Let me start off with this: I think DiGAs are good. The reasoning behind them is good. They bring innovation to an industry which was chronically starved of innovation (more on that in the conclusion).
But what about the DiGA companies and aspiring DiGA founders? Are they setting themselves up for success? I’m not sure. I think many of them will struggle. There are quite a few tricky problems for them, and if they don’t adapt early enough, they might not be able to solve them.
Quick primer on DiGAs - feel free to skip if you know what they are:
DiGAs are reimbursable apps in Germany. It’s a cool new system under which a Healthcare app can be approved in the “DiGA directory” which enables physicians to prescribe it to their patients, generating revenue for the DiGA manufacturer each time a prescription is redeemed by a patient, paid by public health insurance.
And now a disclaimer: A few DiGA companies are our clients. We’re not a DiGA consultancy though, so we typically only help them with their medical device stuff. That’s what we do after all. My observations and rants here are solely based on public information and my experience of talking and ranting to would-be DiGA founders.
With that out of the way, let’s get started!
Did You Try B2C?
Getting people to pay for Healthcare apps themselves (“B2C”) is hard, especially in Germany, where everyone expects Healthcare to be paid for by their insurance. But wait, is that really true?
Personally, I would actually be quite happy to pay for digital Healthcare. But maybe I’m a statistical outlier. In any case, would-be DiGA startups like to say “dude, going B2C is impossible in Germany, because no one is going to pay for our app!”.
If no one is going to pay for your app, you have two approaches to explain this:
- Think about why no one pays for your app. Maybe it’s not providing value to users. Maybe it sucks.
- Or: Blame it on the German Healthcare system and say that “everyone expects Healthcare to be paid for by their insurance”.
Interestingly, people in the DiGA space always choose number two.
Let’s contrast that with other areas of a capitalistic market, like, say, project management software. If you’re a startup developing project management software and don’t generate any revenue, you probably won’t say “it’s not our fault - it’s due to the German project management mentality which expects project management software to be paid for by insurances”. Nope. You’ll probably say “our software sucks and nobody pays for it” even if that realization might take you a few years, like for most startups.
Sure, sure, certain Healthcare apps might really not be profitable in B2C setting. But all of them?
I actually think trying to sell your app B2C is an interesting test. Your pricing has to be lower because patients wouldn’t pay, say, 300€ for an app. Maybe more like 30€. It would also be harder to sell it because the friction of someone having to pay for a Healthcare app might be higher than getting a (free) prescription from their physician (though I’m not 100% about that last one. Going to your physician just to get a paper slip can also be annoying).
Then, if you can generate meaningful revenue B2C, even if your company isn’t fully profitable, it’s a positive signal which might provide further data that the DiGA path might be right for you.
But, on the contrary, if you haven’t generated any B2C revenue so far, my bet would be that becoming a DiGA won’t save you. I mean, it could still work out for you. But you simply have no data. You’re postponing the “market test” of whether people want to use your app until after DiGA approval. In other words, you’re building your app based on your own assumptions for months or years, and that almost always turns out to be terrible idea.
Of course all the usual edge cases apply: Maybe your DiGA is only servicing a very niche population (like people with a rare disease) and therefore B2C could never be profitable for you. Maybe you think you need a physician to prescribe your app and “nudge” the patient towards using it (but will they really?). I don’t know. In those cases, you could maybe skip the B2C test. But I’m still skeptical.
Looking further, there are some almost-medical-device apps which seem to be generating substantial B2C revenue. Headspace, for example. So it seems possible.
Imagine this: You go B2C instead of going for DiGA approval, and it actually works out for you and you end up never needing DiGA approval. How cool would that be? You could focus on building your product instead of juggling all sorts of regulatory complexity like clinical studies, crappy German cloud providers and information security audits. Ah, right, information security audits - you need those since January 2022.
Getting DiGA Approval Is Becoming Increasingly Harder
Since January 2022, new DiGA companies need to have proof for their information security. Commonly that’s accomplished by going through yet another audit, this time for the ISO 27001.
While the usefulness of this certification may be debatable (I’m no expert there so I don’t know), the larger trend is more important: The barriers to entry are increasing.
This seems to be typical for all regulated industries. The first movers go to market very quickly. Second movers get held up by regulatory hurdles which are introduced soon after.
For DiGAs, there are even more factors making market entry harder: The MDR class I fiasco situation and, maybe, the political situation.
Talking about the MDR, DiGA first movers were still able to bring their software to market as a medical device without an audit by a notified body. Why? Before May 2021, software as a medical device was, in simplified terms, less strictly regulated. The old legislation (MDD) would often classify software as a medical device in the lowest class: Class I.
Was that good? Bad? Unsafe? We could approach this question another angle: How many DiGAs have caused significant patient harm which would have been averted if they had been classified higher? Probably none. So I think that’s good.
Now, however, the current legislation since May 2021 is a huge mess and no one really knows how to classify software in it (we call this the MDR class I fiasco situation ). Probably a lot of software ends up being class IIa. From a strictly time-to-market perspective, this is very bad because it will prolong market entry for new DiGA companies by around a year. One year! That’s like an eternity in an innovative, fast-moving market. If they make it at all, because audits are expensive.
New DiGA startups are therefore faced with a choice which I see almost during every consulting call: Either classify your product as class IIa and schedule a notified body audit, which will prolong everything by at least a year, or water down your product so that it has a legitimate chance of being class I. And even if you’re class I, you’re still taking the risk that no one knows what class I software really is and that you might have to take it off the market if you’re wrong.
And finally, there’s the soft, subjective and hard-to-prove factor that there may be political pressure to make DiGA approval harder now. I’m not sure if that’s a thing, but it sounds plausible - we have a new political administration, and the media has started to criticize the spending of the public health insurances on DiGAs. So there could be more “soft” barriers like subjective opinions of the BfArM on what level of data is acceptable.
But again, that’s just speculation. We also have to cut the BfArM some slack here because the DiGA approval process seems quite well-structured, with (comparatively) short turn-around times for replies.
Prices Will Most Be Driven Down, And Competition Will Increase
Similar to drugs, in which generics drive down prices once they’re introduced, DiGA prices will probably likewise be driven down in the future. It’ll be very hard to argue that giving a user access to an app costs a triple-digit sum in Euros. More like a double-digit sum.
So, in a rather ironic situation, DiGA prices might start trending towards B2C prices.. chuckle.
Similarly, when more DiGAs get approved for the same diagnosis, they might not have huge differentiation: If you have three competing apps treating depression and each one simply has implemented the current guidelines for treatment - in other words, they’re mostly a guided diary - they will be quite similar. Sure, their companies will say “but ours is proven in a peer-reviewed study yadda yadda and our UX is better!” but do you really think a 60-year-old physician even knows what “UX” stands for and makes some sort of informed decision here?
I don’t think so. They might prescribe one at random. Or none at all. Or the one with the best marketing. Ah, wait, marketing?
DiGAs Will Need Marketing
Once your DiGA is approved, it gets listed in the official DiGA directory. That’s great, but that doesn’t mean that physicians will now magically start prescribing your app. Chances are that physicians don’t even know about the DiGA directory.
While that might sound obvious, some startups I talk to don’t seem to realize this. Again: Simply being approved doesn’t mean that you’re instantly making revenue.
So what would you do? I’m not much of a marketing dude, but I guess you have two options: Reach out to physicians or reach out to patients. You could do both of course. Reaching out to physicians is a no-brainer because they are the people prescribing your app. Reaching out to patients could also make sense because they can get a reimbursement for your app from their insurance without needing a physician’s prescription.
This sounds a lot like what pharmaceutical companies have been doing for a long time already. They send out their shady pharma reps to physician’s offices to “inform” them about the newest drug developments which, coincidentally, they might have been a part of. It seems to work for them. DiGAs might need something similar.
How Large Can Your Startup Be If It’s Based On DiGA Revenue? Maybe: Small.
How much revenue can you make with a DiGA? Making a few assumptions, I would say it’s somewhere between zero and ten million Euros per year. If your marketing is non-existent, you may make near-zero revenue. If your marketing is good, you might make a six-digit sum.
Sounds like a lot? I’m not so sure. Depends how large your company is. And many DiGA companies are actually fairly large.
Say, you have 30 employees with a salary of 65k € per year incl. taxes each (software developers and regulatory people are more expensive while everyone else is cheaper). Those are annual costs of around 2 million Euros for payroll only! Now, this might work out if your DiGA revenue is 9 million Euros, but it might also not work out if your it’s only 1 million Euros.
And that in itself is also an interesting lesson: DiGA revenue will always be linear and non-exponential, because it’s capped by the number of patients you can address, multiplied with the number of DiGA products you have on the market. I think this actually applies to most Healthcare startups outside of the DiGA space, too.
That’s not a huge problem if your plan was to build a small, profitable Healthcare Tech company. However most would-be DiGA companies, or at least their investors, might have made other assumptions. They might think that building a DiGA company is just like any other tech startup and that they can hyper-scale it once they’ve entered the market.
I don’t think that the “normal” VC-funded, hockey-stick-hyper-growth model for building a tech startup will work for DiGA companies. Their revenue growth is just too.. normal.
Is that bad? I don’t think so. The VC-funded zombie unicorn model is showing its cracks anyway, and more people are starting to realize this during this current recession. I just hope that future DiGA companies and their investors also keep this in mind. Otherwise everyone ends up in a bad situation.
So what might be a good DiGA company size? The optimum DiGA company might be a four-person startup which is profitable. I may be biased though, because I’m running a four-person startup which is profitable. Maybe it could have slightly more than four employees, but probably less than 20. Still, the point holds - we might need to rethink how we build Healthcare startups.
Is DiGA Bad? Should You Build a DiGA Company?
All of that might sound really bad. But I was only ranting about the situation of DiGA companies and not about the concept of DiGA itself. I think the DiGA concept is great!
The main benefit of DiGAs might not be the direct effect they have on patients. Many DiGAs are simply not very innovative, and saying this might be a rather unpopular opinion in the Berlin Healthcare Bubble. The benefit I see, however, is anchored in their second-order effects: Many new startups are being founded in Healthcare now, and founders have realized that there’s at least a small chance that the German Healthcare system might welcome them and be open to innovation.
That in itself is already a huge achievement.
And who knows, maybe we’ll have some more innovative DiGAs in the future. When I talked to Henrik some time ago when DiGAs just launched, I remember us having this conversation where we were saying something like “the first few DiGAs will be built by business dudes who see a business opportunity, but the next wave of DiGAs could be built by physicians and scientists who see a new way in which software can improve Healthcare” or so. I hope that we were right.
I would love to see something which plays you trippy sounds through your headphones before you go to sleep so that you sleep better and have sweeter dreams. That would be cool. Finally, a real digital therapeutic! And not just a guided diary.
So how would the perfect DiGA company look like? In my opinion, it would:
- already be on the market with a B2C product,
- be making revenue and
- have a clear reason for why going the DiGA route is beneficial for it.
What would such reasons be?
- The price needs to be higher and patients are not willing to pay it;
- There are too few patients because the patient population is small (rare disease);
- Managing reimbursement with insurances separately is too tedious;
- It’s a trippy digital therapeutic which should be prescribed in the context of a more complicated, larger medical intervention, guided by a physician.
Yup, those are my thoughts! If you’re considering building a DiGA, please don’t reach out to us because we’re not a DiGA consultancy. If you need help with the medical device part however or are looking for software to automate your regulatory compliance, let me know! :)