By Joe Riley, Psilos Group
Digital health is on a roll — and that’s the best sign that U.S. healthcare is changing for the better. The marriage of healthcare and digital technology improves patient outcomes, lowers costs and broadens consumers’ access to care.
Strengthening this trend is venture financing of digital health, which remained robust in 2016 after two years of unusually strong increases.
Digital health drew investments of $4,3 billion and $4.5 billion in 2014 and 2015, respectively, according to Rock Health. The San Francisco digital-health venture fund says $3.3 billion was invested in the field in 2016 through September, and it expects the final 2016 figure to the 2015 figure.
Investors are deploying capital into opportunities that are set to profit from prevailing macro trends, namely the transfer of risk and financial responsibility to providers from payers and to patients from providers.
Many of these companies, in data analytics, connected health, digital therapeutics and consumer engagement, among other areas, will develop and provide tools that established health-system players will use as they adapt to the evolving concept of value-based care.
In October, Propeller Health raised $21.5 million to continue its focus on digitally managing respiratory disease. Klara raised $3 million to build a platform enabling secure messaging between patients and their care providers. And Accolade Health raised $70 million to support the growth of its digital-health on-demand concierge service.
Notably, some of the largest venture investments in digital health in 2016 focused on redefining how health insurance is provided. Bright Health ($80 million raised), Clover Health ($160 million) and Oscar ($400 million) are all new-generation health insurers trying to disrupt the business of traditional healthcare payers, which remain focused on the declining fee-for-service model.
As the digital-health market matures, M&A activity is accelerating. A total of 41 transactions have closed this year, up 11 percent from 37 in 2015 and up 24 percent from 33 in 2014, according to MobiHealth News. The increases are a response to the risk shifting described above, as companies look to add value-based-care capabilities. Evolent Health’s acquisition of Valence Health and athenahealth’s acquisition of Patient IO are examples of this effort.
Given the strong presence of the established players (health plans, large pharma and provider systems) in the venture-investment landscape, M&A activity is likely to remain robust in 2017.
One disappointing metric was digital-health IPOs. NantHealth, an evidence-based personalized healthcare company focused on more effective treatment decisions for critical illnesses, was the sole digital-health IPO in 2016. This is far less telling than it may seem, however, because 2016 was a disappointing year for all IPOs.
Moving into 2017, venture capitalists and others will continue to participate in M&A deals and focus more on startups that enable healthcare providers to personalize care and participate in outcome-based economics. Investors will also capitalize on growing acceptance of value-based care, which is being pushed especially aggressively by Medicare.
Most important, these developments are just scratching the surface. Goldman Sachs forecasts a near-term digital-health market exceeding $32 billion annually. Goldman also pegs the total savings opportunity from digital healthcare at more than $300 billion, much of it from better management of chronic diseases.
The latter prediction is particularly important because the number of people enrolled in high-deductible health plans has soared, making people far are more attuned to the high cost of healthcare.
Digital health is helping the healthcare community respond in a powerful way.
Joe Riley is a managing director at Psilos Group, a New York digital-health venture capital and growth stage investment firm.
Photo of doctor workplace with digital tablet and stethoscope courtesy of ©iStock/JPC-Prod