This is the third in a series exploring the telehealth sector and the Triangle-based companies behind its rise as a complement to traditional healthcare delivery. Check out previous articles and videos here.

On the surface, telehealth startups are just like any other startup.

They seek to disrupt an industry using new technologies. They compete for the same capital, talent and visibility. And they seek financial sustainability and profitability so they can add jobs and create value in the world.

They also face the same barriers to scalability—funding (or the lack there-of), capacity and market demand. But unlike other startups, after they conquer those barriers, telehealth companies also must navigate the complex web of regulations and rules unique to the healthcare industry.

In the second article in this series, I argued that the Triangle’s existing talent and the strength of both its healthcare sector and entrepreneurial ecosystem could position the state to lead the expansion of the telehealth industry nationwide. That’s true.

But it’s also true that the regulatory landscape and the share of funding NC-based telehealth companies receive from venture capitalists and other funders will also impact NC’s ability to lead the sector.

So far, the state’s record in both areas is spotty. Regulations are lagging behind the innovations occurring in the sector. And venture capital investments to healthcare-focused companies have risen and fallen over the past decade. But to better understand NC’s current regulatory and capital landscape impacting the telehealth sector, we’ll let data speak for itself.

Funding Telehealth Companies

Venture capitalists have long been interested in and invested in healthcare-focused startups, but investments have increased in the past few years. The increase could be due to more opportunities, termed “deal flow” by investors. In a 2015 report, PwC argued that the Affordable Care Act (ACA) incented innovation in the healthcare sector.

“As venture capitalists we look for big markets and healthcare is important to every person, applicable to every human being, and is going through incredible disruption right now,” says David Jones, partner at Bull City Venture Partners, offering some insight into why VCs’ interest in the healthcare sector has grown.

Indeed, healthcare focused startups are popular both globally and nationally among venture capitalists. According to CB Insights, health-oriented startups received 14 percent of the total number of venture capital deals nationally and 11 percent globally in the third quarter of 2016.

The National Venture Capital Association (NVCA) does not break out investments in telehealth companies from general healthcare-focused categories. Instead, NVCA categorizes healthcare investments in two categories: healthcare services/systems and healthcare devices/supplies. Telehealth technologies could fall under either category, thus it’s unclear what share of the reported funding telehealth companies receive.

Nationally, the two categories of healthcare-focused startups received $8.72 billion in venture capital investments in 2015. So far, national investments are at $5.52 billion in 2016. But as the chart below shows, investments in healthcare-focused startups have increased of late and once Q4 figures are reported, 2016 could outpace 2015.

But less so in NC. Deal flow to healthcare startups is already $250 million short of that reported in 2015.

Deal flow is down across the board in NC and the nation. But NC’s drop in funding is more pronounced. At $648 million in total VC investments made to NC companies this year compared to 2015’s $1.36 billion, funding is down by at least 50 percent according to NVCA data.

Still, healthcare-focused startups comprised 14 percent of total VC investments this year whereas in 2016 they accounted for 25 percent of all VC activity.

In the long-term, interest in healthcare-focused startups is still rising in NC and around the country. Still, investing in the sector differs from traditional investments in two key ways: timelines from investment to return-on-investment (ROI) tend to be longer and the regulatory hurdles inherent to the healthcare sector increase uncertainty and risk.

The path from investment to ROI is typically longer than typical investments for a number of reasons including prolonged sales cycles, slow adoption from healthcare institutions, and, of course, the regulatory environment.

Regulations and Policies

How North Carolina politicians, insurance companies, public administrators and telehealth companies design and implement telehealth policies and laws will directly impact telehealth startups’ ability to scale and impact health outcomes.

Regulations influence how the creation of telehealth services are incentivized, how they can be delivered, and how doctors and hospitals are compensated for their services.

For most telehealth services, insurance companies are not required to compensate doctors or the services fall outside of insurance completely. Insurance doesn’t often cover the purchase of medical devices—such as heart monitors or blood pressure cuffs—used to monitor a patient’s health at home. And in NC and many other states, there is no legislative requirement for doctors to be compensated equally for delivering the same service via telehealth technologies as if the service were delivered in person.

NC’s regulations governing telemedicine are sparse and varied. Among my sources, the most popular regulation recommended is a “parity” law—one that allows practitioners to be reimbursed at the same rate as if they were performing the service in person.

“If a physician is going to take the time to conduct a visit and do exactly what they’d do in a normal visit, then there needs to be some way of collecting payment on that,” says Mary Kathryn Bumgarner, a nurse practitioner and leading telehealth advocate at UNC-Chapel Hill’s Heart and Vascular practice.

Similarly, Matthew Cox of RelyMD says the lack of a reimbursement model is one of the biggest barriers to the expansion of telehealth services as a complement to in-person care.

In 2015, members of the North Carolina General Assembly introduced a bill (HB 723) to require insurance companies to reimburse doctors for performing telemedicine (live video only) services. The bill was referred to the insurance committee and didn’t go any further.

Precedents for reimbursement already exist within NC’s regulations. NC’s health insurance programs for low-income children (NC Health Choice) and individuals or families (Medicaid) currently allow reimbursement for telemedicine (live video) services.

Brent Anthony, director for strategy and engagement at Brasco Design and Marketing, says entrepreneurs and those inside the healthcare system “should not be afraid of the regulations.”

“People get into this because they’ve experienced it themselves, or care deeply. Healthcare disruption is not easy—it’s extremely complex—and people don’t do it unless they’re passionate about it,’ he says.

While cumbersome, regulations are typically implemented to protect citizens and ensure high-quality healthcare is available.

“Other regulations that can be barriers that restrict when telemedicine can be used, who can provide it, what can be allowed to be performed—those types of regulations are important to get right,” says Carol Lewis, associate director of the Center for Innovation at the UNC Health Care and School of Medicine.

And as Ed Barber, CEO of Pattern Health, says, “Clinicians have their patient’s best interests in mind. It’s (telehealth) not about cutting them out of the experience, but about empowering them more efficiently and effectively, not adding tools and systems into their lives that make them more difficult, but that help them do what they do well more—which is caring for patients.”

Crafting laws regulating and promoting the use of telehealth technologies will be important for its expansion and adoption. Like all other startups, the local companies designing telehealth technologies will need capital to scale.

For now, both variables seem to point to a less than rosy picture. But both regulations and deal flow can—and often do—change.

Should NC seek to position itself as a telehealth thought leader, both variables will require as much attention as building the local workforce, innovation and healthcare communities.

But perhaps the sector will gain momentum through a source other than the capital and regulatory environment it seeks—the telehealth focused startups could drive it themselves. Stay tuned for the final piece in this series where we’ll explore the startups shaping the industry in NC.