Digital health has been in the news a lot lately — and this time not because of the latest unicorn or multibillion-dollar sale. What was previously considered an investor’s gold mine has started to see more scrutiny and more cautious investment. Overall investment levels in digital health have begun to cool down — while 2021 saw approximately $30 billion in venture funding for digital health, the first half of 2022 has only seen approximately $10 billion (Rock Health), with the majority of that funding from Q1. This has been driven in large part by general economic uncertainty and compounded by the struggles that the healthcare system has experienced over the past few years, primarily with staffing and financial constraints.  

Given the current state of the economy, there is a higher level of “buyer anxiety” — investors and acquirers are conserving cash and extending diligence processes, especially as they see a mismatch between 2021 valuations and 2022 performance. This anxiety has been heightened by the fact that one of the major digital health customer segments, hospitals and health systems, has been hyper focused on post-pandemic recovery.

Specifically, L.E.K. Consulting’s 2022 hospital survey indicates the highest priorities for hospitals right now are managing staffing shortages and ensuring a high quality of care. In fact, there was a notable shift away from digital health being a top priority since the 2019 survey. While digital health investment is still on hospital executives’ minds, they are more focused on areas like telehealth, which was a direct result of the pandemic, instead of more advanced digital health investments (e.g., clinical decision support). Furthermore, they are asking their digital health partners to prove the ROI of their solutions before committing to investment. The one-two punch of the economy and shifting customer priorities means that digital health companies are facing greater pressure to demonstrate proven value.  

What are digital health companies doing as a result? 

With funding slowing, many digital health companies are starting to shift focus — either from top line growth to profitability or to a new product offering or customer segment, which has resulted in layoffs across the board. Some examples include:  

• Truepill conducted its fourth round of layoffs in September to operate “with a new level of financial discipline and prioritization” (source).  

• Carbon Health laid off 250 employees (8% of its workforce) in an attempt to focus more on profitability and less on growth (source).  

• Olive AI, a healthcare automation startup, laid off 450 employees (35% of its workforce). The company is attempting to narrow its range of services to become more profitable (source). 

And many others are following in their footsteps — Ro, Forward and Calibrate are also either reducing their staff and/or pursuing new strategies.  

Digital health startups are also looking at additional strategies to help combat the decreased funding. Some have sought acquirers as a means to access additional funds. Notably, CVS entered into an  agreement in September to acquire Signify Health for a transaction value of approximately $8 billion. This comes shortly after Signify announced its plans to lay off nearly 500 employees beginning in October as it shifts its strategy to managing total cost of care versus stand-alone episodes (source) and looks to create “a positive impact on its earnings” (source).  

So what does all this mean?  

Some have theorized that to achieve the transformation we are seeking in healthcare — to shift our system from reactive sick care to proactive healthcare — big bets and trial and error are required, which don’t usually result in profitability in the near term. As Dr. Ali Parsa, CEO of Babylon, puts it: “Our health system today is reactive and episodic. We have a ‘sick care’ system and not a ‘healthcare’ system. A true healthcare system collects data all the time, monitors us continuously and rewards us when we’re doing well. This healthcare system will take time and energy to build, but when you build it, it will be like Tesla or Amazon — everybody will want it.”  

The question I asked Dr. Parsa in return was, can our healthcare system support the necessary investment Tesla and Amazon required to succeed? One might theorize that the above news about layoffs and reprioritization suggests the answer is no.  

However, we agreed that apart from consistent investment, Tesla and Amazon fundamentally understood their potential customer base, the specific unmet needs that existed and, importantly, what value they were providing to their customers.  

While we can all agree that the stakeholders and regulations in the healthcare system are different from those in automotives and ecommerce, to similarly succeed in healthcare, a firm understanding of the above strategic questions will allow the transformative winners to win and unfortunately send the rest to the Blockbuster Video graveyard.  

The digital health market has become so popular and crowded that everyone began to believe in the inevitability and speed of change. But true transformational change is quite rare and especially difficult in a complex market like healthcare with its entrenched stakeholders and misaligned incentives. The visionaries who will succeed will be those who can see beyond the constraints of the status quo yet firmly understand the value they are creating. However, creating value doesn’t always immediately result in profitability, and to achieve the transformational change we seek, also being able to explain the path to profitability will be key. 

Hence, despite the recent market volatility, there is still growth and investment in select digital health companies that have proven their value to patients and investors. For example, one company that uses artificial intelligence to remotely monitor patients and predict disease, Biofourmis, increased its valuation to $1.3 billion (source) after its recent series D funding in April and continues to add small investments this year ($20 million from Intel Capital) (source). This investment comes on the heels of Biofourmis’ FDA breakthrough label for digital heart failure treatment assistance, which it received in Q3 last year.  

Similarly, Viz.ai, an AI-powered disease detection and care coordination platform, is on track to become Israel’s newest digital health unicorn, raising $100 million in series D funding at $1.2 billion valuation (source). Viz.ai has developed the first stroke detection and triage AI platform to receive approval from the Centers for Medicare & Medicaid Services for a New Technology Add-On Payment (NTAP) and is a true leader in the stroke care market. Alternatively, some digital health companies have partnered with large MedTechs to broaden their reach, specifically in the hard-to penetrate hospital environment. For example, BioIntelliSense, a leading continuous health monitoring and clinical intelligence company, partnered with Medtronic late this past summer (source) and then purchased AlertWatch, which will “allow the wearable’s data to enhance the monitoring and subsequent treatment of patients in healthcare settings” (source). 

These three examples demonstrate that growth and investment are still aplenty for companies that continue to have a militant focus on the value they are providing as well as proving that value to their customers.  

There is no doubt in our minds that the application of digital technologies is the future in healthcare. But digital health companies must be focused on proving their value, even when not obvious (e.g., an employee satisfaction tool that increases retention and thus increases the number of procedures performed/patients seen) by truly understanding what problems they are solving in order to survive the bumpy days ahead.  

The current uncertainty in digital health is proving to be a critical chapter in the evolution of our healthcare system’s digital journey. However, as Dr. Parsa states, “Out of the ashes, phoenixes will rise.”  

Thank you for reading our thoughts! If you want to discuss further, please reach out to Sheila Shah at s.shah@lek.com.  

Special thanks to Joyce Sun and Max Lounds for their efforts in writing this piece.