The other day I met with Adrian Chernoff to discuss what type of business models digital health and therapeutic companies should be exploring and how they should think about getting paid for innovating beyond the molecule.

Digital health has emerged as the term to describe how we use social, mobile, analytic, and cloud technologies to help people improve their health and wellness. It can include the Apple Watch and apps that get you to exercise more, as well as apps that diagnose a disease or apps that provide therapies that are combined with an existing drug or medical device. Some of these digital health applications and products are FDA approved, while others are lower risk and exempt from FDA review.

In the pharmaceutical industry, companies have increasingly looked to digital health and therapies to complement and be combined with their drugs to increase patient compliance, help patients deal with drug side effects, address the stress, anxiety and depression associated with their disease, diagnose a disease and show progress in treating the disease, as well as providing some matchmaking services to find healthcare professionals and enable virtual visits and consultations. Among pharma companies, you will frequently hear digital health expressions such as “value beyond the pill,” “value beyond the molecule,” and “drug+” to describe what digital is offering to the traditional analog business model and therapy.

Adrian spent time at Johnson & Johnson as the head of innovation at a time when they were negotiating various kinds of relationships with digital therapeutic companies. We discussed how pharma companies are looking at such deals, what seems to make the most sense, the way they should think about business model innovation, and where these things should go.

I asked Adrian: Will health insurers pay a premium to Big Pharma for adding digital therapies to analog drug therapies to make them more effective?

His short and emphatic answer, NO!

If you look at non-healthcare digital innovation, like a smartphone, computer, or smartwatch, what you see is that innovation is the price you pay to stay in the game. If you stop innovating, you lose and must exit the market. A new version of a digital device generally costs the same, and sometimes less than, the previous version. Yet the features will deliver 50-100% greater benefits in terms of speed, bandwidth, storage, and performance – this is the power of Moore’s Law. Digital companies are always giving us more for less.

As pharma companies now enter the digital age, they too need to develop this same point of view. Adding new digital features doesn’t mean they get to charge more if the Drug+ Digital offering is better, just like digital companies don’t really charge more even though they are producing better products.

Health insurers (Payers) are already paying a lot for these branded drugs, and, to justify these payments, drug companies already represent they are effective, which is why the FDA approved them.

But the truth that we all know is that most drugs are only effective on 30-50% of the people most of the time; but, despite this, we give these drugs to patients all the time even though they aren’t effective. This is primarily because no one knows a priori if they will work for the patient, and we rarely definitively know post facto that they don’t.

Payers think that if the digital therapeutic makes the drug more effective, then great, both they and the patient then will finally get what they have already been paying for, so why should they pay more just because the drugs finally work as advertised.

Payers are also eager to have pharma companies use digital therapeutics to document the efficacy of the drug so that they can see data on outcomes that validates that the drug is working. Payers see such digital tools as essential in enabling them to force the drug companies to move to a pay-for-performance model, where in the future the pharmaceutical manufacturers will only get paid for a drug if it actually makes the patient better.

Payers know that drug companies fear this level of digital enabled transparency because if their drugs only work on 30-50% of the patient, despite the fact they are prescribed to 100% of the patients, then their pharmaceutical sales will fall if they only get paid for those prescribed drugs that work.

From a business model perspective, payers have the following three perspective regarding the additional value that digital therapeutics add to analog therapeutics:

Digital Therapies Should Makes Analog Therapies More Effective

If digital therapeutic makes the analog therapeutic more effective, then those companies that provide the combined therapies (digital + analog) will become the winners in the market and will sell more of their drugs, and will therefore make more money on volume, not price.

Digital Documents Deliver Evidence of Analog Efficacy

If digital therapeutics document the outcomes and efficacy for patients and increase patient compliance and adherence to drug and digital therapies, then the patients will use more of the drug, and this will increase the volume of drug sales as well.

Digital Therapies Will Increases Drug Adherence

If digital therapeutics verify and validate efficacy to the payer, patient, and healthcare provider, then increasingly, digital therapeutics will complement and increasingly become companions that are combined with analog therapies, and these combined therapies will become the market winners and will crowd out less effective therapies that can’t make the same verifiable and documented claims. Therefore, again, drug companies will sell more drugs at the same price.

In all these three scenarios, the Payers see themselves paying MORE for drugs because more drugs are used that are more effective and, with the companion digital therapy, can validate their efficacy through digital means. But in none of these cases do the Payers see themselves paying a premium or higher prices for digital and analog combinations – the drug price is set based upon what they are willing to pay for the drug. The burden is on the pharmaceutical company to figure out how to use digital to sell more of their drugs, not sell a therapy for a higher price just because it is combined with a digital therapy.