How do you price a new kind of healthcare service?

We all know how traditional healthcare pricing works. You pay your monthly health insurance premiums. Then, one day, you need a doctor so you pay your $40 co-pay to visit the urgent care center. A few weeks later, you get a bill from the urgent care center for $300. You haven’t spent your entire $2,000 deductible so the total out of pocket cost to you is $340. Here’s the psychology of that experience:

You’re in a pinch and you realize you’re going to have to spend some money. To make it financially bearable for most people, they only require you to pay $40 that day. They deliver their care and send you on your way. Then the doctor documents all she did for you and her billers code that interaction in a way that will maximize her revenue from your insurance company and you. This process takes a few weeks. When that process is done, you get the bills. Then you have 30 or 60 days or so to pay the doctor. Most doctors and hospitals now let you pay these online. This is the normal process everyone knows and the only thing surprising about this process is how high the bills can be.

Compounding this psychology is the fact that you’re already paying hundreds or thousands a month for health insurance premiums and, despite the yearly premium increases, it’s not buying you convenient access to higher quality care. And you typically trust doctors, but you’re increasingly getting frustrated with their lack of price transparency and alarming billing practices that make you feel you’re getting fleeced by your very own doctors, the ones you’ve entrusted with your health.

But what happens when there’s a new kind of service with new sets of tools and new ways of communicating and problem solving that differ from the traditional office visit interaction? How do you price that?

Pricing is much more important than product

As Tom Whitwell puts it in this exceptional piece about pricing:

Prices are interesting because they inspire such strong emotions. Responding to price is hard-wired into our brains. When we see something expensive, we know immediately — without thinking — that it isn’t for us.

Sherpaa is a fundamentally new way of communicating and problem solving between doctors and patients. I started Sherpaa because, as a doctor, I knew that 70% of people in my exam room didn’t need to be there in person. If I could only get paid for communicating with you and treating you without bringing you in to the office, your life would be easier and so would mine. So we built Sherpaa and, sure enough, 70% of all the issues our patients have can be diagnosed and treated virtually and without in-person visits. But, the federal government, and therefore, private insurers, have not created codes for asynchronous communication and problem solving when situations can last anywhere from 10 minutes for simple issues to 10 months for life-threatening, complex situations. Remember, Sherpaa’s entire reason to exist is to communicate and solve your problems as best as we possibly can and sometimes this takes multiple messages, phone calls, and videos with you per day, with labs, getting lab results back, interpreting them for you, sending you to specialists, coordinating your care with them, etc, etc, etc.. Sherpaa’s process blows up the entire concept of doctors only getting paid for communicating and problem-solving with you in their exam rooms. But codes only exist for office visits and occasional video visits (only if the situation meets a set of criteria or the service is rendered for simple things like pink eye via TelaDoc or Doctor on Demand). And getting federal approval for new codes is a 10 to 20 year process. This is one of the reasons why the federal government defining healthcare delivery in America is a massive barrier to innovation, but this is beyond the scope of this piece.

Sherpaa is a service and product that works extremely well. We’ve got those down. It’s definitely not perfect, but it’s markedly better than traditional unnecessary healthcare. I think people can get behind:

Yes, I’d like to talk with a doctor and get my problems solved without having to visit a doctor in-person when I don’t need to visit a doctor in-person and, secondly, I’m going to trust that these highly-trained, experienced doctors know what they’re doing.

So, the next, and most important step, is pricing.

Is the price right?

“An optimal price is one that is accepted but not without some initial resistance” says Ash Mauyra. And back to Tom Whitwell:

It is almost impossible to predict how a customer will react to a particular price by asking them. That’s because they don’t know how they will react.
There’s one easy way to find out what customers think about prices. By selling them things.

So that’s what we’ve done. When Sherpaa launched our service directly to individuals in September, we had one monthly plan. Now we have three:

As a new healthcare delivery concept that can’t accept traditional health insurance and play nicely with the traditional business model of healthcare, we’ve experienced fantastic growth. We’re growing every day and that’s extremely exciting to me. However, the question is “Have we priced Sherpaa optimally?” Could we be growing faster? And, inevitably, we’ve got some churn. After ~8 months, our total customer churn is 15%. When people sign up, the vast majority of them continue the membership.

Here are our founding pricing principles:

  • We offer unlimited care because it’s simple for everyone and we philosophically believe we shouldn’t profit off sickness.
  • We do not have a cancelation fee because we want people to try Sherpaa without feeling like they’re stuck. I believe people fundamentally like freedom and they respect and support companies that give them freedom. I’m stuck in my gym membership and it makes me feel pretty icky toward my gym. Also, we’re confident that people will continue to want to use Sherpaa after trying Sherpaa.
  • Based on our 5 years of B2B operations, we know that our patients create 2.7 cases per year, on average. This is on par with how often working age people use traditional primary care doctors. These visits to a PCP would be 2.7 x $200 per visit = $540. These visits to an urgent care center would be 2.7 x $300 = $810. Our overhead is markedly lower than a traditional practice. We’re virtual. A Sherpaa practice has one admin person for every 5 doctors. Traditional practices have 3–4 admins per doctor! These are people like nurses, billers, receptionists, etc.

At our core, Sherpaa sells our doctors’ time. They are salaried by Sherpaa because an uber for random doctors sounds shady and low quality (sorry TelaDoc!). Based on the data we have, we’re confident we can deliver exceptional care to a population of people for $300 per year per person. Of course, some of these folks will use Sherpaa once or twice a year and others will use us 12 times.

Not only is our entirely virtual practice new to consumers, our monthly flat-fee pricing model is completely foreign to consumers. They’re used to paying $300 for an urgent care center in terms of co-pays and bills that show up weeks later. But they’re not used to spreading out that cost in $25 chunks every month, despite this cost being equal.

I personally engage with every client who cancels Sherpaa to understand why. And the most common reason is “I don’t use Sherpaa enough to justify the monthly fees.” I can understand that, if you don’t need a doctor for 9 month spans, and you’re seeing a $25 charge on your credit card every month, that can grate on you. It’s much easier to just pay $300 online once to an urgent care center. But I also assume that charging a yearly fee to someone for unlimited care, prior to their experience, should be a deal-killer given that people typically get a tour of Equinox before they commit to a year. And I can also get why people don’t want to pay more than their co-pay for care because they’re already paying hundreds or thousands a month just to have health insurance. But I think it’s becoming much clearer to people that having health insurance surely doesn’t give you convenient access to high quality doctors. Those premiums are going toward health insurance company operations, not doctors who care about you. And the reality is most people nowadays do not have a primary care doctor. I recently spoke with a hospital system exec who told me that 50% of his patients do not have a primary care doctor and 50% of them do not want a primary care doctor. People are looking for a transaction that solves their problem as quickly and inexpensively as possible. However, in every other aspect of our culture, there’s a strong association with price and quality. Does someone really want to go to the cheapest doctor? Yes, if it’s a crystal clear problem. No, if it’s a complex unknown problem that requires a creative solution from a doctor with decades of expertise.

That’s why, in the next few days, we’re launching a new Sherpaa plan designed to help customers transition from one mindset to another:

Instead of unlimited care (most people don’t need unlimited care), you pay for Sherpaa when you need it. There are lots of quite healthy people on daily/monthly medications so they do need some sort of consistency with a doctor. As a Sherpaa Pay-As-You-Go Member, you get free refills for those medications and free guidance/referrals to Sherpaa-trusted local specialists when it’s clear you need to be seen in-person. One of the nice things about Sherpaa is patients can reach out to our docs first before they spend money on in-person care and we can ask for details and then direct people’s in-person care. This guidance is included in the low monthly membership fee.

So what’s included in the Pay-As-You-Need Membership?

  • The same features as the Basic Unlimited Care Plan (minus the unlimited care!)
  • Free Referrals to Sherpaa-Trusted Specialists
  • Free Refills for medications Sherpaa prescribed
  • The Market (coming soon!)

Instead of the cost of a $25 dinner hitting your card every month, it’s the cost of Netflix. And, when you occasionally need care, we’re going to charge you $50 for that yearly UTI you always get or $150 for that pneumonia you just developed. This is the transactional pricing people are used to in healthcare. These prices are not expensive, simply because our overhead is a fraction of a traditional doctor practice or urgent care center. And because we believe if you rethink how healthcare is delivered, it doesn’t have to be expensive. It can be higher quality, and less expensive. That’s true disruption.

But only if you get the pricing right.

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