When Warren Buffett called healthcare a "tapeworm" on the U.S. economy, he was referring to the fact that healthcare costs have been growing faster than the overall economy and show no signs of slowing. There are a host of companies working on the problem of mitigating rising healthcare costs and making the system more efficient. To the extent these companies are successful, they may prove to be extremely valuable.

Teladoc Health (NYSE:TDOC) is a good example of a company working to make the healthcare system more efficient. The company is a global leader in providing virtual healthcare services enabling patients to consult health providers over the phone or through a video chat. Virtual healthcare, or telehealth, is expected to be one of the fastest-growing segments of healthcare information technology (IT) in the coming years. Given the long-term trends, Teladoc is a stock that investors should familiarize themselves with.

How Teladoc works

If Teladoc is covered by insurance, a patient can log on to the Teladoc website or app to schedule an appointment with a doctor. Patients have the option of selecting a video call or a phone call at their convenience. The company manages a nationwide network of over 3,100 board-certified doctors licensed to see patients in all 50 states, as well as many international regions. Physicians and therapists are available to discuss general health and a number of specializations.

Teladoc's technology aims to seamlessly replicate a routine doctor's visit. A patient's medical records and test results are made available for review on the platform for medical professionals, and doctors are able to prescribe medication to a patient's local pharmacy.

Anyone who has sat in a waiting room for something that could have been settled with a quick phone call can immediately see the benefit to Teladoc's service. The company's technology also aims to help doctors become more efficient by allowing them to see more patients and streamlining paperwork.

A person holding a chest X-ray in front of his chest

Image source: Getty Images.

Teladoc Health's business model

Teladoc Health works with insurance companies and corporate benefit plans to provide its services to patients. The company has three billing models: It collects a monthly subscription fee from most of its U.S. paid patients, collects a fee-per-visit, and also offers a hybrid subscription/fee-per-visit billing model.

On the medical professional side, Teladoc manages its own network of doctors and pays them based on the number of patients they see. The company keeps the difference between what patients pay and what it pays its doctors per visit. The company is currently unprofitable but boasts a near-70% gross profit margin and believes it will be net profitable with greater scale.

As of Q2 2019, Teladoc counts 40% of the Fortune 500 companies, over 40 U.S. health care plans, and 70 global insurance firms as clients. This has enabled the company to amass over 35 million covered patients in the U.S. as paying customers. However, Teladoc estimates that its total addressable market in the United States could be as large as 313 million patients -- almost 10 times more than its current customer base.

Rapid growth

Teladoc is strongly positioned for growth. The company's core phone-a-doctor product promises to save the healthcare system money if it is widely adopted by increasing doctor utilization and reducing administrative burden. In fact, according to a study commissioned by Teladoc, healthcare providers save $472 on average per general medical visit.

Furthermore, the telehealth market is estimated at $20 billion and is expected to grow as much as 17% per year over the next five years. Teladoc is currently the largest telehealth company, but it has only a small fraction of this large market.

TDOC Revenue (TTM) Chart

TDOC Revenue (TTM) data by YCharts.

Given the circumstances, it should be no surprise that Teladoc has experienced robust sales growth since going public in 2015. It's reasonable to expect strong revenue growth to continue.

The only publicly traded telehealth stock

Investors who are interested in investing in healthcare companies working to reduce the expansion of healthcare costs should keep Teladoc on their radar. The telehealth market appears to save medical care providers money, which has resulted in strong growth for the industry. Teladoc is not only the largest telehealth company in the world, but it is the only publicly traded stock focused on this market.