Is the health IT market on the brink of a bubble?

Two health IT companies that did particularly well in their initial public offerings (IPO)--IMS Health, seeking to raise $1.4 billion and Castlight Health, valued at more than $3 billion--highlight a booming sector. But could it all burst? Paul Teitelbaum, managing director and medical device/healthcare IT mergers & acquisitions expert at Mesirow Financial, a Chicago-based investment banking firm, said healthcare reform is driving the high IPOs and HIT companies have strong potential for growth, Healthcare Informatics reported.

"If you look at the 2003-2007 timeframe, which was also a time where you saw increases in VC investment in lots of things. Then the market crashed in 2008 and it dried up over night," Teitelbaum said. "It may start to cool off and if there is a bubble that's forming now and it bursts at some point later in time, who knows when, that would certainly curtail the VC activity."

Despite the seemingly boundless opportunity for health IT, a bubble similar to the tech boom of the 1990s is forming, investor and entrepreneur Anne DeGheest warned in an interview with the Wall Street Journal. With "feverish activity and high valuations comes the danger of a bubble," DeGheest said. Now, a number of health entrepreneurs without solid business plans are trying to raise money from investors. A lot of money is going into these HIT companies from Series A and angel investors, DeGheest said. "When it comes time for these companies to raise a larger, Series B round, they are going to have to answer a lot of tough questions about their business plans. Many will not have answers to those questions, and some of these companies are going to fail."

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