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The Rise of Digital Health Venture Capital Firm Companies: What’s Behind It?

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Health care systems around the world are heavily reliant on private markets. Although private insurers, drug and device companies, and provider organizations are known to many, there is little known about the growing presence of digital health venture capital firm companies.

The growth of venture capital and venture-capital financed startup companies warrants the attention of patients and policymakers because medical advancements are no longer exclusively born from providers in the delivery system but more from innovators outside of it.

Although digital health venture capital-backed startups offer opportunities to change the cost and improve the quality of care, often by going against existing modes of care delivery, they present potential risks to patient care and raise important issues for policymakers.

However, there remains a lack of analytic framework for understanding the role of venture capital in the medical field.

History of Digital Health Venture Capital Firms

Venture capital firms finance startups deemed to have the potential to disrupt existing industries. In return for the funding, they gain ownership and some control over strategy and operations. A digital health venture capital firm is one that’s focused on financing healthcare startups.

Several digital health venture capital firms have recently financed hundreds of startups focused on the development of technology-enabled digital health products, such as mobile health applications, wearable health devices, telemedicine, and personalized medicine tools.

The value of digital health investments has increased by 858% between 2010 and 2017, and the number of financing deals in this market went up by 412%; over $41.5 billion has been invested in digital health in the last 10 years.

This growth surpasses the growth of total venture capital funding (166%) and the total number of venture capital deals (50%) in the overall economy, including growth in healthcare spending (34%).

In 2017 alone, venture capital firms were said to have invested over $11.5 billion in digital health, from patient-facing equipment to provider-facing practice management software to payer-facing data testing services.

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There are three important elements that are said to have driven this growth. First, the physicians’ inability to regularly monitor patients and frequent challenges concerning patient adherence resulted in the need for digital technologies as a tool for care delivery.

Second, the rising migration of medical care out of the hospital and deficiency of care among specialties led to the increased demand for new means of communication between patient-to-provider and provider-to-provider.

Third, the increase in insurance coverage and the introduction of new payment methods encouraging cost control have aligned incentives for technologies substituting higher-cost services with lower-cost but higher-value services.

Methods for Disruption

There are two factors from which the venture capital movement will be mostly judged: whether it is able to improve patient outcomes and experience and whether it is cost-effective for society. For now, there isn’t a lot of evidence out there concerning the impact of venture capital-backed innovations.

The majority of deals that took place occurred in the past few years, and it takes time for most startup technologies to scale. In addition, they are not implemented with a control group or design that makes evaluation easy.

Conventional provider groups are often too small, hospital operations too strict, and delivery systems too dubious for certain digital health innovations to be utilized and thoroughly tested. Furthermore, information on the impact of the aforementioned technologies on patients and costs may be kept secret due to data privacy.

But some early small-scale arbitrarily controlled studies have shown evidence on the potential health benefits of mobile health applications and wearable biosensors (such as improved glycemic and blood pressure control). Additional evidence may be acquired as more startup products are introduced to the market.

Even with so little public evidence, the strategies of startups to control use and spending are pretty obvious. A number of startups focus on wellness and prevention among self-insured employers, using wearable technology and smartphones to track and engage patients in hopes of lowering costs through decreasing use.

While this strategy of saving money by helping people become healthier is yet to be proven effective, hundreds of companies in this market have already been granted sufficient funding. Omada Health is among the lucky ones to be granted funding.

The company provides proprietary online coaching programs and other digital tools that aid in the prevention of diabetes and other chronic diseases. It is the USA’s largest federally recognized provider of the Centers for Medicare and Medicaid Services (CMS) Diabetes Prevention Program.

The company has already received over $125 million in venture funding since it was founded in 2011.

Other startups focus on an entirely separate driver of healthcare costs—the cost of medical services. These startups have been partnering more with employers to guide patients towards lower-cost providers for costly treatments like joint replacements.

Their goal of creating savings through price transparency still remains unproven, although lowering prices by increasing competition is a reasonable line of action.

However, other digital health startups remain focused on improving primary care access through virtual visits, telehealth, and other related methods of accessing care. Some startups use biometric data (biosensors or genetics data) to make early detection of medical problems possible.

Although there is not much evidence on this, these efforts may result in increased use and spending. Furthermore, there is no guarantee that the startup technologies will be priced less compared to existing substitutes. In order for these technologies to improve outcomes at a greater total cost, policymakers and users of such innovations will have to face difficult choices over access and exchanges.

What’s in Store for the Industry?

Digital health venture capital firm involvement in healthcare increased in the first three quarters of 2018. The third quarter witnessed an estimated $4.5 billion in digital health financing—the most of any quarter ever recorded. As the digital health space grows, the role of policymakers grows as well.

Regulatory guidance is necessary in order to change the scope and direction of new medical technologies, keeping in mind patient safety and societal costs. Digital health venture capital firms often point out the lack of regulatory guidance on the things that require formal approval.

The current Digital Health Innovation Plan by the Food and Drug Administration (FDA) is a positive step towards paving the way to market for low-risk digital devices and identifying what digital health tools fall outside its scope.

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