Downturn in digital health funding presses tech founders to innovate on care delivery

BY AMANDA D’AMBROSIO

Amid a slowdown in digital health investments that set the tone for 2022, a potential recession, dwindling initial public offerings and, now, the banking crisis have put additional pressures on an already-strained industry.

After a booming year for health tech in 2021, funding declined last year by around 30%, according to a recent report from Deloitte. Digital health companies raised $39.3 billion in 2021, partly because of the increased interest in telehealth during the pandemic and the ne- year, analysts say.

“The economy is rapidly sinking into a recession,” Barbara Ryan, senior adviser in life sciences at Ernst & Young. What this means is, money will be scarce, she said, and investors are going to be a lot more selective.

The instability of the economy has put tech founders up to the challenge of setting their companies apart—namely, by providing value to patients through integrated health platforms and holistic care models, experts say.

Investors have already shown an interest in funding late-stage companies, signaling that they want to invest in businesses with proven value propositions. Last year 75% of investments were in latestage companies, the Deloitte report found.

2022 Health Tech Funding And Deals

While deals and funding dropped from last year, there is still an upward trend one place may move the needle for this payment model. cessity to adopt virtual care models.

Technology platforms that can integrate more patient data into electronic health records will allow providers to analyze medical services or therapies that contribute to health outcomes, Ryan explained. “Theoretically, we’re going to be able to evaluate what treatment algorithms actually were associated with best outcomes at the best price,” she said.

In the immediate future, Gotsch said, she expects to see continued interest in companies that provide holistic health care. She noted that KindBody, a women’s health tech company that offers fertility benefits to employers and provides gynecological care at its clinics, provides integrated care in a specific health area.

Last year, however, funding for digital health companies reached $27.5 billion, according to Deloitte’s data. The number of deals dropped from more than 1,100 in 2021 to 926.

The declines in health tech funding in 2022 have returned the industry to normal levels following an unprecedented skyrocket in capital. But macroeconomic factors such as inflation, rising interest rates and the banking crisis have created a volatile landscape for emerging digital health companies that will likely continue into this

As the digital health industry has become more crowded, investors have turned their focus to late-stage companies, said Maria Gotsch, president and chief executive officer of the Partnership Fund for New York City.

Six or seven years ago, there was an explosion of early-stage health tech startups. But now, the market has whittled down to companies that can successfully integrate their technology with health systems and electronic health records, as well as provide a platform that works for patients, Gotsch explained.

“There were a lot of horses in the race,” Gotsch said. “Now we are figuring out who the leaders are.”

Mixed signals

While funding for digital health companies was down in 2022, it doesn’t necessarily spell doom for the industry. The Deloitte report noted that investments in 2022 were still 30% higher than those in 2020, and more than double the investments in 2019.

In addition, the median health tech deal valuation increased to $57 million in 2022 from $33.9 million in 2021.

The uptick in funding over time outside of 2021’s tech boom shows that there is still a lot of growth opportunity for the industry. As more health care providers and payers merge, it suggests that health care needs to become a lot more efficient, Ryan said. Companies such as CVS Health or Amazon, for example, have displayed acquisition models of providers and insurers.

More companies are attempting to implement value-based care— tying health care payments to improving patient outcomes. While value-based care has been on the horizon for years, technology that has the ability to put patient data in

Opportunities for growth exist, but it will still be a tough environment for health tech companies in the coming year. While companies that are generating technology platforms that provide value to patients and health systems will succeed, some businesses will still struggle for capital, pushing them to restructure or merge, Ryan said.

“There’s clearly been a reduction in new capital formation,” said Peter Micca, a life sciences and health care partner at Deloitte.

But even with economic challenges, there’s a need for digital tools and innovations in the health sector, Micca said, emphasizing that “the demand for innovation still far exceeds the supply.” ■