Digital health, health IT funding slumped in Q2, but some bright spots remain, PitchBook finds

Digital health and health IT funding continued to decline in the second quarter of 2023, according to two new reports from PitchBook.

Venture capital deals in health IT  dropped quarter over quarter but are beginning to recover from their low in 2022, per one of the reports. Digital health VC deal flow hit a new low, though several strong segments persisted, according to the other. The numbers show that private equity activity remains muted despite investor interest, according to PitchBook's analysis.


Health IT starts to recover amid health system interest
 

PE activity declined in the second quarter amid high interest rates, limited debt financing availability and ongoing buyer-seller valuation gaps, per the Q2 2023 Healthcare IT Report. PE investors are still interested in the space, but it has yet to translate into deal flow. PitchBook anticipates PE deal activity to begin to accelerate in the second half of 2024.

VC fundraising for health IT also dropped quarter over quarter to just shy of $1 billion but is recovering from its low in the fourth quarter of 2022. More VC dollars are flowing to health IT—defined by PitchBook as enterprise software used by payers and providers—as health systems regain their footing following COVID.

Staff turnover and inflation have cooled, and many health systems have implemented better workforce management practices, the report said, leading organizations to turn toward improving efficiency through tech—in particular, generative AI.

Clinical documentation is seeing a lot of competition from generative AI companies. Going forward, price, accuracy, privacy and integration capabilities will all be key ways to differentiate in an increasingly saturated market. Another way will be to build clinical documentation products for specific specialties.

Despite the buzz, truly transformational applications of generative AI will come only after the industry identifies widely trusted, high-performing language learning models and learns to incorporate transparency and human checks into these tech-driven processes.

Another emerging opportunity for health IT is imaging workflows. Enterprise imaging is a vast category that can serve many types of providers, from cardiologists to dermatologists to neurologists and more.

Radiology and cardiology are the top markets for imaging by total revenue, per PitchBook, and it remains a category ripe for disruption as up to 30% of organizations are considering switching vendors. Companies will either consolidate or grow into multifunctional platforms, the report predicted.

The Centers for Medicare & Medicaid Services (CMS) has in recent years refined reimbursement for chronic care management, remote patient monitoring (RPM) and remote therapeutic monitoring by introducing new codes and expanding the range of practitioners allowed to offer the services. This, plus improvements in provider workflows and the shift toward value, has led to growing provider and investor interest in RPM, PitchBook analysts wrote. Programs still need to demonstrably improve patient outcomes to maintain payer reimbursement, however.

CMS has also expressed interest in making a national provider directory, likely to fuel a commoditization of basic provider directories, analysts noted. Vendors will increasingly compete on additional analytical and data layers to offer.

Definitive Healthcare, the leader in healthcare commercial intelligence, announced a $52 million acquisition of provider commercial analytics firm Populi in August, positioning itself to compete in the space, according to the report. Trilliant also recently announced a free provider directory API, creating a marketing channel for its premium claims-enhanced directory and analytics. 

The most popular VC and PE exit type for startups thus far this year has been acquisitions, followed by buyouts. Public listings have been virtually nonexistent. Most deals have involved late-stage companies as well as growth investments.


Digital health funding slumps, but several promising areas remain
 

Digital health deal activity has settled into a multiyear low, and PitchBook does not expect a material uptick in funding for at least the next several quarters, the company wrote in its accompanying Q2 2023 Digital Health Report. Though the number of VC deals in the second quarter, 73, was equal to the volume in the previous quarter, total deal value fell from $1.2 billion to under $1 billion.

In digital health, defined by PitchBook as consumer-focused health tools and virtual care delivery, the two categories receiving the most funding this year are teletherapy and behavioral health as well as care coordination and navigation. The former led the way with headline deals this year. The largest deal in the quarter was a $115 million early-stage round for Author Health, a Medicare Advantage mental health provider. 

There has been a renewed investor interest driven by a desire to link accessible primary care to chronic condition management, PitchBook analysts noted. Utilization of behavioral health services is also on the rise. The high fragmentation of providers should accelerate market demand for startups offering consolidated mental health platforms, the report noted. 

It's likely there will be more M&A in the digital therapeutics space going forward, in part as a way to resolve point-solution fatigue, according to the report authors. The Access to Prescription Digital Therapeutic Act may significantly expand Medicare and Medicaid coverage of this space, if passed, but companies will still need to convince providers to prescribe their digital treatments. In a sign of increasing consolidation, Big Health announced its acquisition of Limbix in July. 

There were no notable exits in the second quarter and the IPO market remains frozen, per the report. There is also a reduced appetite for late-stage deals, given the tough outlook for exits and reduced interest in funding unprofitable startups. What's more, high iterest rates have meant few mergers and acquisitions.