Value Propositions for Mental Health Tech: All Roads Lead Back to the Payor

June 21, 2021
14 min read
Written by Gabe Strauss

Back in the 2010s, Ginger and Lantern were the early poster children of digital mental health. Both started with direct-to-consumer business models. However, they faced limited long-term growth, and both pivoted to target employers and health plans. Lantern failed to make the leap, tragically closing its doors in 2018. Ginger succeeded, achieving a billion-dollar valuation and marquee success.

Why did Ginger succeed while Lantern failed? While there were many factors at play, one, in particular, played a major role: Ginger was able to prove compelling value propositions to third-party payors while Lantern did not.

Third-party payors (often simply referred to as ‘payors’) are the entities that cover healthcare expenses on behalf of patients. These include commercial insurers (e.g., the ‘Blues’ or UnitedHealthcare), self-funded employers (e.g. Google or JPMorgan), and the government (e.g. Medicare or Medicaid).

Whether they are focused on exclusively, or included as a channel in a larger revenue mix, third-party payors form an essential pillar of most mental health startups’ long-term success. As a16z general partner Jorge Conde elegantly puts it: “In healthcare innovation, all roads lead back to the payor”.

In healthcare innovation, all roads lead back to the payor

However, it is not enough to simply decide to target third-party payors. To be successful, startups must have a compelling value proposition for them!

Many mental health startups struggle with payor value propositions because the US healthcare industry is riddled with complex dynamics and counterintuitive incentives. For example, while it would make sense for reimbursement to be primarily driven by better health outcomes or long-term cost reduction, that is often not the case.

I’ve spent the last several years at health-tech startups — and countless conversations with colleagues across the industry — deep diving into what third-party payors care about and how best to demonstrate value propositions to them. I’m excited to share what I’ve learned!

Specifically, I’ll cover 5 value propositions:

  1. Cost reduction
  2. Differentiated benefits offerings and increased member satisfaction
  3. Improved health outcomes
  4. Provider satisfaction and support
  5. Mental health parity

Much of what I’m sharing applies to all health tech startups. However, I have included many details and examples that are specific to digital mental health.

Value prop 1: Cost reduction

Cost reduction is arguably the strongest value proposition for payors. If your product materially reduces health care spending, payors are highly motivated to cover it.¹

There are two types of costs that mental health startups can reduce: First-order costs and second-order costs.

First-order costs refer to the direct cost of treating a mental health diagnosis. If someone with depression generally requires 12 sessions at $100/session to address their symptoms, then the first-order cost is $1,200.

Second-order costs refer to the indirect costs of a mental health diagnosis. If that same person also has diabetes, their depression tends to exacerbate their diabetes symptoms, because they’re less likely to eat well, exercise, or take their medication. If this exacerbation doubles their overall medical expenses from $16,000 to $32,000, then the second-order cost of the mental health diagnosis is $16,000.

In this depression example, the first-order cost of a mental health diagnosis is relatively small. Many payors do not consider such costs large enough to invest significant efforts to decrease them.²

In contrast, the second-order cost of the mental health diagnosis when combined with other chronic illnesses is significant and deemed worthy of cost-reduction efforts. Other impactful second-order costs of mental health conditions include lower employee productivity and increased absenteeism.

AbleTo, Quartet, and Vida Health are examples of behavioral health startups whose primary value proposition is to reduce the second-order costs associated with mental health conditions. Many chronic condition management companies, such as Livongo, Omada, and Onduo, have also expanded into mental health care for exactly this reason.

Proving the value prop

Cost-reduction value propositions are proven through studies and pilots that measure the product’s impact on the first and second-order costs of mental health conditions.

Commercial insurers are primarily interested in a product’s impact on overall healthcare expenditure. For example, AbleTo demonstrated in a peer-reviewed study that the use of their program led to significantly fewer all-cause hospital admissions and fewer total hospital days.

Self-funded employers also care about the impact on overall healthcare expenditure. However, they are also interested in metrics like employee absenteeism, retention, and productivity. For example, Lyra Health claims that the use of their platform is associated with a 50% decrease in employee turnover and that 70% of members show improved productivity. These productivity and retention savings account for a significant proportion of their purported 4x ROI.

Commercial insurers generally require payback periods of around 12–18 months. Anecdotally, the average member stays with an employer-sponsored plan for around 36 months. A plan is willing to invest such that they are in the red for 12–18 months, and then earn a positive return for the final 18–24 months. If the payback period is any longer, the plan risks making the upfront investment, only for a different insurer to reap the reward.

Most self-funded employers require a positive ROI within 12 months, because healthcare expenses are usually approved by their finance departments, and must show a financial return within a single, annual budget cycle.

This emphasis of insurers and employers on short-term ROI is unfortunate, because mental health treatment often leads to very meaningful and significant savings, but only when measured on much longer time horizons.³

On the other hand, Medicare Advantage plans tend to accept longer payback periods because members are usually retired, and stay with their plan for a longer period of time. The longer payback period, combined with higher instances of chronic illness in older populations, makes Medicare Advantage an excellent segment for cost-saving value propositions.

Value prop 2: Differentiated benefits and member satisfaction

Commercial insurers care about differentiation and member satisfaction because they want to compete on quality over price. Self-funded employers — particularly those in high-paying industries — want to attract and retain the best employees. They often compete with one another by having the best portfolio of benefits.

Having excellent mental health benefits has become even more important during the COVID-19 pandemic, with a Teladoc survey showing that 90% of employees reported having mental health concerns during this period. A weak behavioral health offering is now a deal-breaker for many employers and individuals when choosing a plan.

Directly advertising to consumers and providers — a common strategy among pharma — may ‘incentivize’ the member satisfaction value proposition. When members demand a product, payors become motivated to cover it, lest they risk disappointing their members and driving them to a competitor that does cover it.

There are four common ways to differentiate and increase satisfaction through a mental health offering:

  1. Access. Many plans and employers struggle to offer accessible mental health care. They offer it in theory (i.e., there is a mental health benefit) but in reality, it is often very difficult to find a provider that takes insurance. The first wave of mental health startups addressed this problem. These include Ginger, Lyra, and Talkspace. In such cases, payors and employers want turnkey solutions that guarantee immediate access to mental health care for their members and employees.
  2. Quality. As more mental health startups offer turnkey solutions, they must compete with one another on the basis of quality. Quality is most often measured in terms of net promoter score (are members satisfied with the service), engagement (are members consistently using the service), and health outcomes (are members getting better after using the service). Many digital mental health solutions for employers, like Lyra, Ginger, and Modern Health, explicitly position themselves as higher-quality alternatives to ‘antiquated’ employee assistance programs (EAPs).
  3. Breadth. Instead of only offering therapy, many services have expanded their offering to encompass both higher and lower acuity diagnoses and adjacent well-being solutions. For example, Ginger offers everything from coaching to psychiatry. Modern Health offers management and financial coaching in addition to mental health. BetterUp came from the other side, starting with performance and management coaching, and later adding in mental health offerings.
  4. Specialization. There are an increasing number of startups that target specific demographics and diagnoses. For example, NOCD offers services specifically for obsessive-compulsive disorder (OCD), Big Health offers digital therapeutics for insomnia and generalized anxiety disorder (GAD), Cognoa offers digital therapeutics for developmental and autism-spectrum disorders, and Brightline offers services for children and their families.

Proving the value prop

Payors gauge differentiation and satisfaction through net-promoter score (NPS) and engagement.

Net promoter score is measured by asking users how likely they are to recommend the product to a friend or colleague. It is a well-established measure of user satisfaction in most industries.

Engagement is often measured in terms of utilization rates. I.e., the percentage of eligible employees that are actively using the product. Engagement is important to measure for two reasons. First, if you have a high NPS but low engagement, then the NPS is moot because most employees don’t find the offering attractive. Engagement is also important because many products charge on a per employee per month (PEPM) basis, regardless of usage, and employers do not want to be stuck paying for a service that few employees use.

Showing strong NPS and engagement from existing customers will be enough to get the conversation started with a new payor. However, they’ll ultimately want to run a pilot to directly measure the metrics with their own members before committing to a long-term contract.

Another important strategy is to ask benefits directors from large employers to participate in case studies that outline how your product increased employee satisfaction.

Value prop 3: Improved healthcare outcomes

There are several reasons why payors value improved clinical outcomes.

Improved outcomes for its own sake

Non-profit health plans, in particular, are motivated to improve healthcare outcomes for its own sake. The primary mission of these plans is to maximize the health of their covered population, and they are not beholden to achieving quarterly growth and profitability targets for shareholders.

For this reason, non-profit health plans (BlueCross BlueShield of North Carolina is a notable example) are great early adopters of new, pioneering mental health products. You can work with such early adopters to collect data, generate a groundswell of support, and then move onto for-profit insurers and employers that need a shorter-term ROI.

Differentiation and member satisfaction

Better clinical outcomes can be a means to differentiate a plan from the competition, and to increase member satisfaction. For example, many employer offerings point to superior clinical outcomes as a way to distinguish themselves from legacy EAPs. In this way, improved clinical outcomes are a means to achieving a different, more impactful value proposition.

Financial incentives through value-based care

There is an increasing trend within the US to pay for healthcare on the basis of quality rather than fee-for-service. In particular, this impacts commercial health insurers that administer Medicare Advantage (MA) plans.

CMS (the government body responsible for Medicare & Medicaid), assigns MA plans Star Ratings across various dimensions, including “improving or maintaining members’ mental health”. Plans are awarded approximately $500 per member in bonuses when they achieve an average of 4 or more stars across all dimensions. To put this in context, a plan with 1M members can expect to make an additional 500M per year when they hit the required quality targets.

Managed Medicaid plans are also measured based on quality ratings, but are not awarded any financial bonuses based on them. However, the ratings are prominently displayed to consumers to influence what plan they pick.

Proving the value prop

The gold standard is to measure clinical outcomes using randomized control trials (RCTs) with clinical endpoints.

However, RCTs are expensive and logistically complex, so single-arm or retrospective research designs are often used instead. These look at the average clinical outcomes before and after completion of the program. The most common clinical outcome measures for mental health studies are the PHQ for depression and the GAD for anxiety.

CMS measures MA plans’ behavioral health quality using items 4, 6 & 7 from the annual Medicare Health Outcomes Survey (HOS), rather than through clinical trials. Plans are rated based on the percentage of members whose scores are the same or better than expected after two years.

CMS measures Managed Medicaid plans’ behavioral health quality across the following 4 dimension (see exhibit 33):

  • Antidepressant medication management
  • Follow-up after hospitalization for mental health illness
  • Follow-up care for children prescribed ADHD medication
  • Initiation and engagement of alcohol and other drug dependence treatment.

Value prop 4: Provider satisfaction and support

Payors track broad measures of provider satisfaction and consider it an important factor in attracting high-quality providers to their network. While provider satisfaction is unlikely to be a primary driver of reimbursement, it is taken into account when making coverage decisions.

Examples of mental health solutions that improve provider satisfaction include tools for easy identification and referrals for mental health conditions (e.g. Quartet), or the ability to provide immediate access to behavioral healthcare through prescription digital therapeutics (e.g. Pear Therapeutics & Akili)

Provider support can also lead to new therapeutics being considered medically necessary, or even becoming a new ‘standard of care’. In such cases, health plans may be legally required to cover the therapeutic, as they would any other medically necessary drug or procedure.

Proving the value prop

Provider satisfaction is evaluated through provider NPS. Specifically, payors will ask providers how likely they are to use the product with a patient, or how likely they are to recommend the product to a colleague.

Clinical society support is also important because payors view such support as a proxy for both provider satisfaction and standard of care. For this reason, many digital health startups (particularly in digital therapeutics) hire medical liaisons and participate actively in clinical society conferences.

Value prop 5: Mental health parity

In 2008, the federal government enacted the Mental Health Parity and Addiction Equity Act. The law — further strengthened by the 2010 Affordable Care Act and various state laws — prevents health plans from providing mental health and substance abuse disorder benefits that are less favorable than their medical/surgical benefits.

Despite the law, many insurers have struggled to provide mental healthcare access to their members. Although plans provide an in-network therapy benefit, there are often far too few in-network therapists to meet member demand. This results in members facing long waitlists or receiving no care at all.

Insurers are experiencing regulatory pressure and negative PR to comply with mental health parity laws. For example, in 2015 Kaiser Permanente paid a $4M fine to regulators for inadequate access to mental health services, and a recent, widely circulated article in Fast Company, criticized its continued lack of access. Over the past 4 years, regulators have assessed $13m in fines for non-compliance with federal and state mental health parity laws.

While the fines are relatively minor (e.g. the $4M fine represented around 0.2% of Kaiser’s $1.8B 2015 operating income), payors are motivated to improve their compliance, even if primarily to avoid negative publicity.

Some startups work with payors to elastically expand their mental health network when demand exceeds the payor’s baseline supply. This is particularly relevant in California, where the government enacted state regulations in 2020 that require plans to arrange coverage for out-of-network mental health services when in-network services are not available.

Bringing it all together

Let’s finish by exploring how a hypothetical company might apply the different value propositions to third-party payors. Not all payors are alike, so we’ll need to segment the market and identify which value prepositions are most important to each type of payor.

Self-funded employers

We can launch our go-to-market strategy by targeting a cohort of self-funded employers known to be fast-moving, early adopters of digital health solutions. These companies — often in Big Tech — are looking for ways to increase employee satisfaction. They tend to be willing to pilot promising new products that do not yet have an established ROI.

As part of these early employer pilots, we’ll run studies looking at our product’s ability to reduce costs, including overall healthcare spend, as well as employee retention and absenteeism. Of course, we’ll also closely measure user satisfaction and engagement. These metrics, in particular, will be critical to converting our early adopter pilots into long-term contracts.

Our early adopter sales won’t be sufficient to get us much further than a Series A, so we’ll need to move quickly to the next wedge of third-party payors: ASOs and more financially conservative self-funded employers.

ASOs (administrative services only) are divisions of commercial insurers that administer the health claims of self-funded employers. They often compete with other ASOs by offering a superior suite of benefits that help employers lower costs and improve employee satisfaction.

Financially conservative self-funded employers (and the ASOs that sell to them) will require a strong 12-month ROI based on a combination of healthcare cost reduction and productivity improvements. We’ll leverage the data from our early adopter pilots to substantiate this value prop.

Fully-insured plans

Next, we’ll start targeting fully insured plans. Due to regulations limiting their profit margins (known as the 80/20 MLR rule), fully insured plans are often less motivated by cost reduction, and more motivated by the potential to attract and retain more members through differentiated benefits and greater member satisfaction.

We can start by targeting some of the non-profit plans that are known to be early adopters. Later on — once we are a well-known brand with a wealth of user satisfaction data — we’ll target for-profit plans.

We can also offer our product to fully insured plans as a way for them to meet mental health parity requirements and alleviate pressure from members and the press. They will value our ability to elastically scale their behavioral health capacity when needed.

Medicare Advantage

Around this time, we can also target Medicare Advantage plans. In addition to showing cost reduction and high member satisfaction, we’ll run pilots demonstrating that the use of our product materially improves the health outcomes tied to Medicare Star Ratings. We can also run studies showing that our service reduces the medical costs associated with high-cost comorbidities — like diabetes and heart disease — that are prevalent in Medicare populations.


Finally, we’ll target CMS, itself, which is responsible for non-managed Medicare and Medicaid. By this time, we will have established a strong case for cost reduction, improved health outcomes, and have a groundswell of provider satisfaction and support. The rest of the healthcare industry tends to take CMS’s lead on reimbursement, so once we gain CMS coverage, we will be well on our way to long-term commercial success.

Your path to commercial success

One silver lining of the COVID-19 pandemic is that mental health is finally getting the attention that it has always needed and deserved. Digital behavioral health is experiencing a deluge of funding and third-party payors are more motivated than ever to offer mental health solutions.

The time is ripe to partner with payors. However, proving compelling value propositions takes time and considerable effort. To be successful you’ll need to start early and learn from the successes and failures of those who came before you.

I hope the insights I’ve shared will help you along the way.

Thank you to Maitreyee Joshi, Ross Klosterman, Joe Connolly, Elise Ogle, Mel Goetz, Jon Sockell, Ben Lewis, Matias Sanchez, Ashley Bland, Arun Bhojwani, Ryan Lawler, Annie Li, Cady Macon, and Ziv Reichert for feedback on drafts!

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  1. The economics of cost reduction appears simple: lower costs lead to more profits for the payor. However, they are more complex than they seem. Fully insured plans, in particular, are bound by the 80/20 medical loss ratio (MLR) requirement. A fascinating analysis in the American Economic Journal showed that the regulation inadvertently incentivized the plans to increase rather than reduce their costs. It’s therefore important to understand the specific value props that each type of payor (and plan) values.
  2. Moreover, there is a serious shortage of mental health providers in most payor networks. Many members simply cannot find an available therapist that takes their insurance. This shortage of providers results in many members not accessing any care at all, which further lowers the first-order costs of mental health conditions for payors.
  3. For example, a study commissioned by the UK’s NHS examined 15 forms of prevention and early intervention in mental health. It showed a strong ROI (up to 18x return), but only when measured on a 10-year time horizon. Unfortunately, such pay-back horizons are often only feasible when financed by a single-payer health system.