Telehealth companies Teladoc Health (TDOC 0.50%) and Hims & Hers Health (HIMS -2.54%) offer treatment options outside of traditional health insurance coverage, and they've grown rapidly -- in part due to patients seeking to avoid the high out-of-pocket costs common to many health insurance plans.

Healthcare and insurance giant UnitedHealth Group has escalated this trend by expanding into the direct-to-consumer space, offering generic drugs and virtual services to people who don't have insurance. That might make some investors nervous for Teladoc and Hims & Hers -- but, in fact, UnitedHealth's move is a positive sign for these telehealth players.

The rise of direct-to-consumer care

The average health insurance deductible was more than $4,000 for individuals and more than $8,000 for families in the U.S. in 2020. These high out-of-pocket costs have contributed to the growth of direct-to-consumer healthcare.

Shocked man looking at his medical bills.

Image Source: Getty Images

The median individual income in the United States is roughly $36,000 per year, so it's easy to see the difficulties a high deductible could causer for an average earner. Such patients would have to cough up more than 11% of their gross income before their health insurance companies start fully covering many major expenses, and the percentage relative to take-home pay would be even higher.

Between that standard financial pressure and the added impacts of the pandemic, it's obvious why many people are seeking less costly ways to access healthcare.

Affordable care

While Teladoc and Hims & Hers Health are both telehealth companies, there are some noteworthy differences between them. Teladoc primarily operates by signing up businesses to offer its services to their employees. Still, it does make some basic services available to individual patients, with or without insurance, including general health, dermatology, and mental healthcare.

Meanwhile, Hims & Hers Health goes direct to patients -- it specializes in niche care areas such as dermatology, sexual health, and hair loss, but also offers primary care and mental health services. It, too, offers options for care that don't require insurance.

Virtual visits cost anywhere from $39 (Hims & Hers) to $75 (Teladoc) for general care consultations, and can be performed on a computer or smartphone. The low cost and convenience of this model benefit patients, even if a more complicated ailment would push them back into the traditional healthcare system.

Total healthcare spending in the U.S. was more than $11,000 per person in 2019, putting the total industry at $3.8 trillion. There are many costs to be lifted from patients' shoulders and opportunities for companies to help patients save money on quality care.

UnitedHealth validates the direct-to-consumer care model

UnitedHealth is one of the biggest healthcare companies in the world. The conglomerate operates the largest health insurance business in the United States, covering 70 million members. It's expected to do more than $280 billion in revenue this year and trades at a market cap of more than $400 billion. That's more than 10 times the combined market caps of Teladoc and Hims & Hers.

As such, UnitedHealth's decision to begin offering direct-to-consumer health services is a big deal for the industry. The company set up its Optum Store in late 2020, through which it offers virtual care services and generic drugs to uninsured patients.

Investors might be scared that the entry of such a large player into this niche will spell trouble for the smaller companies that pioneered it -- among them, Teladoc and Hims & Hers -- but so far, that hasn't been the case. Teladoc reported a 40% year-over-year increase in visits in the second quarter, while Hims & Hers reported a 75% year-over-year increase in subscriptions for the same period.

Last year's pandemic-driven surge in telehealth means that 2021's comparisons are being made against unusually high growth numbers. That both of these companies are achieving strong double-digit percentage growth even relative to 2020's impressive results shows just how effective their business models are. In that light, one could view UnitedHealth's entry into direct-to-consumer healthcare more as a further validation of the opportunity here than a threat.

Does fear create opportunity?

Despite the companies' strong business results, both stocks have had a rough 2021 thus far. Shares of Teladoc and Hims & Hers are down 30% and 51%, respectively, year-to-date, even as the broad market S&P 500 index is up by almost 20%. As a result, the stocks have become inexpensive based on their forward price-to-sales ratios.

Company 2021 Revenue Guidance Forward P/S Ratio
Teladoc $2.025 billion 11.3
Hims & Hers Health $255 million 5.2

Is it possible that UnitedHealth and other larger healthcare players will adapt and put pressure on emerging competitors like Teladoc and Hims & Hers? Of course -- but so far, that hasn't been reflected in their activity numbers. Based on visits and subscriptions, these businesses continue to expand rapidly.

Given these now-reduced share prices, the risk/reward calculus here should make these stocks attractive to investors who can stomach the volatility and noise of owning companies that aren't currently in favor with Wall Street. And if market sentiment turns positive on them again, these healthcare stocks could deliver outsized returns.