Quick Hinge Health S-1 Thoughts

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Hinge: An IPO Date ;)

There have already been lots of good pieces written about Hinge health’s financials (Hospitalogy), care model and evidence (Surgeon’s Record), and how the S-1 changed in messaging (Exits & Outcomes). As per usual, I’m a little late to the party cause I pregamed a little too hard.

But I’m here to bring the real academic rigor to this discussion. Exhibit A: 

I’ll just mention a few things I found interesting when I read the S-1 that I didn’t see in some of the other pieces. Would love to hear your thoughts on what you found interesting.

Waiving Co-Pays, and ERISA arbitrage

When you work with self-insured employers, you’re governed under a different set of rules than traditional health insurance. You get more flexibility in what you can pay for, what you can waive, and how you charge for things.

IMO Hinge demonstrates the massive benefits from simply having no co-pays for something way lower cost and potentially preventive of a surgery like physical therapy. Working in the employer realm gives Hinge the flexibility to do things like waive co-pays, which they state as one of the key value props to getting employees to use the service.

“Our platform is typically offered at no direct cost to our members, without a copay or deductible, and is fully paid for by their employers or health plans. By comparison, the cost of in-person physical therapy copays for even 10–12 sessions can be burdensome”

This feels like this is something that should be more standard in physical therapy outside of employers, especially if it actually seems to produce ROI like Hinge says. 

In general we should be using the increased flexibility allowed in the employer segment to do payment experimentation. And if it seems like something works, we should also then mimic those rules in the fully insured health insurance segments. This is like the one benefit of employer insurance being separate, let’s not squander this. 

Channel Partners: A Double-Edged Sword

A consistently highlighted part of the S-1 is the use of partners, which in this case are health plans, third-party administrators, pharmaceutical benefits managers, etc. These entities usually work with employers to handle the administrative side of paying providers, vet vendors, etc. If you don’t know what I”m talking about, imagine a polycule of health plan payment rails and vendors. If that doesn't help, we will go over this in our upcoming healthcare 101 course starting 4/22 ;).

If you’re a vendor, you can typically become a preferred vendor or partner with these entities. The health plan/TPA will pre-diligence you and if they think you’re good, they’ll recommend you to their employer customers. The vendor is usually paying some relatively hefty admin/marketing fees to whoever is helping the employer make vendor decisions (the health plan/PBM/etc. in this case, but can also be a broker/benefits consultant).

Hinge Health’s go-to-market motion heavily relies on this partner strategy (they have 50+ partners). One of the ways you can improve your value proposition to employers is that you heavily reduce the contracting burden they have to deal with, you can tap into existing budget that they already have, and you can get up and running ASAP when they’re already feeling the pain point (either from employee spend or employee complaints). 

You can see this very specifically in this paragraph from the S-1 [line breaks added by me].

“Depending on a client’s needs, we have the ability to contract directly or through one of our many partners. 

Similarly, we are able to invoice a client directly or submit via claims through a client’s health plan. If a client chooses to pay via claims through a health plan, the cost typically comes directly out of their medical budget for the year and is embedded in their medical costs, rather than a separate discretionary budget. Allocation of the spend on Hinge Health to the client’s existing healthcare budget enables faster implementation as it avoids a potentially lengthy approval process. 

Our agreements with partners help us simplify contracting and implementation with clients. In 2023, the vast majority of our contracts were completed via our partners, negating the need for many clients to contract directly with us since many clients can leverage existing contracts through our partners. This is a significant strategic advantage for us as it enables implementation and launch of our platform as quickly as a few weeks after entering into a contract. As a result, most implementations are completed in a 40–100 day period.”

Do not underestimate how much value there is in reducing contracting barriers. If an employer is looking at a few different vendors, how easy you’ll make their life can become a real differentiator if their products and outcomes are in the same range. That’s why in the S-1, the number of partners that help with distribution is one of the most recurring themes.

Partners can be a double-edged sword though (no pun intended). You can end up giving up significant economics in these deals and depending on how they’re structured, you can lose control over how the offering is presented to the end patients. This can make it tricky to actually get them engaged, though most companies do their own targeted marketing in tandem as well.

There’s also a risk that you lose contracts if your partners want to swap you out for another vendor that charges less, provides more services, etc. In the S-1 Hinge talks about having 3 year contracts, but their partners don’t have to work with Hinge exclusively and are able to terminate the contract for convenience (aka. they have a relatively easy out). 

79% of revenue for 2024 was contracted through partners (vs. only 21% direct to customers) and three partners accounts for 42%+ of all their revenue. This can be a moat, because from what I’ve seen these partners will rarely push multiple vendors within one category (anecdotally). But this also puts you in a precarious area if they bring on another preferred vendor that’s lower cost or terminate the contract because suddenly a lot of revenue can go away. This is why I’m glad I’m an only child - I don’t like when people play favorites and the favorite isn’t me. 

I have no idea how Hinge actually structures their deals specifically or whether these are issues they run into. But I have to assume that some part of their enormous sales & marketing spend is related to this. It was 50%+ of their entire revenue in 2023, and still >42% last year including their convenient ramp down in spend in Q4 2024 (gee whiz wonder why that happened). 

Courses Now Enrolling

A few courses are now enrolling, we know you have to start bothering people to get budget so we’re giving you a heads up this time.

• US Healthcare 101 (starts 4/22) - YOU KNOW WHAT IT ISSSSS. I’ll teach you how US healthcare works in 3 weeks, something that took me like 8 years and I still haven’t figured all of it out.
• EHR data 101 (starts 5/6) - EHR data is really weird and quirky to work with with lots of unexplained rules you’ll have to navigate. We’ll teach you all about how to analyze it, what’s in it/not in it, etc.
• Selling To Health Systems (starts 5/12)- Need to figure out how to actually sell into a hospital? You can either pray to your respective god, or take this course. The course might actually be easier to figure out.
• The Pharma And Life Science Breakdown (starts 5/12) - New course we’re doing a beta run of that explains how drugs get to market and what pharma cares about. We’re doing a limited number of spots, so if you’re interested I would get it sooner than later.

You can find all the courses here and we can chat group deals here. 

We’re also doing some on-site “teaching you how to use genAI tools at your company” workshops, email nick@outofpocket.health for more details.

Virtual PT - a winner during COVID

It’s very clear that virtual physical therapy care was a big winning category during COVID. When everyone was forced to stay home, more patients and employers became open to the idea of virtual physical therapy as a modality that’s worth trying. Everyone complaining about their back pain and ergonomically suboptimal work from home setup probably helped too.

Once people start trying it, they see that it works pretty well and then the vendor can also start pointing to savings after a couple years. I think the reason this works well for virtual physical therapy is because so much of the care plan is just getting patients to actually do the thing, AND there’s a ton of borderline unnecessary surgeries. So lowering the barriers to doing the thing is the number one goal. 

The question I’m grappling with is still trying to figure out which of these care models got a boom during COVID that maintains that kind of trajectory post-COVID? Hinge has pretty good economics, but you can only really see what’s going on from 2021 forward. Plus their standard is three year contracts, which would probably come up for renewal some time this year.

Does this persist for the next 3 years? I think that’s the open question right now.

Artificial Intelligence, Care Scaling and Abstractions.

As AI enters healthcare, we can watch how different layers of services get turned into commodities. And how different layers of LinkedIn Top Voices say “AI is targeting headcount, not IT spend”.  

It’s been particularly interesting to watch the virtual physical therapy companies because a lot of their products start converging in a lot of ways (e.g. moving from sensors to computer vision). The next wave has been LLMs handling everything from message triaging, to automated messaging, more dynamic patient intake forms, etc. Hinge is deploying this across its products, claiming they reduce human care hours by 95% compared to in-person physical therapy. Sword has its own Phoenix product that uses AI to guide and adjust users during the sessions themselves.

At the moment, this is great because the virtual PT companies can meaningfully scale the number of interactions they have with patients without needing to hire way more clinical staff (gross margins ain’t gross at all). Plus the existing companies like Hinge and Sword have an edge here because they have a lot of historical interactions and data to pull from. 

However, as these models themselves get better, you’ll need less data to fine-tune the models and this will become more accessible to more companies in the category. What happens as these parts of the stack get commoditized? 

Then best-in-class in this product category probably won’t be anything to do with patient intake, messaging, care plan design, etc. since those seem relatively “easier” to automate. The S-1 heavily emphasizes the AI aspect of its business, but the defensibility has to come from other things:

1. Contracting simplicity and channel partners, which we’ve already talked about. Sword also for example bought a UK-based company Surgery Hero presumably because that company already has contracts with a bunch of NHS trusts. That’s another way to simplify things with the buyer and those contacts can be hard to swap out (especially when selling to governments).

2. Integrations with everything outside of the actual care. For example in our podcast with Hinge CEO Daniel Perez he shared some interesting tidbits on how they built out their real-time claims feed so they can engage patients at the right time and have integrations with providers via HingeConnect for in-person care. Building things with external partners is way more than just tech and automation. 
3. Hardware? The company has a device called Enso for pain management, but I actually think that leaning more into hardware can be defensible. You have a physical object in a patient's home (and one they probably use daily for pain) to remind them you exist.

“We are firm believers in getting the job done and we think the job could be done with technology and that hardware allows you to scale an actuator where you could actually do a physical task.

And it's been a huge differentiator for us is actually being willing to build this skillset of being able to build hardware. And look, we brought our costs down for hardware or for Enso probably by 75, 80% in the last three years as we've scaled it…

Hardware is hard for a reason, but if you could do it, doing a hard thing is itself a moat. And I think too many tech companies are afraid of hardware. But I tell you what, medical device companies have phenomenal moats around their business. They have phenomenal valuations as well, and they deliver really, really good outcomes for their patient.” -Daniel Perez, Hinge Health CEO (Source)

This issue is going to face any company where AI provides an increasingly lower barrier to entry. The virtual physical therapy space is just interesting because it’s one of the first care delivery companies where we’re seeing it play out at scale.

S-1s and upcoming laws

The S-1’s are great reads to understand how other parts of healthcare work! You can learn a lot about things like how the 510(k) pathway works for their Enso medical device. Don’t just read other people’s analyses of these companies, peruse them yourself to learn other things. For example I learned about new regulations happening on the med device manufacturing side in the US and EU:

“For example, in February 2024, the FDA issued a final rule to amend and replace the QSR, which sets forth the FDA’s current good manufacturing practice requirements for medical devices, to align more closely with the International Organization for Standardization standards. Specifically, this final rule, which the FDA expects to go into effect on February 2, 2026, establishes the Quality Management System Regulation (“QMSR”), which among other things, incorporates by reference the quality management system requirements of ISO 13485:2016.”

Or new data privacy laws coming down the pipeline:

“We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions….
For example, Washington State enacted a broadly applicable law to protect the privacy of personal health information known as the “My Health My Data Act,” which generally requires affirmative consent for the collection, use, or sharing of any “consumer health data.” Consumer health data is defined to include personal information that is linked or reasonably linkable to a consumer and that identifies a consumer’s past, present, or future physical or mental health status; consumer health data also includes information that is derived or extrapolated from non-health information, such as algorithms and machine learning.

You can learn a lot from reading things like this in the risk sections. Wait no one else finds this cool? Wait where’d everyone go?

Conclusions and Parting Thoughts

All-in-all, I’m hoping Hinge keeps this momentum up. I’m not saying this just for their sake, but for the sake of the entire health tech ecosystem that is depending on this IPO to go well. Literally every single new tech-enabled services company is going to get compared to this so…there’s a lot of paper money at stake here.

Thinkboi out,

Nikhil aka. “Unhinged”

Thanks to Malay Gandhi for reading drafts of this

Twitter: ​@nikillinit​

IG: ​@outofpockethealth​

Other posts: ​outofpocket.health/posts​

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