The digital healthcare industry is undergoing a significant transformation, with funding dwindling after the COVID-19 pandemic peak. To succeed, companies must pivot and prove their value. Investors are seeking demonstrated outcomes, while patient engagement strategies must be tailored, and a cautious approach to scaling is advised. Some firms may need to reassess their valuations, and a lack of established reimbursement pathways remains a challenge. However, digital health-savvy investors may provide valuable connections. Despite the digital-first focus, the human touch remains crucial in healthcare.
The digital health market, once characterized by record-high deals and funding in 2021, now demands a recalibration of strategies from its participants as it undergoes significant changes.
The surge in demand, funding, and innovation in digital healthcare during the COVID-19 pandemic reached unprecedented heights. However, as the pandemic continued, so did the transformation of the digital health sector, and not all players emerged unscathed. Some faced insurmountable challenges, leading to bankruptcy.
The digital health arena is now a complex tapestry of success stories and failures, highlighting the growing obstacles that digital health companies confront. A central challenge is the dwindling investment in digital health products and services. According to data from Rock Health, after the 2020 boom in digital healthcare demand, venture capital funding soared to a decade-high of $29.1 billion in 2021.
However, funding nosedived to $15.3 billion in 2022 and plummeted further to $6.1 billion in the first half of 2023, drastically altering the market landscape.
In today’s digital healthcare landscape, establishing a presence is arduous, and maintaining the momentum of previously successful offerings is even more challenging. Industry experts interviewed by mHealthIntelligence agree that digital health companies must adapt and pivot to survive and thrive.
How Did We Reach This Point?
Following the meteoric rise in demand for digital healthcare solutions, developers and vendors found themselves in a market brimming with opportunities to introduce and expand their innovations.
Adriana Krasniansky, Head of Research at Rock Health, noted, “Startups were able to secure investments at very high valuations, and it was a favorable environment for founders. They didn’t struggle to find investors from various industries, including those not well-versed in digital health or healthcare. It was an exhilarating time in digital health, marked by a crowded and diverse landscape.”
However, much has changed since the heyday of digital health deals. Krasniansky explained that in 2023, a smaller group of experienced investors is steering the digital health landscape. These investors possess a deep understanding of the market and can distinguish valuable investments from the noise.
Larry Cohen, CEO of Health2047, an innovation firm backed by the American Medical Association, emphasized that investors now seek demonstrated value as the market matures. He highlighted the importance of proving that an innovation genuinely solves healthcare problems and resonates with customers before seeking investment.
In essence, investors are scrutinizing the long-term value of technologies introduced during the pandemic, taking into account patients’ enduring preference for in-person care.
According to Dr. Erin Ney, an expert partner at Bain & Company’s healthcare practice, the market remains saturated as patient preferences evolve. This places additional pressure on digital health companies to demonstrate the impact of their offerings on outcomes and cost.
“All buyers want to see proven results and a return on investment,” Ney emphasized. “Many companies simply haven’t achieved that yet.”
What Does It Mean for Digital Health Stakeholders?
The evolving digital healthcare landscape necessitates that companies adjust their strategic plans to thrive.
As digital health players contemplate scaling their operations, they must consider the unique patient needs that drive sustained engagement with technology. Ney from Bain noted the intricacy of patient engagement, underscoring the importance of assessing the target population and devising focused engagement strategies.
She cautioned against adopting a one-size-fits-all approach in healthcare, stressing the significance of understanding local market dynamics and variations in payer, provider, and employer dynamics when scaling.
Cohen from Health2047 observed that scaling too quickly has led to challenges in the digital healthcare sector. He cited the example of Pear Therapeutics, a digital therapeutics provider that went bankrupt after expanding too rapidly, underestimating the complexities of gaining acceptance in the healthcare ecosystem.
Similarly, Babylon Health, a digital health startup, faced bankruptcy due to overly aggressive market expansion. Cohen explained that both companies may have oversimplified the healthcare system, failing to account for the intricacies and nuances of healthcare data and stakeholder dynamics.
As digital health companies scale, Cohen stressed the importance of addressing user concerns among all market participants, including patients, providers, and other stakeholders.
Considering the potential for missteps and the changing market dynamics, Krasniansky of Rock Health suggested that some companies may need to reevaluate their inflated valuations. The extraordinary funding and large initial public offerings during the early pandemic years raised expectations for the trajectory of publicly traded digital health companies. Privately held firms also face high expectations based on their funding valuations.
“Some companies that secured funding in 2021 may now have valuations that seem unsustainable in this more cautious market,” she noted. “This makes it challenging for them to secure subsequent rounds of funding without having difficult conversations about valuation adjustments.”
Another hurdle for digital health companies is achieving commercial traction, as there is no well-established reimbursement pathway. Krasniansky pointed out that this particularly affects companies like Pear Therapeutics, which struggle to find commercial pathways for their innovative products despite having FDA approval.
However, the investor-led market could offer a silver lining. With more digital health-savvy investors, companies may access experienced individuals who can foster connections within and outside the market.
Regardless of the strategic adjustments digital health players contemplate, their primary focus should remain on those seeking healthcare. Ney from Bain stressed that even in the “digital-first” era, the human touch remains essential in healthcare. Eliminating human connection from the patient care journey could undermine digital health efforts.
“In healthcare, there are numerous complex and emotional moments when a human-first, digitally supported approach is necessary,” Ney emphasized. “As a former practicing physician, I believe this aspect is crucial and easy to overlook amidst the excitement about the potential of digital technology.”