Next Wave Forecast: Digital Health Transformation Poised to Return to Core Clinical Technologies
Digital health has witnessed several waves of investment trends: wearable devices in 2013, medical big data in 2014, virtual services in 2015, and efforts by investors to disrupt the traditional healthcare payment landscape in 2016. By 2017, investment is expected to return to the core of medical practice: technology. Technology can enable providers and biopharmaceutical companies to expand their business scope, but it also entails significant risks.
In 2016, the venture capital market primarily invested in digital health startups that were disrupting traditional industries. Over the past 12 months, we have seen a significant number of startups secure funding. For instance, the newcomer Bright Health raised $80 million in April; Clover Health secured $165 million for its new Medicare Advantage plan in May; and Collective Health attracted an additional $80 million in late 2015 for its TPA/ASO replacement technology. Hixme, a corporate services company that encourages employers to distribute the funds they would otherwise spend on employee health insurance premiums directly to employees, enabling them to choose health insurance plans better suited to their individual needs, along with the startup Oscar, are each set to raise hundreds of millions of dollars in Series B and C financing rounds.
Why does this occur? Because taxpayers have long been an easy target. As medical reimbursement systems achieve broad coverage, related operators emerge, establishing vast supplier networks and leveraging economies of scale through volume and leasing to gain access to employer self-insured networks. Consequently, labor contracts become less stable.
Suppliers are scaling up at risk with the assistance of Evolent Health. Employers are building their own narrow networks, with the help of companies like Imagine Health, to control the volume directed toward high-quality, low-cost centers. This reduces insurers’ profits by lowering the medical loss ratio (MLR), which dictates the proportion of premium revenue that insurers must spend on clinical services.
In response, major insurers have sought to counter employers’ actions by merging or expanding their scale. However, relying on size for survival has its own limitations, which led the U.S. Department of Justice to intervene on antitrust grounds in Anthem’s $54 billion acquisition of Cigna and Aetna’s $37 billion acquisition of Humana.
Our view is that enterprises operating at scale exhibit labor- and capital-intensive characteristics. In the United States, establishing operational linkages with 5,600 hospitals and 800,000 physicians is considerably complex, involving tasks such as issuing membership cards, verifying eligibility, processing claims, and attracting patients to seek care when they call in. Under these circumstances, it is difficult for investors to achieve their expected rates of return after billions of dollars in Series B and C financing rounds.
We have witnessed such patterns: In 2013, investors poured tens of millions of dollars into Fitbit and Jawbone to develop wearable devices. In 2014, capital flowed into vertical applications leveraging healthcare big data, such as “price transparency,” which directly led to Castlight’s controversial IPO. In 2015, investments were overwhelmingly focused on telemedicine—Doctor on Demand raised $63 million in its IPO, MDLive raised $50 million, and Teladoc raised $157 million. These financing events were all announced during an eight-week window last summer. Nevertheless, investors in these deals still failed to achieve the expected returns upon exit.
We believe that in 2017, the market will reward innovative startups whose work enables suppliers and pharmaceutical companies to implement personalized medicine solutions and engage in outcome-based economic activities.
Several factors have contributed to this outcome. In the vendor landscape, adopting esoteric terminology such as “Meaningful Use 1” and “Meaningful Use 2” has strongly supported their own growth. Vendors now have greater bandwidth to advance the integration of electronic medical records (EMR) into expanding care technologies. Meanwhile, enhancing advantages in genomics and complex specialty pharmaceuticals is creating new avenues for pharmaceutical companies to apply personalized medicine to patients, which forms the cornerstone of outcomes-based pharmaceutical reimbursement.
Since the second half of 2016, venture capital in the digital health sectorInvestment, will turn to startups backed by vendors and pharmaceutical companies. Silicon Valley Bank predicts that healthcare investment in 2016 will range from $9 billion to $9.5 billion. MobiHealthNews recently reported that digital health companies raised $150 million in July 2016. Last month, Azalea Health, a company selling cycle management software and mobile tools to vendors, secured $10.5 million in Series B financing. Akili Interactive raised $11.9 million in Series B financing to develop clinically validated video games for cognitive intervention. Caremerge, a company selling a care coordination platform for assisted living facilities, obtained $14 million in Series C financing. Docent Health, a company building patient management software for health systems, received $17 million in Series A financing.
Medical innovation is the solution to curbing the growth of healthcare costs. We believe that, as a component of the global economy, the healthcare industry in the United States is not merely a sector but a $3 trillion market accounting for nearly 20% of GDP. For both developed and developing countries, achieving an affordable and efficient healthcare market presents a significant challenge. We aim to secure high-quality, effective medical services by funding the next wave of transformative digital health companies.