Digital health, health IT funding slumped in Q2, but some bright spots remain, Pitchbook finds
PitchBook Reports Unveil a Mixed Landscape for Health Technology Investments
The second quarter of 2023 witnessed a continued decline in funding for digital health and health IT, according to two new reports from PitchBook. Venture capital deals in health IT experienced a drop quarter over quarter but show signs of recovery from their 2022 lows. Despite investor interest, private equity remains subdued.
The healthcare IT sector is beginning to recover, thanks in part to renewed interest from health systems. Private equity activity declined in Q2 2023 due to high interest rates, limited debt financing availability, and ongoing buyer-seller valuation gaps. However, venture capital fundraising for health IT is recovering, nearing $1 billion. This recovery is attributed to health systems regaining their footing post-COVID and implementing better workforce management practices.
Generative AI is emerging as a competitive field in clinical documentation. The industry focuses on price, accuracy, privacy, and integration capabilities to differentiate in an increasingly saturated market. The transformational applications of generative AI are expected to materialise once the industry identifies high-performing language learning models and incorporates transparency and human checks.
Another area of opportunity is imaging workflows, serving a variety of providers, from cardiologists to neurologists. Radiology and cardiology are the top markets for imaging by total revenue. Up to 30% of organisations are considering switching vendors, indicating a market ripe for disruption.
The Centers for Medicare & Medicaid Services (CMS) have refined reimbursement for chronic care management, remote patient monitoring (RPM), and remote therapeutic monitoring. This has led to growing provider and investor interest in RPM, although programs still need to improve patient outcomes to maintain payer reimbursement. CMS is also interested in creating a national provider directory, which will likely fuel competition among vendors on additional analytical and data layers.
Definitive Healthcare acquired provider commercial analytics firm Populi for $52 million, positioning itself to compete in the space. Trilliant also announced a free provider directory API, creating a marketing channel for its premium claims-enhanced directory and analytics.
In terms of exits, acquisition has been the most popular venture capital and private equity exit type for startups this year, followed by buyout. Public listings have been virtually nonexistent. Most deals have involved late-stage companies as well as growth investments.
In the digital health sector, defined by PitchBook as consumer-focused health tools and virtual care delivery, teletherapy and behavioural health, care coordination and navigation, have received the most funding this year. The largest deal in the quarter was a $115 million early-stage round for Author Health, a Medicare Advantage mental health provider.
A renewed investor interest is driven by a desire to link accessible primary care to chronic condition management. The utilisation of behavioural health services is also on the rise. The high fragmentation of providers should accelerate market demand for startups offering consolidated mental health platforms.
PitchBook expects more mergers and acquisitions in the digital therapeutics space going forward. High interest rates have meant few mergers and acquisitions, and there is a reduced appetite for late-stage deals, given the challenging outlook for exits and reduced interest in funding unprofitable startups.