Digital health start-up Zocdoc is wrestling with a price change that could cripple doctors

Key Points
  • Zocdoc told doctors that it was changing the fee structure of its booking software, focusing more on transaction costs than subscriptions.
  • Doctors have vocalized their opposition on Facebook and through a petition, claiming that the change would lead to exhorbitant costs and create potential legal problems.
  • As of late last week, the company put its plans on hold, at least temporarily.
Kyle Walsh | CNBC

When Peter Chien opened Lumos Dermatology in New York in 2014, he turned over patient booking to Zocdoc, the website used by seemingly every doctor in the area to attract new patients.

Chien spends $3,600 a year per doctor for the service so his skin care practice can be discovered by consumers who count on Zocdoc's site or mobile app for last-minute appointments, similar to how restaurant reservations are made on OpenTable. But as Zocdoc, which is used by over six million U.S. patients a month and was valued in 2015 at about $2 billion, looks to fuel its growth, doctors like Chien are being put in a potentially untenable position.

The company had been planning to roll out a pricing change starting Oct. 1, lowering the annual charge while adding a booking fee for every new customer, even those that end up canceling. The model was piloted recently with some physicians in New York and, according to a document seen by CNBC, certain doctors in Washington, D.C., were informed of a pricing change starting July 1.

For Chien, the change would multiply his Zocdoc bill by more than seven-fold, an increase his low-margin business would be unable to absorb. Beyond that, the booking fee would put doctors in a legal gray area, because of state and federal laws that prevent physicians from paying third parties for referrals.

"Zocdoc is basically forcing doctors to engage in professional misconduct," Chien, 43, said in an interview.

So Chien helped launch a public campaign on Facebook and through a petition, which now has more than 100 signatures, to rally support from doctors and keep Zocdoc from moving forward with its proposal. It's having an impact. Late last week, Zocdoc told the Medical Society of the State of New York that it was putting the plan on pause and started informing some of its customers that it "will slow down to take the time to listen and consider the feedback."

Zocdoc, which is backed by some of the biggest names in tech, including Jeff Bezos, Marc Benioff and Peter Thiel's Founders Fund, is the latest highly-valued software start-up that's found it difficult to find sustainable growth in health care. In January, electronic health records provider Practice Fusion was acquired by AllScripts for $100 million, a fraction of its earlier valuation, and in May the board of HealthTap, a struggling medical advice app, fired the founder and CEO after concerning reports about his conduct.

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Founded in 2007 and led by CEO Oliver Kharraz, a former doctor, Zocdoc has particular prominence in its hometown of New York, where about one in five new patient-doctor relationships are established on the service. Patients in need of an immediate dermatologist, dentist, internist or optometrist can find an available appointment nearby rather than calling all over town or getting a referral from a primary care physician and waiting for a time slot to open up.

In particular, Zocdoc is relied upon by tens of thousands of private practices that don't have the big administrative budgets employed by hospital systems and universities. The company has tried to do for doctor's offices what OpenTable did for restaurants and Airbnb did for vacation rentals.

But Zocdoc faces challenges that are unique to health care. If getting large swaths of doctors to buy software is hard, raising prices is a non-starter. Private practices are already contending with years of lower reimbursement rates from the government and insurers, pushing more physicians to join large hospital systems rather than staying independent.

Were Zocdoc's new pricing to take effect, Chien's dermatology office would go from a $3,600 annual fee per doctor to a $300 license for the whole practice and $35 per new booking. A plastic surgeon's price would change from $3,000 per doctor to $1,800 for a practice (up to 14 providers) and $100 per booking, according to documents viewed by CNBC. The CEO of a New York office with about 25 doctors across all different specialties said the practice's total Zocdoc costs, currently $3,000 a year per doctor, would jump 251 percent under the new model, making it unaffordable.

Zocdoc said in a statement that it's looking for a pricing model that allows more doctors to join the network, and it expects that most existing customers in New York will not be paying more under the new framework.

"We aim to lower the barrier to entry so more providers can participate in Zocdoc's marketplace, and to improve patients' choice and access to care — particularly those in underserved and rural markets," the company said. "Under this new model, we estimated that the majority of providers in New York would pay the same or less than under their current subscription pricing."

Zocdoc told clients that they would not incur booking fees for people on Medicare or Medicaid. Chien said his sales representative indicated that Zocdoc was waiving the fee for those patients because of "anti-kickback laws." According to the American Academy of Family Physicians, anti-kickback laws make it "illegal for providers (including physicians) to knowingly and willfully accept bribes or other forms of remuneration in return for generating Medicare, Medicaid or other federal health care program business."

'Potential exposure'

The laws exist, in part, because if physicians could pay for referrals, a broker would be able to make more money sending a patient to a particular doctor even if better treatment is available elsewhere. It's not just a problem in relation to Medicaid and Medicare patients, but also for people covered by commercial insurance across many states.

A clause in the New York state health department's definitions of professional misconduct says that doctors may not give or receive money "to or from a third party for the referral of a patient or in connection with the performance of professional services."

Jennifer Kirschenbaum, a Long Island, New York-based attorney who specializes in health care, said the booking fee could be considered a referral paid by the doctor to Zocdoc.

"They're leaving their customers with potential exposure," Kirschenbaum said. "The laws relative to whether or not there's a violation have a much greater implication to the physician."

Here's Zocdoc's response to CNBC's questions about the legal issues posed by the proposed price structure:

"As we work to develop new models, we recognize that each state, including New York, has its own distinctive environment. We take compliance with federal and state regulations seriously, and we are committed to openly and collaboratively adapting new models to each state's landscape."

Kirschenbaum said she's received several calls from doctors who are concerned about the changes.

Zocdoc also operates in big cities in California, a state with clear laws that prohibit physicians from paying for referrals. Jill Gordon, a Los Angeles-based health lawyer at Nixon Peabody, said that in pricing arrangements, it's often a "tip off that someone is concerned about anti-kickback or other compliance issues," if they price differently based on the type of insurer.

In delaying the rollout, Zocdoc says it's listening to customers and taking into account their concerns. However, doctors are still worried that the delay is just temporary.

One doctor's notification about the pause, which was viewed by CNBC, referred to Zocdoc's move "away from an unlimited, flat subscription model" as an "important change for our company, for the healthcare providers we serve, and the patients who use Zocdoc to find and make appointments with providers."