Episode 36: Understanding Digital Health's ROI with Charm Economics Founder Adam Block, PhD
If you can’t easily explain your digital health company’s ROI, this episode is for you
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In this episode you’ll discover:
Why digital health startups need to calculate ROI
What types of organizations to consider targeting as customers
What range of ROI Adam sees digital health companies produce
How to supercharge success by creating value pathways
Keep scrolling for a transcript of this episode.
Key Takeaways
When you’re pitching to a CFO, they’re going to be looking for the answer to two questions: 1.) Are you going to bring my organization more revenue? 2.) Are you going to reduce the overall cost structure across my organization? You need to have a clear cut answer. CFO’s tend to be calculation-oriented people.
There are five types of organizations you can target as customers:
Health plans
ACOs (Accountable Care Organizations)
Hospitals
Employer groups
Self-insured employers
The ranges of ROI for digital health companies can go as low as 2x to as high as 20x or 30x, depending on the estimates that are used.
Create value pathways. Think about how your digital health company is going to lead to potential overall additional revenue or additional savings for your clients. Write it out and add it into your demo.
Learn more from Carrie and Rebecca:
Healthcare insights (monthly email) | Telehealth/Virtual Care Mgmt Update (biweekly LinkedIn update)
Website | Carrie on LinkedIn | Rebecca on LinkedIn | NGL on LinkedIn
“Pricing is a bit of an art but I’m a believer that ROI should be driving what your pricing is.”
Learn More About Adam Block, Ph
Website: https://www.charmeconomics.com/
LinkedIn: https://www.linkedin.com/in/adameblock/
Read the transcript
Rebecca Gwilt (00:16):
Welcome back everyone to Decoding Healthcare Innovation. I'm super pumped to have an old friend of mine, Adam Block with me today, founder and principal of Charm Economics. Welcome, Adam.
Adam Block (00:27):
Great to see you, Rebecca.
Rebecca Gwilt (00:29):
Yes, it's great to see you again. So, Adam, I'm gonna, flatter you a little bit with background, and oh, by the way, I have my Charm cup with me.
Adam Block (00:38):
Very nice.
Rebecca Gwilt (00:40):
I did not forget. Adam sent me a gift package and I'm shamelessly plugging his <laugh> his coffee mug. So Adam is a health economist who spent the last 20 years working at the intersection of hospitals, health insurance, government, and research, after earning his Ph.D. from a small private liberal arts college in Cambridge Mass, you may have heard of it. He worked for Congress helping to draft the Affordable Care Act, one of the largest speeches of healthcare reform legislation in the last a hundred years, and then for CMS as a health economist during the implementation of that law. That's actually where Adam and I met—in the trenches. Is that right?
Adam Block (01:20):
That was definitely the trenches.
Rebecca Gwilt (01:23):
<laugh> Absolutely, absolutely many stories to tell, none of which are relevant to the topic today. But you know, if you ask for it, I might have to bring Adam back and tell all the secrets. Anyway, so I was so excited to reconnect with you earlier this year, after nearly a decade away of us, sort of parting ways and doing our own thing. And, I was so excited to find out that our work is still intersecting. You, like me, took your passion for health policy and health reform to the private sector after your government service. And, you founded Charm Economics, which is a really cool company that's growing like gangbusters. And, I think, addressing a key pain point for digital health companies and purchasers, and that is understanding digital health's ROI return on investment. So, Adam, we're gonna dig into ROI, but before we do so tell me what you're doing over there at Charm Economics. I know it's a little broader than ROI studies. What led you to found the firm?
Adam Block (02:21):
Sure. So why don't I start out with what led me to found the firm? So thank you so much for having me. This is a pleasure to be here. And I always like telling the story because I got into this so organically. So I'm a health economist by training. I spent five years doing that work for the federal government. And then afterward, I went into the private sector. I spent two years working for a health plan and then three years working for a hospital system. And all the time I was in finance. And while I was in finance, what I found was the same thing over and over again, which was that there were digital health companies, medical technology companies, lots of organizations that were trying to partner with the health plan I was working for, the ACO I was working with, or the hospital system I was working for.
Adam Block (03:04):
And at the end of the day, at one of these organizations, you cannot buy a pencil without having CFO sign off. So the CFO is always gonna be in the room before a major investment is made in a digital health or any kind of company like that. And what the CFO would always be thinking about was one of two questions. Are you going to bring my organization more revenue? Are you going to reduce the overall cost structure across the basis of my organization? They would always be thinking in terms of that, and sometimes specifically ask those questions. And what I found was when many of the businesses that I saw pitching to the CFO, which means that they had gotten through a couple of rounds already got to that level, they did not have a clear-cut answer. 'Oh, you'll save loads of money. Oh, you'll save tons of money.'
Adam Block (03:48):
There's enormous pathways to value here, but they didn't have a calculation, and CFOs tend to be calculation-oriented people. They wanna see things in a certain way and they just weren't seeing it. And I didn't see this one time; I saw this three or four or five times. I, on the inside, was doing back-in-the-envelope calculations for this. And so what I decided afterwards was like, there was an opportunity here and there are lots of organizations that can do these calculations. There are big management consulting houses, lots of places, right. Big actuarial firms. They can do it, but they do it at a price point that is not conducive to small startups. And so I thought I'd start Charm Economics trying to develop these types of analytics for these organizations at a timeline they could handle and at a price point that they could handle.
Rebecca Gwilt (04:38):
Okay. So, this is super interesting because the story that I hear on the, not the purchaser side, but on the vendor side, is there are so many competitors out there and the health systems have already said yes to so many people that it's really hard to differentiate themselves. And I can imagine that having solid numbers behind your, innovation would, would help to differentiate you. But how do I make sense of the news that I hear that hospital systems have like a hundred different vendors that they have sort of said yes to in the pilot stage? Is that because the CFO said, prove it to me as a pilot, and then you can get in the door and does this, does this sort of demonstration of ROI help solve that for vendors?
Adam Block (05:27):
There are some of them. And I think for some of these guys, they see the writing on the wall, which is that they have to have a venture, right? They have to have a venture wing because healthcare is changing and they wanna be a part of that change. And so they're thinking about that. And they're also thinking about like, how can we partner with these organizations? What can we provide them with and what can they provide us with? And so what the hospital system or the health plan can provide them with is access to data most and an opportunity to target some patients. But also it's a financial commitment. Whether you look at it as a actual cash, financial commitment through an investment, or even if you're an operational financial commitment, meaning that they're gonna take 10 employees, a director, and a couple of analysts and a manager, and have them work on this startup and integration for it, the CFO views that as a financial commitment. And so they're thinking about it in terms of what they're going to potentially get back. And I believe that there are lots of, there are lots of different ways that the healthcare world is inefficient. So it doesn't surprise me that these organizations have a hundred partnerships.
Rebecca Gwilt (06:41):
Say it ain't so, Adam. Say it ain't so.
Adam Block (06:43):
<laugh> There are lots of different places for, digital health companies to come in and fix some of the problems that are associated with the actual accessing of healthcare.
Rebecca Gwilt (06:55):
Yeah. Yeah. Okay. So, if I'm understanding this correctly, you used to help purchasers, so plans and hospital systems evaluate vendor investments, and now you're helping vendors make compelling value prop arguments to purchasers. Sounds like you're doing little coaching with the other team's playbook. And, sounds like that may be a significant advantage for you.
Adam Block (07:19):
Yes, I think it is. I think it is definitely an advantage that I've seen all of this before. And I know the questions that they ask, and I know what my former CFOs would roll their eyes at. You know, I have some digital health companies that come to me and they'll show me some of their numbers, and their numbers are just like crazy. I'll just say like, their numbers are just like, oh, we're gonna save 20% of the total cost of care. Like, and at the end of the day, like just, no, you're not. And so you have to come into the door with a reasonable, compelling argument. If your number, your estimate is too small, you're not gonna attract any attention. But if it's too large, it's gonna seem unreasonable. And not only all your methods are gonna get questioned, even if your methods are somewhat good everybody knows that nobody is saving 20% overall cost of care, right? Like the cost of care is, in the U.S., is like four plus trillion dollars. So you can't tell me if you apply your digital health to everybody, it's gonna save 800 billion dollars.
Rebecca Gwilt (08:25):
Although there has been such positivity and sort of endorsement behind digital health in the last couple of years it's maybe that people really sort of want to believe that that is true. I'm wondering if these purchasers are just getting more savvy the fifth company that says we can save you 20%, you're thinking, oh, we've solved the whole thing. Twenty times five is a hundred percent or we're done.
Adam Block (08:49):
<laugh> We are done. Yes. We are now at zero. We were at four trillion dollars and you're at zero.
Rebecca Gwilt (08:56):
So are you, are you starting to see purchasers get a little bit more savvy around this? Are you starting to, so for instance, like a parallel that I'm seeing here is I used to do a bunch of HIPAA work. My firm still does a bunch of HIPAA work. We had a time there where nobody needed a SOC 2 Type 2 report to get in the door at a health system or a payer. And then all of a sudden we started seeing that as sort of a ticket to ride for the larger folks and companies being required to do that just as an entry-level requirement to get in the door. Is that, do you think that that is the way that these ROI calculations are gonna go, or are purchasers gonna start demanding evidence-based ROI to make decisions about bringing them in bringing vendors in?
Adam Block (09:44):
I think it's gonna happen more and more. I mean, but what I will say is that ROI is not the only thing that they're making a decision on. You know, when you're partnering with a digital health company, as a purchaser, you're making a bit of a leap of faith. And you are trusting your eyes and that you believe that the digital health company is addressing a pain point that you have, right? This is a problem among your patients and among your physicians. This is a problem that you have, and that the user experience that what the digital health company is doing, is actually you have to view the demo and see that it's actually gonna provide something. And then what I provide the service that I provide is really, to me, the icing on the cake, that's gonna hopefully sell the whole thing. I don't think you're getting it without either of those two areas, but quite honestly, the startup that is their job, their role is to make sure that they have addressed a pain point for lots of large organizations and that their demo is clean. And it is something that providers or patients want to use. And then my area is to focus on that. There's a business case for this as well.
Rebecca Gwilt (10:51):
So speaking of business case, I'm starting to sort of solidify in my mind how a company might use this, use the concept of ROI either as a basis or an icing on the cake to sell their product into a larger organization. What about, I have to think that sort of the ROI should be related in some way to pricing. So is the calculation of the ROI, something that helps companies figure out pricing or are these two separate things, and how do you counsel clients about that?
Adam Block (11:28):
That's a great question. So pricing is a bit of an art, but I'm a believer that ROI should be driving what your pricing is. So let's say cost were zero and you had zero costs, and quite honestly, some companies, because they have already built their product, they have may have a relatively low marginal cost. That really depends on the digital health company. But if you were holding costs completely aside, costs aren't a problem, what I believe that organizations should be doing is they should be thinking about what is the savings that they are providing to their clients, and they should be providing a multiple of what their overall price is. And in fact, I heard some of the CFOs that I reported to give me an actual number. And so I used that with many of my clients, which is that I expect an ROI of somewhere between four and tenfold. And so you can basically use that four and tenfold and the savings that you get to back into what the pricing ought to be.
Rebecca Gwilt (12:25):
Yeah. Sounds like, sounds like value-based reimbursement. Is that right?
Adam Block (12:31):
Well, it is, except that the pricing might be firm, in other words, it's not dependent on what you get that particular month, it is overall, but it's how you decide what the pricing is. And the intuition behind it, I think is, let's take it on either extreme. Let's forget about the four to 10, right? Let's say you were getting $1 for every dollar that you put in. So if you were getting a dollar of savings and the price was a dollar, then why would you do it? Right. You're just giving a dollar that you'd be getting to somebody else, you're not getting, as the firm, you're not getting any of the, any of those savings. So that doesn't make any sense. And you want a little cushion on that. But let's say you are providing a hundred dollars a savings and charging a dollar, then all the value that you're creating for this company, 99, right? $99 out of $100 is going to your client. That seems a little excessive as you, the digital health startup, you've created that value for this company. You should be sharing in that. And so on either end, it's too far. And so you need to come up with something in the middle of that.
Rebecca Gwilt (13:37):
And, is this a more compelling argument for organizations that are operating on a value-based perspective versus organizations that are truly fee-for-service or, or does it not matter?
Adam Block (13:52):
It, it absolutely matters. So when I do my work for clients, generally my digital health clients, their clients, the people that they're trying to sell to are four or five types of organizations, and all of them have a little bit different of an overall incentive base. So it could be health plans. The health plan's goal is to reduce the total cost of care. ACO's goal is to reduce the overall cost of care, but there's a little bit of fee for service mixed in because it is generally owned by a provider organization. Then there's hospital, which is generally fee for service, which may have a quality service bonus associated with it. And then there's employer groups, who actually have incentives that are primarily similar to health plans. A self-insured employer that is trying to reduce the total cost of care. So generally, I mean, when I do models, the models look, the financial models look different depending on who the organization is directly targeting as their client.
Rebecca Gwilt (14:54):
Okay. Okay. That makes sense. That makes sense. I'm actually now curious about, so I get why, right. I get why. I'm actually curious about how this even gets done. I assume there's big data sets out there, but you know, I'm trying to think about the clients that I have and how I would quantify what they're even if they had clinical effectiveness research clinical trial research, so many startups are so early stage, it seems, it seems like it'd be quite difficult to figure out even a rough ROI. So can you, I know you don't wanna give it all away, but can you go over
Adam Block (15:32):
Just gimme the secret sauce. <laugh>
Rebecca Gwilt (15:35):
Well, I'm just interested in general about, I mean, listen, I'm not gonna be, I'm not going to Harvard to learn to be a health economist. And thank goodness, I don't, I don't have to do this for a living, but I am interested in sort of what it looks like to calculate an ROI for a company either to help them with pricing or them or to make a more compelling argument to a purchaser.
Adam Block (15:58):
So let me say a couple of things. First is we have the capability of doing sophisticated econometric models. We are actually doing that to now for a second time client. We did a simpler model for them they got when they were series A; now they're like series C and they're gonna get FDA approval and they wanted us to do something more sophisticated for them, which is great. But in general, in my experience, the CFO does not want that. I don't think it has value for them. So you actually have to get the level of the modeling, right. What we are developing generally is what I would call a proforma. And usually what we're trying to do is come up with, okay, like, what are the savings, and how do you come up with savings? Lots of organizations are trying to reduce the overall avoidable ED visits.
Adam Block (16:40):
So where are you gonna get avoidable ED visits? Right. Well, first, what we come up with is what is the epidemiology, right? How many ED visits do you have if you are a Medicare Advantage plan, how many ED visits do you have if you're on a Medicaid plan? How many, if you have a commercial plan? So, we segment that out and come up with estimates for all of that, but then there's data sets that are also available to determine what the overall cost of these visits are. Not each individual one, but on average, what are the overall costs? And then you have to determine what is the value proposition of the organization. How many are they reducing? And that comes from sometimes organizational internal data. And we supplement that with health services research. One thing that I found, and I am a full-time professor now at New York Medical College, is that there's a whole lot of academic research available that's around for free if you have an academic affiliation and can access all these journals. We dig up all these journal articles and we find out what the elasticity of demand is for something using the journal articles. And we compile that and we incorporate that into our model. That's in fact, a large part of the value proposition that we provide for our clients.
Rebecca Gwilt (17:52):
Well, I was just gonna ask, possibly a dangerous question to ask, but I was just gonna ask, have you ever found no ROI or not enough ROI to make a compelling argument? I mean, you have to imagine it's a possibility.
Adam Block (18:02):
I live in constant fear of that. So it has happened. The clients are not as happy as they are when they find a big one. But what it doesn't mean, well, it doesn't mean that the product has no value. Number one, it could mean that they're pricing it in a way that is problematic, right. And number two, it also doesn't necessarily mean that the product has no value. It just means that it's not saving, it's not saving costs for the potential client. Right. It could just mean that it is improving, God forbid, improving the health of the patient without saving somebody money. And so that's important for the company to know. Because they can say, look, we did this, you should not go with this at an ROI angle because, but you are providing a better patient experience. Now, if they're not providing a better patient experience (we've never had that happen) and not providing any savings, then they have a problem.
Rebecca Gwilt (19:13):
Right. Right. And what is the what are the ranges of ROI that you're seeing for the, for the companies that are coming across, uh, Charm's desk?
Adam Block (19:23):
Sure. I mean, generally we see a positive one. I mean, we see as low as 2X and as high as 20 or 30X, depending on the estimates that are used. When we do our estimates, we do what I would call a sales model. So we build a big Excel spreadsheet and it might have 50 states worth of data in it with each state lined up with all their, because what I find is, well, I'm gonna tell you a trick of the trade, which is that, which is that when I was on the buyer side, what we would tell everybody is our patients are different, you don't understand our patients. And we would want someone to come in the door with data that was specific to our patients. However, now that I'm on the sales side, what I see is that actually, the patients aren't all that different as long as you can target, whether it's a Medicare or Medicaid population, the patients aren't all that different. However, each organization thinks their patients are different. So we tailor our models to say, we know your patients are different, and therefore we have a, I'm gonna throw this out, a 'Colorado-specific model.' We have a California-specific model. We have a Texas-specific model that has Texas epidemiology, Texas ED rates, Texas out-of-network rates, whatever it is, that's specific to them in general, it doesn't change the ROI by a huge amount. 10%, 15%, but not a hundred percent.
Rebecca Gwilt (20:49):
Yeah. I mean, it sounds like something that would be very valuable to do like training for sales teams on, right. I mean, this is a lot of information, but for, not the earliest digital health companies, but, well, some of them are certainly regionally based, but I can imagine this goes back to how to make friends and influence people, right? If you can show someone that you know them and you understand what their pain points are and their goals, your pitch to them should be tailored to that is much more likely to be successful. Is that something that you've done before?
Adam Block (21:27):
Yes. So the other thing that we do in our models, we have what we call, we call them toggles at the top of our models. That'll be, so it'll be like, are you talking about a Medicare or Medicaid? So you'd click on it. And you click in Medicare, right. You click in Colorado and then you click in, do you want to be conservative, moderate, or aggressive? And then because the sales team is gonna know who they're talking to generally and know whether they should say, oh, we should try to come out with a, with a big number. Let's put in a best-case scenario, or they're skeptical about all this stuff. Let's go very conservative here. And if we get more savings then that's better, so we provide the sales team, the option to click into lower or higher numbers based on what the overall assumptions are. Because the assumptions aren't perfect. They're generally a range.
Rebecca Gwilt (22:19):
Yeah. It seems like this is the kind of resource that is available to your big, huge companies. And so I can see how this could help smaller digital health companies gain a competitive advantage. I mean, this kind of insight is just honestly, I've never seen it in an early-stage digital health client of mine. It's usually not to their series C series D that they're getting that they have the budget to get this kind of insight to drive their sales strategy. So it's very cool. Are there many competitors of yours out of yours out there?
Adam Block (22:54):
So I think there's a couple, but in general, I think...
Rebecca Gwilt (22:58):
Will I need to hire a health economist? Should I be telling my clients they need a health economist on staff?
Adam Block (23:03):
I mean, it's really the ROI calculation. And so what the pain point that most of our clients have is that many of the CFOs at the organization at the digital health company, they have the ability on staff to do this work. They can do, if they can't do a hundred percent of it, they can do almost
Rebecca Gwilt (23:22):
On the buy side you mean?
Adam Block (23:24):
No, on the sell, on the sell side on, the digital health organization, maybe if it's not a five-person organization. Once they're at scale at, let's say 30 people, a lot of times they have the skill, they know their materials. Well, they have a chief medical officer that knows what kind of savings they can provide and the finance folks can put this together, however, it's not easy. And so as a result, it sits on their to-do list and it just sort of festers there. So I've actually taken over for a couple of companies where I have seen their performance and these analyses in early stages. And they've just, the CEO has been like this isn't getting done. And quite honestly, it is not the best use of my employee's limited time, to my C suites limited time, to be able to do this. I'd rather outsource this to you. We have a check-in meeting at month one, we have a final product at month, two or three, and then we can just go and that is a better use of their time because they have to go dig up all these data sources that like, for me, I use every day. They have to go hunt them down. So,
Rebecca Gwilt (24:37):
Right. Is that what we would refer to as economies of scale?
Adam Block (24:42):
You're gonna get mad at me here. But, we would refer to that as economies of scope, which basically means that like I do the same thing over and over and over again, which is that I pull data from the the 20 or 30 data sets that I know. And quite honestly, sometimes there's not a data set for you, and like a company won't know that, but I know like that just doesn't exist. Just because I've been doing this for a long time.
Rebecca Gwilt (25:10):
All right. Well, I'm gonna have to integrate that phrase into my, into my lexicon. I don't know if you've noticed, but I'm trying to, I'm trying to speak a little economics language to you and I'm like 50, 50%. I'm 50%.
Adam Block (25:22):
You got, you got most of it. That's why I felt so bad. I was like, oh, that's a that's yes...
Rebecca Gwilt (25:26):
We made it to the end and she messed up!
Rebecca Gwilt (25:29):
So, OK. So, anyway, this has been really, really interesting. Back when you told me that this was sort of what you were doing as a company I have wanted since then to sort of share that with my network. So I'm so appreciative that you, that you joined me today. I, I always end these with a question, the same question, which is what is one thing that digital health companies can do right now that is certainly within your area of expertise that can supercharge their success? Like what could they take from this today that could help them grow and scale?
Adam Block (26:04):
So the first thing I do in a kickoff meeting with all of my clients is, we call them value pathways, which is how is your company, your digital health company, going to lead to potential overall either additional revenue for your clients or additional savings. And just write them out, which is that we reduce overall avoidable ED visits. Well, if you reduce overall ED visits, maybe you reduce overall admissions, right? Like, think about all the pathways to that. And even though you may not be able to calculate it because that's sophisticated, you should be able to see all of the value pathways by which you are potentially saving your clients money or adding revenue for them and write them down and put that in your demo.
Rebecca Gwilt (26:48):
I mean, that seems so simple, but super, super powerful. I think that's absolutely wonderful advice. Where can they find out more about you about Charm? How can they get in touch with you all that
Adam Block (27:00):
This is where I say go to www.charmeconomics.com to learn more?
Rebecca Gwilt (27:06):
This is It, there you go.
Adam Block (27:07):
OK, excellent. So go to our website or you can find me at adam@charmeconomics.com and yeah. We look forward to doing, we love these projects and we look forward to doing more of them, and we hope that organizations will use the work to go get lots of new sales from different types of organizations.
Rebecca Gwilt (27:29):
Yeah. Yeah. Well, that's what they're all looking for, for sure. That's what I'm looking for. So, okay I'll add your information to the show notes. Thank you everyone listening today, this has been a super invigorating conversation for me. I'm gonna go write down my new vocab words and I hope you all have a great rest of your day. See you next time.
Outro (27:51):
Thank you for listening to Decoding Healthcare Innovation. If you'd like the show, please subscribe, rate, and review it 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.