An emerging, ground-breaking trend, the convergence of the healthcare system with digital technology, is rippling across healthcare and providing compelling investment opportunities for astute investors, particularly in private markets. Best of all, it’s only in its early stages.
Digital healthcare attracted $4.5 billion in venture capital funding in 2015, more than 4-and-a-half times the investment total of five years ago and a second consecutive annual record, according to investment firm and market watcher Rock Health.
Moreover, digital health is no longer a novelty. Late-stage deals accounted for nearly a quarter of deal volume and M&A activity nearly doubled in volume last year to 187 deals with $6 billion of disclosed activity. Five IPOs also raised $1.4 billion.
This growth produces heightened healthcare efficiency, long overdue in a U.S. healthcare system mired in a malaise of mediocrity despite world-class physicians and technology. According to a report by The Commonwealth Fund, a private U.S. foundation focused on the healthcare system, the quality of U.S. healthcare in 2014 ranked dead last among 12 nations studied, including Australia, Canada, France, Germany and the United Kingdom.
With the advent of digital health, there is realistic hope for substantial improvement. And along the way there will be huge market implications. Goldman Sachs forecasts a near-term digital health market exceeding $32 billion annually. Of this, 45 percent will come from remote patient monitoring (mostly for chronic disease management), 37 percent from telemedicine and 18 percent from behavioral modification.
In addition, Goldman Sachs pegs the total savings opportunity from digital healthcare adoption at more than $300 billion, much of which will again come from better chronic disease management.
Why are these opportunities unfolding? I see six key reasons:
- Higher deductibles. The proportion of the population enrolled in high-deductible health plans, which have higher co-pay and co-insurance, has swelled, by some estimates fivefold in the last decade. This makes people far more attuned to the cost of healthcare and what they get for their money, creating a consumer in healthcare that demands high-value services.
- Digitalization of clinical data. This has been spurred by federal legislation to implement electronic medical records five years ago. It provides digital health entrepreneurs with a deep repository of clinical data to mine for analytical insight and patient health updates, plus a central software platform for caregiver and patient interactions.
- The growth of value-based medicine. This effort, led especially by Medicare, focuses on healthcare outcomes, not procedures, and pressures the U.S. healthcare system to deliver higher-quality care at lower costs. Increasingly, the current fee-for-service model is considered unsustainable because it creates incentives to drive higher volume and pricing without sufficient correlation to quality outcomes.
- Better mobile devices. With the widespread adoption of electronic medical records and smartphones, easy-to-use wearable and implantable devices can now provide actionable data, not just a catalog of data.
- Heightened interest in interaction. Physicians, hospital administrators and patients are inclined to engage with each other more than before, sometimes through smartphone apps provided by doctors and hospitals to track patient health metrics or remote technologies to track data and tweak prescriptions.
- Large companies, including non-healthcare companies, are embracing digital healthcare technology. Companies such as IBM, Oracle and Philips see the growth of digital technology helping their businesses. Innovative startups are pushing the technological envelope even harder. One of them, HealthEdge, provides business-transforming technology to enable health insurers to innovate and reduce costs through an integrated, automated and fully digital financial, administrative and clinical platform.
Another young company, HealthMine, is developing digital engagement software so consumers can begin to proactively manage their health. The company’s technology platform integrates with health insurance, or employer-sponsored plans.
Digital healthcare is becoming a reality in a healthcare system previously resistant to change. It’s beginning to revolutionize healthcare by making prevention, diagnosis and treatment widely accessible at a fraction of the cost. The changes are only in their first couple of innings and will take years to spread widely. But they are inevitable, and our children and grandchildren will benefit their entire lives.
Steve Krupa is the CEO of Psilos Group, a New York-based digital health venture capital firm. Psilos is an investor in HealthEdge and HealthMine.
Photo illustration of doctor working on virtual interface from Shutterstock.
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