Record-setting digital health funding in 2017 shows D.C. turmoil isn’t driving away investors

For an industry traditionally scrutinized for low executive pay, one has to wonder what our executives are actually making.
Analysts expect the digital health industry to maintain its funding momentum into the second half of 2017.
The first half of 2017 saw a record number of deals and an unprecedented level of funding within the digital health sector. Analysts predicted the industry would build on that momentum despite the ongoing healthcare debate consuming the nation’s capital.

Thanks to a “record-shattering” second quarter, investors sunk $3.5 billion into U.S. digital health companies during the first half of 2017, outpacing every previous year, according to a midyear report by Rock Health. The 188 deals inked during the first two quarters were on pace to surpass last year’s total of 304.

Digital health investment saw steady but predictable growth during the first quarter of 2017, setting up nearly $2.5 billion in funding during the second quarter.

RELATED: Despite regulatory uncertainty, digital health investment remains steady

The analysis by Rock Health, a venture capital firm that focuses solely on digital health, aligns with trends reported last week by StartUp Health, which reported $6.5 billion in digital health funding across the globe during the first half of 2017. Unlike StartUp Health, which looks at global digital health funding for a broad range of companies, Rock Health limits its analysis to U.S.-based companies covering deals that exceed $2 million. It excludes healthcare services companies like Oscar and diagnostic companies like Theranos.

The spike in funding was slightly surprising to analysts given the black cloud of regulatory uncertainty hanging over the healthcare industry. But Rock Health Research Director Megan Zweig pointed out that venture capital firms are working with funds they’ve already raised, which means they’re more likely to stay the course when it comes to digital health investments.

“We expect 2017 to be a banner year,” she told FierceHealthcare, adding that the amount of funding and the number of deals is so far ahead of the last several years, “even if there was a return to the level of growth we’ve seen in past years, it would still be a record-breaking year.”

There are several reasons the future looks bright for the digital health industry, even as Congress continues to grapple with the nuances of health insurance reform. One is the ongoing push toward value-based payment models, which have received bipartisan support. Zweig said that transition is forcing providers to find ways to deliver high-quality care at a lower cost, which is driving innovation.

The second is an injection of consumerism in healthcare. Whether GOP senators are able to pass a reform bill or not, deductibles are trending upward, which is forcing consumers to closely monitor how they spend their healthcare dollars. That's giving consumer-directed digital health offerings more of a foothold in the market. 

“It’s just a fact of life that employers are figuring out any way to contain healthcare cost growth,” Zweig said. “Part of that is shifting costs to employees.”

RELATED: FDA’s Bakul Patel envisions a new regulatory approach to digital health

While regulatory uncertainty generally doesn't help investment in the long term, venture capitalists are getting a boost from one agency. The FDA recently announced a reformed approach to digital health, one that was applauded by leaders throughout the industry. That gives more credence to the theory that digital health investment will continue to grow during the second half of the year, according to Bill Evans, managing director of Rock Health.

“We look at that as a really nice tailwind,” he said.