It was the best of times; it was the worst of times. That Dickensian construct is a perfect one for thinking about digital health before and after the advent of the coronavirus.
As late as March, the runaway train that has been investment in digital health had been running along at Bullet Train speed. 2019 B.C. (Before Coronavirus) saw over $14 billion in digital health investment, a downturn, actually from 2018’s $17 billion showing. By Q1 2020, the train was back to hyper-speed; over $3.1 billion was invested in digital health deals, more than 1.5x any previous Q1. It was estimated by Rock Health and others that the sector was on track to close in on $20 billion of new investment.
Indeed, while the virus began to make its way around the world during Q1, over 142 digital health deals were done in 19 countries, according to Mercom Capital Group. Tech Crunch reported that three areas dominated all of venture capital in Q1: AI, Fintech and Digital Health. Average deal sizes were up to $29 million. Best of times to be sure, especially if you were the entrepreneur bringing these deals to the table and garnering the type of valuations and check sizes that we have become almost used to seeing. $100mm pre-money for an idea you just thought of while on your Peloton? Sure, why not? Show me a paid pilot and I’ll double it!
Interestingly, though, the pre-COVID19 era has also been the worst of times for digital health in many ways. There have been unbelievable amounts of money poured into the space, and we have seen little in the way of value creation to match. Yes, there are some good companies and even some that border on profitable (!), but there have not been billions in revenues to show for all the investment capital. Rather, digital health has been struggling to find its groove from an adoption perspective ever since it started to spread (under that moniker anyway) in 2010. Unlike the virus that has catalyzed a digital health movement, the products themselves have spread more like molasses.
Digital health companies have only recently begun to realize the importance of things like clinical and financial evidence of return-on-investment for the purchaser. And even where that has been well-demonstrated, digital health has faced a mountain of other challenges that have made adoption seem a lot more like Thomas the Tank Engine than the Shanghai Maglev. Who pays and with what codes? How do companies work with or around the FDA? How can security and privacy be ensured in a world where data is (cough, cough) the new oil?
And most of all, how in the world do companies get their solutions into the hands of patients? It’s not as if there have been clear paths to enable providers to prescribe products to patients or to guide them on how to download the app or reboot when the app doesn’t load. There is no “geek squad” for digital health. There is mostly the multiplicity of products and a plethora of patients in need and a large void in between. So, while the pre-COVID world has been the best of times for raising money, it has been the worst of times for making it, in many ways. Yes, yes, there are exceptions, but for every exception, allow me to show you 500 companies that may never learn to spell “EBITDA”.
And then came the coronavirus and social distancing and contract tracing and a whole bunch of other gerunds we never heard of before. In response, virtually every single provider organization came to a standstill, except with respect to the virus and its victims. Even more notably, 63% of all funded digital health companies in Q1 were focused on selling solutions to healthcare provider organizations (Source: Mercom Capital). So, what would that all mean in 2020 AD (After the Disease).
Life is so interesting, isn’t it? For 10+ years digital health companies have been begging provider organizations (and also payers) to adopt their products and it took a sickly bat to make it happen. We haven’t yet seen a downturn in investment dollars pouring into digital health in Q2 – it’s too early to tell—but we have seen a massive uptick in digital health usage that dwarfs everything that has come before it. And we did get a little big of foreshadowing that this might come as we saw investments in telemedicine go from $220 million in Q1 2019 (and number 3 on the list of investor priorities) to number 1 with a bullet garnering over $788 million in capital (source: Mercom Capital). Also moving up the charts is clinical decision support, rising from 5th in line to 3rd among digital health categories garnering the most investment dollars in Q1 2020. Interestingly, and not coincidentally either, health investment AND adoption priorities have shifted from products and services that make administrative operations run better to those that make clinical operations run better. And that may be one of the few silver linings we will see out of this whole COVID-19 mess.
It is very likely that venture investments in digital health will drop in Q2 2020, when we finally see the numbers. There is already a trend towards far fewer seed stage deals, which means the pipeline of A and B deals will not be as rich. Many VCs are focused right now on one of two things: 1) how do I support my existing portfolio; and 2) where in the hell can I buy toilet paper – this is not the investment strategy I had in mind!
The IPO market is pretty much shut down right now and many are anticipating a recession and unemployment rates that look to give the Great Depression a run for its money. If a recession does occur, we will likely see a major drop in valuations and deal sizes. This is the worst of times scenario for entrepreneurs, although some may be glad just to get financings done at all. It will be the best of times for investors who have cash and patience, because they will get better deals at lower prices. We may even see a return to discipline around due diligence – in 2019 you just needed to have good breath to get a term sheet. In the post-COVID world, you will need nice breath and an actual revenue strategy.
On the other hand, this will also be the worst of times for investors who have small funds and are unable to support their existing portfolio or, worse, who will be unable to raise a new fund because their first fund will be crushed by circumstance. We don’t much think of VCs being among the ranks of the unemployed, but, let me just say that after the 2008 financial crisis, there were a lot of fleece vests in secondhand shops. Only the strong will survive, and the strong will be those who can support their investment portfolio through the darkness and come out the other side with asset value. The rest will live through the mayhem of down rounds and restarts and cap table restructuring, the three signs of the apocalypse for most early stage investors.
On the other hand, the time may actually be NOW for digital health, so get ready you best of times fans. If you are one to quote Amara’s Law, this is your moment – the time when the long game pays off. The coronavirus crisis has driven provider, payer and other organizations to rush into the arms of digital health solutions companies to help them through their crisis response; the government has been facilitating every move by relaxing or suspending regulations related to privacy, interoperability, FDA approval, and telemedicine, all of which have contributed to slow growth in the realm of digital health. At the same time, various U.S. and state governmental entities have improved Medicare and Medicaid reimbursement of telemedicine and related technologies and interventions (e.g., digital diagnostics).
The result has been an explosion in all manner of telemedicine, virtual visits, virtual ICU oversight, virtual consults, triage chatbots, wireless diagnostics and more. The crisis has also broken through the age-old stigma against behavioral health treatment, expanding the number and type of digital interventions to address the expansive trauma caused by the coronavirus situation. What’s particularly interesting is this: it’s gone pretty well. Physicians and patients have had a taste of digital health and it’s been pretty darn palatable. And now the genie is out of the bottle. I have a large health system client that kinda knew it had to get into the telemedicine game, but, like many, was not taking the express train to get there. They averaged a nominal number of visits pre-COVID, and are now averaging thousands of visits per week. Several years of thinking about how to do it without too much provider disruption has given way to all in. They are not alone.
From a best of times perspective, all forms of virtual medicine, remote monitoring, home-based care, biometric tracking and prescriptive analytics are hot, hot, hot. And interoperability is the key to using analytics to societal advantage and, ultimately system advantage. Never before have we seen the level of information sharing and mission-driven collaboration in the healthcare field as we are seeing right now. In fact, one of the outcomes of this whole COVID-19 fiasco is that provider organizations are going to become much more effective users of date, not just creators and sellers of data. And that holds great promise for companies, investors and especially patients.
On the worse of times front, though, we are in for some ugly. While the healthcare system has bent itself into knots to respond to COVID-19, patients with other serious and chronic conditions are going untreated and getting sicker. Hospitals have reported a 20%-40% slowdown of hospital visits for heart attacks. Heart attacks. It’s not as if these just go away without consequence. Similar reductions in hospital visits have been reported for stroke, bowel obstruction, appendicitis and numerous other conditions. When these patients re-enter the healthcare system, assuming they are still alive, they will be in worse shape and thus harder to treat than before. The digital health silver lining, I suppose, is that the demand for biometric monitoring and measurement, as well as for clinical decision support in the form of predictive and prescriptive analytics, will be higher than ever. It will be the only way to respond to the flood of need in a scalable way.
We will also likely see massive provider consolidation as a result of what we just experienced here in the U.S. A vast number of small provider practices are likely to have to choose between being acquired or going bankrupt. Anyone who thought we would see a big escalation in value-based pricing models is probably going to be disappointed. We are already hearing that providers want to bail out of accountable care models because they are worried that the financial impact will be the last nail in the coffin (see story about this HERE ).
All of this is worst of times level stuff, as many digital health offerings are sold around the story of reducing utilization, which is exactly what the provider systems just had in abundance. Punchline: they didn’t like it. They are not going to self-inflict a second helping of low utilization in a more fee-for-service oriented world. On the plus side (silver lining time), predictive analytics can also help you find cases that need to be treated and patient populations that are under-served, all of which can help drive up utilization and provider revenue. I think I just heard payers everywhere shudder. They’ll likely shudder again when they see the large number of members who have lost coverage as a result of the crisis.
For investors, the coronavirus crisis has highlighted the importance of certain due diligence items that may have previously been glossed over. Science was already making a comeback, but it will be more and more essential to understand how new digital health offerings demonstrate true clinical and financial value. No one can afford “good enough” sensitivity and specificity during the crisis; we shouldn’t settle for it afterwards either. Operations issues such as supply chain, true scalability and ability to keep fixed costs down should be top of mind when evaluating digital health companies. These things were always important but got a bit lost along the way as the hype drove the train right off the tracks. And if this situation doesn’t point out the importance of getting to profitability, I give up. There is no better way to survive a financial crisis than by relying on your own retained income.
While we have had a pretty significant globally-shared worst of times experience, that experience may well have given digital health the boost it needed to finally drive widespread adoption. Sadly, it took this horrible crisis to achieve what a squillion chief revenue officers could not, but as we look forward, perhaps we can use what we have learned to be prepared for the next time. Digital health is clearly here to stay and the fact that a downturn might create superior investment and M&A/roll-up opportunities in the field – whether that’s the best of times or the worst of times depends on which side of the table you sit.
Harsh Vathsangam says
It’s great that the genie is out of the bottle and in some sense, it’s nice that now the incumbent experience (which is tough to change for bureaucratic systems) is now telehealth. I feel the open question is whether the floodgates are truly open to the extent of changing national coverage and reimbursement policy permanently or if we are just in a now telehealth is pushed a little further into mainstream mode and still have a few more years before it is truly a de facto. The fact that we are in an election year also adds to the uncertainty. One thing’s become obvious in our conversations – wrt digital health vendors, provider organizations aren’t going to move on anything that doesn’t produce revenue and produce revenue fast. Still quite a few divergent scenarios possible.
Lisa Suennen says
Harsh, you are right, some will definitely roll back – but I don’t think all the relaxed telemedicine rules will. I have to believe (hope?) tha the reimbursement sticks at parity with in person visits. Time will tell. I totally agree with your last point! Lisa
Hey Lisa –
In support of your thesis, I think the key as to whether recent changes last will be driven, in addition to increased use of telehealth and digital health more broadly, is that for the first time providers, payers, and CMS will have a critical mass of data to compare costs and outcomes – old model vs digital health based care delivery.
Lisa Suennen says
Good point Jody! L
Bill Esselstein says
Very interesting piece, Lisa. If telemedicine does finally get the boost it needs to be a big piece of healthcare, it could be the life support rural healthcare needs. Wouldn’t that be lovely.
Lisa Suennen says
Bill, I so agree! I was just talking about that yesterday to some hospital people. Let’s hope. Lisa
Dr. Sherif Khattab says
Lisa, the B.C. and A.D. analogy just hits the mark. It also hints that all of us mortals need to believe in something. The number one influencer and threat to US healthcare remains the out-of-control costs. All other innovations are adding efficiency and margins to the existing system of overpriced delivery. That is why the pinball machine keeps pinning in healthcare. As these mortals accept more personal responsibility, we can flatten the curve of cost escalations. Oh. it may even get us to a non-maniacal gradual opening of the US and fear can come down to normal daily levels.
Your analysis is so thorough – and funny! Thank you for sharing.
Lisa Suennen says
Thanks Dee! L
Manasi Ramanna says
Thanks for insightful and entertaining article. Isn’t it interesting that most disruptions in healthcare happen when patients/consumers are in the driver seat pulling through innovation?
Lisa Suennen says
Hi Manasi, I’m not sure this is the moment when patients are in the drivers’ seat. Patients are at the mercy of the system right now more than ever and they are terrified to go for treatment that is non-COVID-related, even when they desperately need it. there has been little done to address the patients who are having heart attacks, strokes and other crises and not reaching into the healthcare system for help or reaching for help that has gone unserved. I think that times of crisis and change drive innovation for sure. Lisa
Jo Masterson says
Wow, this article echos so many of the conversations we are having recently.
1) It is a good time to be a digital health company with some solid ARR.
2) COVID showed the world the value of remote healthcare solutions that can be delivered at scale. No one thinks healthcare will be left unchanged.
3) At the very time when we most need innovative thinking and bold solutions, most startups, healthcare organizations, providers, and even investors all need to prepare our own organizations for the yet unknown consequences of a global pandemic (yikes!)
4) Everyone thinks digital health is here to stay, yet who pays is still messy.
Lastly, it is inspiring to talk with other clinicians, health researchers, and digital health enthusiasts and find them concerned about the same things, yet still also asking “how can we help?” I am pretty impressed by people in general, but especially by those who choose to work, innovate, or invest in healthcare.
Lisa Suennen says
Jo, thanks for the note! Really appreciated the sentiments. L