Top 5 High-Growth Internet Healthcare Investment Sectors in 2015 File IPO Prospectus

VCBeat previously compiled Rock Health’s summary report on digital health investments in 2014 (for details, please clickHere). According to this report, Malay Gandhi, General Manager of Rock Health, recently predicted the five areas of digital health investment most likely to grow in 2015. A detailed analysis is provided below:

Will the Bubble in Internet Healthcare Investment Burst? Malay Gandhi Doesn’t Think So.

We cannot yet predict what the coming year will bring, but we do know that investment in digital health experienced explosive growth in 2014. According to a recent annual report from Rock Health, a prominent U.S.-based digital health incubator, total global investment in digital health exceeded $4 billion last year, and this figure is projected to continue rising in 2015.

“Digital health is not a bubble,” said Malay Gandhi, General Manager of Rock Health, who has long worked with the firm’s portfolio startups. “A wide range of stakeholders—including patients, physicians, and payers—are dissatisfied with the current state of healthcare. Over the past two decades, advanced technologies have not fully penetrated the healthcare industry, but that time has now come. We are seeing a wave of digital health companies delivering truly valuable services to customers, with many high-potential firms entering the space.”

It is hard to ignore the “boom” in internet healthcare, especially since capital market investments in a single quarter last year exceeded $10 billion for the first time since the dawn of the internet era. However, Gandhi points out that even amid the internet wave, with quarterly investments surpassing $30 billion and the overall market appearing to develop rapidly, the capital market as a whole remains relatively conservative.

As Gandhi noted, it is precisely the inherent dissatisfaction with the healthcare industry that has fueled the growth in digital health investments. In 2014, 258 digital health companies secured investments exceeding $2 million. According to a report by Rock Health, the six categories that attracted the most investment in the digital health sector last year—accounting for 44% of the total digital health investment—were: big data analytics ($393 million), consumer engagement ($323 million), digital medical devices ($312 million), telemedicine ($285 million), personalized medicine ($268 million), and health management ($225 million).



What will the growth trend look like in 2015?

Here are the five areas that Malay Gandhi believes are most likely to see rapid growth in internet healthcare investment:

1. Telemedicine

Telemedicine was the fastest-growing segment of internet healthcare last year, with total investment reaching $300 million, a year-on-year increase of 315%. The two core issues determining whether telemedicine can sustain its growth are access and reimbursement. A report from the American Telemedicine Association (ATA) shows that 22 states in North America have received an overall “A” rating for medical quality licensing standards. “We are seeing positive trends,” said Gandhi.

Additional positive signals include the American Telemedicine Association’s (ATA) development of a certification program for vendors providing patient consultation services, and the Centers for Medicare & Medicaid Services’ (CMS) confirmation that seven new telehealth services will be eligible for reimbursement starting this year. Of course, challenges remain in market access that could hinder the growth of telehealth investment. For instance, although more than 40 related bills are currently under discussion in Congress, there is still no national standard for telehealth. Gandhi stated, “While we cannot expect legislation to be enacted in the short term, at least the trend is now evident.”
Reimbursement growth has been relatively slow, but it is only a matter of time before commercial insurers accept and adopt services from telemedicine providers. Gandhi also noted that while this network may narrow and align with specific telemedicine providers, it will certainly cover telemedicine. An intriguing scenario to watch is what happens when consumers prefer using their own chosen telemedicine services over those recommended by their insurers.

2. Payer Management & Hospital Management

Extremely high operational pressure and razor-thin operating profit margins will continue to drive growth in payer management investments in 2015. With interest rates constrained at historic lows and billions of dollars in claims inefficiently shuffled back and forth, reducing administrative costs has become critical for all payers. “Looking at the companies in our portfolio today, most payers need to cut administrative costs by approximately 15%–50% to maintain robust profitability amid the low-interest-rate environment,” said Gandhi. “This creates significant pressure, as payers can no longer pass administrative costs on to consumers.”

Investment in hospital management will also grow for similar reasons, as many healthcare providers are willing to use short-term management gains for long-term fund investments. However, Gandhi stated that he does not anticipate significant growth in the area of electronic health records (EHRs).

He stated, “I do not believe that investment in electronic health records (EHRs) will increase. However, I anticipate a substantial rise in investment in clinical workflows and many areas related to electronic health records (EHRs).”

While the continuous influx of data from electronic health records (EHRs) will drive growth in big data analytics investments, Gandhi believes that the EHR market itself is already mature. In other words, many alternatives to EHRs are expected to emerge. According to a survey by the RAND Corporation, 61% of physicians believe that EHRs have improved the quality of medical care, yet 43% feel that EHRs have reduced their work efficiency, and only 35% report that EHRs have increased their job satisfaction.

Gandhi stated, “I believe we will continue to see sustained growth in investments surrounding electronic health records (EHRs). Despite widespread dissatisfaction with EHRs, I remain uncertain whether investors will fund alternative solutions. In particular, if they continue to invest in addressing the current shortcomings of EHRs, one should not expect a surge in investment for replacements; however, investment in the EHR ecosystem will undoubtedly continue to grow.”

3. Healthcare Consumer Engagement

It is important to clarify that so-called consumer engagement in healthcare does not simply mean providing you with an app through which your doctor reminds you to participate in managing your health. Rather, it aims to empower consumers to play a more active role in the consumption and selection of healthcare services and health insurance products. Investment in this field is poised for substantial growth in the future, particularly as consumer-directed health plans, including High-Deductible Health Plans (HDHPs), continue to gain traction.

According to a survey by the National Business Group on Health, large employers’ healthcare costs are projected to rise by 6.5% in 2015. Consequently, many companies have introduced consumer-directed health plans in an effort to curb healthcare spending. The survey found that 81% of employers plan to offer at least one consumer-directed health plan in 2015, up from 72% in 2014. Approximately one-third of employers (32%) indicated that they will offer only consumer-directed health plans in 2015.

These changes will drive growth in investment within the consumer engagement sector. Currently, more than 30%–40% of healthcare expenditures are paid out-of-pocket by consumers, a figure that includes mandatory insurance premiums.

Gandhi stated, “Consumers are compelled to enter the market, and they will inevitably come to realize how poor the experience is. Over the past five years, they have effortlessly purchased their preferred items online. For most people, buying medical insurance through official healthcare institutions has been the worst consumer experience they have ever encountered. Consumer dissatisfaction will also drive increased investment in healthcare services and the consumer journey, which is why this category holds immense investment potential.”

4. Digital Therapeutics

Digital therapeutics experienced explosive growth in 2014, and this upward trend is set to expand further in 2015. Many companies have emerged as standouts in this category—including Omada, Propeller Health, Lantern, Wellframe, and Wildflower Health—demonstrating that software can effectively deliver clinical outcomes. Many firms in this sector received angel investment two to three years ago and conducted rigorous efficacy studies; their products are now commercialized, establishing a new, viable business model distinct from the traditional pharmaceutical company model.

From mental health services to disease management interventions, digital healthcare can gain sustained traction from population health management and shadow billing reimbursement models.

Gandhi: “Seventy-five percent of healthcare spending is associated with chronic diseases, and 80% of heart disease and diabetes cases are preventable through lifestyle modifications. Therefore, we must recognize the immense market potential of lifestyle behavior management software. From the business models created by these young enterprises, I see many possibilities for the future.”

5. Personal Health Tracking Tools

The media has been abuzz about the strong momentum shown by personal health tracking tools in 2014. However, Gandhi believes that although this field has demonstrated sustained growth potential, the code for how to specifically leverage these opportunities has not yet been fully cracked.

Nevertheless, Gandhi believes that the potential in this field will continue to drive investment growth. Solutions centered on daily mental health activities and sleep are expected to emerge as a promising area for expansion.

Gandhi stated, “We have not yet fully figured out how to expand the potential of these health-tracking apps and related tracking devices, which is precisely why I believe this sector will continue to grow; there remains a substantial amount of unmet demand in this field.”

If Gandhi’s predictions are correct, 2015 will also be a landmark year for internet healthcare. Of course, it is hard to imagine how many innovative attempts and failures will occur in the process of exploring market demand. However, if our expectations are as substantial as these investments, we will see significant returns in 2015. Internet healthcare is becoming the new leader in the venture capital sector and will ring in the new year, quite possibly with the sound of prosperity.

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