare industry.
Read the transcript
Rebecca Gwilt (00:01):
You're listening to Decoding Healthcare Innovation with Carrie Nixon and Rebecca Gwilt, a podcast for novel and disruptive healthcare business leaders seeking to transform how we receive and experience healthcare.
Rebecca Gwilt (00:17):
Welcome back for another episode of Decoding Healthcare Innovation. This is a double host, a true co-host episode. My partner Carrie is here. Hello, Carrie.
Carrie Nixon (00:28):
Hi Rebecca. We're gonna have a lot of fun today.
Rebecca Gwilt (00:31):
Yes, yes, yes. Maybe not as fun as in the podcast booth at HLTH. But we will try and do so in this virtual environment. So very often healthcare innovators come to Carrie and I, and they've created something that's gonna move the needle on health outcomes or save the system a bunch of money or make the patient experience better. And they're super excited. And they come to us and they say, ‘here's my idea. It's gonna have a tremendous impact. But I don't know how to make money using this idea. I don't know what our revenue model's gonna look like. I need you to help me understand and think through it’.
Rebecca Gwilt (01:05):
And we do this every day. And we wanted to take this opportunity to provide some insights into our approach, what we've learned in the last couple of years of having these discussions. So today we're gonna be discussing five key questions to consider if you're a digital health company and you need to develop a minimum viable revenue model. This is not a term of ours, but it's one that we use in-house because of how many times we tackle this kind of work. And we thought the best way to do that would be to tackle a particular hypothetical, a pretend business, and walk through how we might help that business develop their go-forward revenue modeling. I'm so excited to have Carrie Nixon here today because our make believe company is an RPM company. And there's no one that knows more about this than she does. So, Carrie let's, let's talk about ABC, LLC. <Laugh>.
Carrie Nixon (02:06):
ABC RPM, LLC. How about that? The alphabet soup of healthcare. Okay. Yeah, we can, we can definitely talk about ABC RPM company for sure. And, you know, I'll just underscore what Rebecca was saying. It is incredibly important in the healthcare industry to have reimbursement on revenue associated with something that you are selling into the market. It is very frequently the case, if something in healthcare doesn't get paid, it doesn't get done, all too often. We're hoping to shift away from that with value-based care, but especially in the fee-for-service model, that is sort of where we live. We help clients every day walk through, how can they build a revenue model? Is it in the fee-for-service space? Is it in the value-based care space? What are the other opportunities? And what does that look like? So Rebecca, you wanna tell us the first key question? We can talk about that.
Rebecca Gwilt (03:05):
Oh, that's right. Oh okay. So I'm gonna go through the questions and then Carrie's gonna set the stage and describe this ABC RPM LLC. <Laugh> Pkay. So the first question seems like a simple one but it's where we start. And that is, what are you selling? The second is, who is your customer? The third is, what are the available payment mechanisms to you? The fourth is, how do you build a compliant business arrangement to capture that revenue? And the fifth, which is quite important, is the step that helps you actually execute on this is, what contracts and documentation and processes do need to have in place to actually put that business into effect.? So Carrie, tell me about ABC RPM, LLC, what are they up to?
Carrie Nixon (03:53):
Yeah. So for those of you who may not be familiar with the acronym RPM, it stands for remote patient monitoring. Generally, it's a relatively new sort of vendor part of the healthcare industry. But generally, a vendor of remote patient monitoring services is typically selling a software platform to record all of the information that goes on on the patient side and the clinician side. They are often providing devices along with that software platform and those devices capture physiologic data or therapeutic data from patients that clinicians are treating. And then they also may provide care management services by clinical staff. So with remote patient monitoring, you generally need someone who is going to keep an eye on the patient's data and let the practitioner, the physician, know if there are anomalies in that data that may indicate a problem that needs to be addressed.
Carrie Nixon (05:07):
So a lot of RPM vendors have found that this is a useful service to outsource because a lot of physician practices don't have extra clinical staff sitting around to monitor data. So, in short, to answer the question, a remote patient monitoring company is often selling software, devices, and clinical services in the form of care management services.
Rebecca Gwilt (05:34):
Okay. So that's question one. What are you selling? And that's not the only model of remote patient monitoring, but ABC RPM, LLC, that's what they're doing. So now we know what they're selling: devices, care management and software. So who are they selling those to Carrie, who is their customer?
Carrie Nixon (05:52):
A customer for a remote patient monitoring company could vary, right? It could be an individual patient where it's sort of a direct consumer model, and a company is going out there and saying, do you qualify for remote patient monitoring services? We can help get you into a program, right? So there's the direct consumer model. There's also the B2B model where the customer of RPM Company is a physician practice who says, 'we have patients in our patient base that would benefit from remote patient monitoring, but we don't have the bandwidth to provide all of the clinical services, nor do we have a software platform or the devices, so we would like to outsource that to you'. So physician practices is another potential customer. It is also the case that a remote patient monitoring company could choose to focus on the employer segment of the industry. They could choose to sell to insurers. They could even choose to sell to pharmaceutical companies who are doing clinical trials. So in this case, let's just say that we have identified our customer. We, RPM Company have identified our customer as physician practices who have patients who could benefit from remote patient monitoring.
Rebecca Gwilt (07:15):
Okay. Yeah. And I just wanna emphasize that the 'who is your customer' question can have lots of answers, but when you start to define your revenue model, you've got to define it by potential customer. So you may have three lines of revenue, one from practices, one direct to employer, self-insured employers. You could be working on the long game and selling into Blue Cross or whatever insurer you know a VP of <laugh>. But the point is, identifying the customer is a key step in figuring out the next step, which is 'what are the available payment mechanisms' right? In healthcare there is a huge range of how you can make money, everywhere from a patient giving you their credit card, to seeking reimbursement on a fee-for-service basis, from a payer, or naming your price selling B2B. So Carrie, what are the available payment mechanisms for our RPM Company that's selling into physician practices?
Carrie Nixon (08:18):
Right. Great. So for physician practices, we know that there is fee-for-service reimbursement available for remote patient monitoring services. That means that it is possible to serve a physician practice as a vendor with a services agreement, right, whereby the physician is providing and supervising generally the remote patient monitoring services for their particular patient. They are billing Medicare or a commercial payer for those services. And they are also, though, paying a fee to RPM Vendor Company for providing the software, the devices and/or the monitoring services. So when you are selling to physician practices, you know that a fee-for-service reimbursement infrastructure is one available revenue stream. It is also possible that another available revenue stream for a physician practice would be a practice that is in some sort of value-based care and delivery and payment arrangement. So it may be that they are not engaging really in a fee-for-service model but have value-based contracts. In that case, that's another potential revenue stream that you need to be aware of when you are creating your business model.
Rebecca Gwilt (09:42):
So the next question we're gonna get to is how to build a compliant business arrangement around this. And I wanna just take a pause here and, you know, have a lawyer moment when I point out that you can know where your money's coming from and still have a lot of work to do to figure out whether the way that you are designing your reimbursement structure or designing your commercial arrangement is actually compliant with state and federal law. It is the case that partnerships like between an RPM company and a physician practice in healthcare can be rife with risk related to how and how often, and in what amount, money changes hands between the two companies.
Rebecca Gwilt (10:26):
And so whereas if we were selling widgets, maybe number four, wouldn't, wouldn't be as important a question. But in healthcare, designing a compliant business arrangement is key to capturing revenue without getting yourself in trouble. It's where a lot of folks get tripped up. And a lot of innovators in the healthcare space don't have a background in healthcare regulatory, and this is something that sometimes gets missed until it's too late. And then you have to sort of rebuild it. So of course, ABC RPM LLC has come to us right at the beginning to help us fashion their revenue model. So Carrie, how would you advise them in the model whereby they're being paid by the physician practice under a fee-for-service system.
Carrie Nixon (11:10):
Yeah, exactly. So I'll focus first on the non-compliant non-healthcare way of doing this, right? It might be instinctual to say, 'well, we, the vendor, RPM Company, we're gonna take a percentage of everything that you get reimbursed for from the practice', right? That is a natural instinct. It is a practice that might be very typical in other industries in most commercial transactions and business arrangements. It is definitely illegal in the healthcare space. And that's something that not everyone knows. So this is where you go, 'all right, let's focus on a compliant business arrangement that's gonna work for the revenue.
Rebecca Gwilt (11:59):
Because orange looks good on no one.
Carrie Nixon (12:01):
Yes, exactly. Exactly. So a compliant business arrangement for an RPM vendor company looks like a services contract whereby the vendor RPM Company is charging a flat service fee per patient per month for providing the software, the supply of the device, and potentially, if the physician practice chooses it, the clinical staff to do the care management and monitoring of the data. That services fee should be at a fair market value for the services that are provided. And it should not be tied to whether or not the physician practice receives reimbursement. So the bottom line here is that, I just described for you the intricacies of one type of compliant business arrangement in this space. There are other compliant business arrangements. The big takeaway here is that there are lots of non-compliant business arrangements. And if you're using one of those non-compliant arrangements to capture the revenue that revenue down the road may be taken away.
Rebecca Gwilt (13:22):
It may be clawed back from you.
Carrie Nixon (13:23):
Exactly, it may be clawed back. So compliance is an important part of your revenue model.
Rebecca Gwilt (13:31):
Yeah. And, and Carrie mentioned the services contract piece of that. That's step number five, right? What paper do you need to have in place to document what the arrangement is? And I'll tell you, my experience is often that clients contact us and say, I just need you to write me up a services contract. But I hope what we have illustrated here is that that is the last step. Once you identify your service, your customer, the available payment mechanisms, and the compliant business model, only then can you construct documentation to reflect what that means in a transactional sense. So in this case, I think Carrie mentioned it's a services contract. It might be equipment lease, depending on how it's structured. And of course, the setting of the price, the process to set a price that is compliant with the law will be an important thing to have in place.
Rebecca Gwilt (14:24):
This is something that we do pretty consistently, but it creates a ton of value. And I hope anybody who's listening has gotten some value from this. To recap, these are our five key questions. What are you selling? Who is your customer? What are the available payment mechanisms? What is a compliant business arrangement? And then how do you execute what contracts, documentations and processes you need to have in place? We've got a takeaway in the show notes you can download that highlights this again if you wanna have it on your desktop to reference as you're building new business models. Check the show notes for any additional notes and information from us, and certainly reach out to us and let us know if this was helpful, or if there are any other topics that that it might be helpful for us to share. And thank you, thank you to my fabulous co-host Carrie Nixon.
Carrie Nixon (15:18):
And thank you right back at you and to our listeners. All right, till next time. Bye bye.
Rebecca Gwilt (15:26):
Thank you for listening to Decoding Healthcare Innovation. If you like the show, please subscribe, rate, and review at Apple podcast, Spotify, or wherever you get your podcasts. If you'd like to find out more about Carrie, me or Nixon Gwilt Law, go to NixonGwiltLaw.com or click the links in the show notes.