Sep 16, 2024

(This story is from our new Health Tech newsletter. If you’d like to sign up, just click here.)  An AI-powered digital physical therapy startup is the latest health tech company to switch to a relatively new way of getting paid — one that depends on whether it can improve patients’ health, rather than how often it’s used. Sword Health, valued at $3 billion after a Series D round this summer, will now be paid based on the health outcomes it produces, the company said last Tuesday. After charging employers an initial fee for each member’s first session to cover costs such as equipment, employers will only pay the rest of the costs if patients show signs of recovery, a company spokesperson told Endpoints News. Outcomes will be measured by whether a member reaches recovery goals they set when they first enrolled, or if they show clinically significant improvements based on the Patient Global Impression of Change, a patient-reported assessment tool, the spokesperson said. The way health tech companies are paid has evolved over the years. Traditionally, they’ve received fees for the number of members enrolled in the product each month, Sari Kaganoff, chief commercial officer at research and venture firm Rock Health, told Endpoints News in an email. But over the last few years, more companies have moved toward getting paid for the number of members who actively use the product, she said. Sword said it shifted to this kind of engagement-based pricing in 2020. More recently, employers and health plans, frustrated with how expensive health tech products are becoming, are being more careful in weighing whether products are worth buying. That’s driven up the demand for payment models that are based on how well products work, Jared Augenstein, a managing director at consulting firm Manatt Health, said in an interview. “Many digital health solutions have experienced very low uptake and engagement, and so the customers are saying: Why are we paying when our employees or health plan members aren’t actually using your product or service? So there’s some pressure coming from that,” he said. Paying for outcomes isn’t the norm in the healthcare industry. According to Kaganoff, the model is more common among companies that treat a specific condition or episode of care, such as chronic diseases or cancer, as results are easier to measure over time. For example, diabetes care startup Virta Health and substance use treatment startup Pelago are paid when they meet certain performance benchmarks. Augenstein said getting paid for outcomes is growing more common among later-stage companies, since they tend to have a longer history and a better pool of data to give them confidence they can achieve good outcomes. It’s tougher for earlier-stage companies to come up with contracts that are measurable, as well as strong monitoring and evaluation capabilities to track how patients are doing, he said. Sword said it’s switching to outcomes-based pricing because it’s confident in the consistent outcomes its AI platform has achieved over the years, a spokesperson said. According to the company, 62% of its members report being pain-free after completing Sword’s program, while 47% of members report a decrease in the use of prescribed painkillers. The company also claims it reduces the use of costly surgeries. Sword said all new clients will start with outcomes-based pricing, and it plans to eventually switch existing clients over to the new model.