The ceiling for Talkspace and BetterHelp
Breaking through requires re-focusing on the remaining pain points with mental healthcare
Last article, we talked about Livongo’s massive potential, given its innovative product and scalable business model for diabetes management. Today, we’re going to flip the switch and look at Talkspace and BetterHelp, two companies in the mental health space that have a significantly harder path to success. And in case you haven’t done so already, you can follow along with biweekly articles by subscribing:
Introduction
There is a mental health crisis in America. I’ve written about the systemic issues driving the crisis before and what we should do about them here, but it has spawned a wave of digital health startups in the space. Talkspace and BetterHelp are two of the leaders, with Talkspace having raised more than $100m to date and BetterHelp being acquired by Teladoc in 2015. Both are “teletherapy” platforms, designed to connect patients in need of mental health services to licensed therapists remotely. Once connected, patients are able to seek help from their therapist through messaging (text / audio / video) or scheduling live sessions (phone / video).
As of now, both companies have largely opted for a direct-to-consumer business model where patients pay for services out-of-pocket. BetterHelp offers a single product tier, with unlimited messaging and live sessions, at different prices depending on the commitment term (from $80/wk to $1820/yr). Talkspace offers multiple product tiers, from messaging only ($260/mo) to messaging with 1 live session/mo ($316/mo) to messaging with 4 live sessions/mo ($396/mo), as well as different prices depending on the commitment term. Neither company releases public data on user numbers making it hard to evaluate traction to date, although Talkspace’s CEO disclosed in mid 2019 that they had close to 100k active subscribers.
Challenges
Before we get into the scaling challenges that Talkspace and BetterHelp will face, we have to first look at the underlying pain points with mental healthcare that startups should be looking to address. Firstly, the geographic distribution of mental health (MH) professionals in the US is extremely unequal — more than 90% of MH professionals work exclusively in cities, and more than 60% of rural Americans live in places with a shortage of MH professionals (source). Secondly, mental health services can be very expensive for patients, with poor insurance coverage leading to high out-of-pocket costs. Thirdly, setting aside geographic inequality, there is still an overall scarcity of MH professionals at the national level — psychiatry is one of only two medical specialties designated as having urgent, national shortages.
The fundamental challenge with Talkspace and BetterHelp is that even though they help alleviate the geographic inequality of MH professionals by connecting patients to therapists remotely, they do not address either of the other pain points. Both companies have to reckon with the fact that mental healthcare is still largely paid for out-of-pocket, services remain prohibitively expensive for many patients, and there are not nearly enough MH professionals, even nationwide, to meet the patient demand.
This leaves Talkspace and BetterHelp stuck between a rock and a hard place. On the one hand, as D2C services, their revenues are severely limited by what patients are willing to pay out-of-pocket for mental healthcare. To provide some context, the average American spends $1125 per year on out-of-pocket health expenses. An annual subscription for BetterHelp ($1820) or Talkspace ($2496) would essentially require tripling the average person’s budget for health expenses. It’s hard to imagine the available market for this being that big.
On the other hand, the companies are stuck with low margins, due to stubbornly high variable costs and minimal economies of scale. Both platforms operate like two-sided marketplaces, collecting subscriptions from patients and using a portion of the revenue to pay for therapist time. Given the national shortage of MH professionals, demand is outstripping supply, making them quite expensive — on average, a licensed therapist makes $3633/mo, a social worker makes $4266/mo, and a clinical psychologist makes $6926/mo. And as of today, neither platform has a clear way to leverage economies of scale; the 1000th user will require (on average) the same amount of therapist time as the 1st user.
To illustrate this challenge further, let’s model out a few hypothetical scenarios. Since we don’t know exactly how much the average therapist is paid on these platforms, let’s average the numbers above and round to the nearest thousand, giving us $5000/mo for a full-time therapist. We’ll focus on BetterHelp first, since they only offer a single product tier which costs $260/mo for a monthly commitment. The key parameter that will have the biggest impact on BetterHelp’s scalability is their “patient to therapist ratio”; in other words, how many patients can each full-time therapist manage at once?
If we assume (a) therapist compensation is the only variable cost for BetterHelp’s platform, and (b) each therapist is able to devote 100% of their time to patient care, we can model out a couple of hypothetical patient to therapist ratios to see what the projected margins would look like, and vice versa for what the ratio would need to be. We can also look at the feasibility of these ratios by calculating the number of hours each therapist would have available per patient per week, assuming 40-hour work weeks.
The takeaways here are striking. First of all, we immediately see just how important this patient to therapist ratio is for determining BetterHelp’s scalability and profitability. Secondly, we see that the picture is daunting. To break even (0% margin) using our assumptions, BetterHelp would need to assign almost 20 patients to each full-time therapist, leaving them with only ~2 hours to spend on each patient per week (assuming 40 hour work weeks). Given that the platform’s pitch is unlimited messaging and live sessions with therapists, it’s difficult to envision how this business model could be scaled while maintaining a stellar customer experience.
Perhaps this is why Talkspace has chosen to put a cap on the number of live sessions per patient per month for their premium product tiers. Nevertheless, this doesn’t change the underlying facts that (a) the market size for teletherapy is severely hampered by its cost for patients, and (b) companies are stuck with unenviably low margins.
In an age where startups have repeatedly justified sky-high valuations by masquerading as tech companies (à la Adam Neumann), all this should ring alarm bells. From our analysis, Talkspace and BetterHelp appear to have a financial structure more akin to a provider network focused on mental health rather than a unicorn app.
Opportunities
So what does all this mean for Talkspace and BetterHelp? First off, all this is not to say that platforms like Talkspace and BetterHelp don’t have a purpose or a market. There is significant societal value in addressing the geographic inequality of MH professionals and being able to provide care to patients in need more quickly and conveniently. There is also clearly a market for teletherapy, though it is likely overvalued due to the challenges we’ve discussed. However, for Talkspace and BetterHelp to break through the limitations of their current business models, they will need to re-focus on the remaining pain points with mental healthcare: the cost of mental health services and the national shortage of MH professionals.
On the first point, the two companies should do everything they can to accelerate broader payer coverage of mental health services, and then present a compelling story as to why teletherapy should be a reimbursed product. One angle would be to argue that teletherapy saves patients time and money, while decreasing no-shows, since patients do not have to commute to and from their appointments. Another would be to demonstrate that teletherapy access encourages earlier intervention for serious mental health conditions, reducing long-term costs for the health plan. Talkspace has started to move in this direction, by establishing partnerships with Optum and Cigna to give members access to their platform.
Nevertheless, the second point of the overall shortage of MH professionals may be more important, since it’s unlikely that reimbursement would lead to a drastic increase in revenue for these platforms, given the stinginess of payers when it comes to mental health. There are numerous angles to addressing the overall shortage of MH professionals, but from a business standpoint, the question boils down to this: how can we provide mental healthcare more affordably, and with a smaller supply of MH professionals?
One idea is shifting live sessions from 1-on-1 to group teletherapy, which would allow the costs of each therapist to be distributed over multiple patients. There is a strong body of evidence supporting the efficacy of group therapy when delivered in-person, which reinforces the feasibility of this format.
Another approach is to improve patient triaging. Patients looking for mental healthcare have varying degrees of severity, and the most optimal system would match patients with the exact level of care they need, through a stepped care approach. Proper triaging can lead to substantial cost savings, since providing care for patients with severe needs requires more therapist time and training than those with mild cases. Incorrectly matching a patient with a mild condition to a highly trained therapist for weekly one-on-one sessions would be wasteful to the system and needlessly expensive for the patient.
This framework also sheds light on Talkspace’s decision to offer multiple product tiers, with different levels of access to care. The level 1 tier is significantly more scalable cost-wise compared to their premium tiers (and all of BetterHelp’s offerings), since it only offers messaging and no live sessions. From a revenue standpoint, the level 1 tier still earns more than 80% of tier 2 ($260/mo vs $316/mo), and from a care standpoint, messaging alone may be sufficient for a large fraction of patients.
Taking triaging a step further, the most scalable platform would be one that can provide baseline care without needing a MH professional at all, and only escalates to therapists as needed. This has started to become possible with the advent of platforms that deliver and teach evidence-based psychological skills to improve mental health without human involvement. One example of this is meditation apps like Calm and Headspace, which help improve mental well-being while remaining uber scalable. Another less proven approach is AI-driven chatbots like Woebot, which deliver automated, evidence-based therapy without a human therapist.
For now, Talkspace and BetterHelp will continue to swallow the market for teletherapy by reducing the geographic inequality of therapist availability. However, that is more a product of the dire state of mental healthcare in the US than a testament to their long-term scalability and potential. To overcome the limitations of their current business models and grow in the long run, Talkspace and BetterHelp have to re-focus on the remaining pain points with mental healthcare today and find innovative ways to tackle those as well.
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