Gabriel Perna | June 2, 2021
The tidal wave of investments that’s propping up the digital health industry may not slow down in 2021, but what about next year and the years to come? In part one of our series on digital health funding, we spoke to five digital health experts from five different areas of the health care system impacted by this trend.
Payer executive: Sukanya Soderland, Chief Strategy Officer and Senior Vice President for Blue Cross Blue Shield of Massachusetts
Provider executive: Aaron Martin, Executive Vice President, Chief Digital Officer, Providence and Managing General Partner, Providence Ventures
Investor: Bill Evans, CEO, Rock Health
Digital health executive: Sean Duffy, CEO, Omada Health
Industry analyst: Raj Prabhu, CEO and Co-Founder of Mercom Capital Group
In part one, these experts shared insights on how the trend has developed over the last few years, the role provider and payer venture funds and accelerators have played in accelerating funding, and COVID’s impact on increased digital heath adoption. In part two of our series, we explore the essential question that many health care leaders are wondering: Will this trend continue along the same path, or will it be a bubble that bursts?
Here’s what our experts had to say when we asked them to take out the crystal ball and look at digital health funding in the next few years. Plus: What role have special purpose acquisition companies (SPAC) played in the funding surge?
How do you see this digital health funding boom shaping out: Is this going to be a bubble that will burst, or will it turn into something sustainable?
Aaron Martin: It’s hard to predict. I grew up in an economist’s household. My dad is a PhD economist. There is an old economist joke that economists have called five out of the last two recessions. I am always a public market bear. I’ve called bear markets the last three years. Even with a pandemic, I was wrong. When the stock market swooned last year, I was right for the exact wrong reasons.
To me, the question is how fast does it slow down or deflate? What’s the retrenchment look like? If you’ve seen this pattern before, there is going to be a pullback. It’s inevitable. Just two to three years ago, I had made 16-17 investments and I think there was one exit. Everyone was in the same space. These companies were growing, but no one was getting bought, no one was going public. The game changers were the IPOs that happened early last year. Finally, you had companies who could be acquirers with public stock. Teladoc. Livongo. OneMedical. You started to see liquidity in the market.
Sukanya Soderland: My sense is that over the next ten years we’re going to see a marked shift in the health care landscape where digital health—which is health care that leverages the power of advanced computing and analytics to improve experience, outcomes and affordability—will take on a central role in our health care system. It will likely be a hybrid role of digital health merging with, and/or powering and supporting in-person healthcare to make it more predictive, preventative, efficient and effective. So, the question then becomes, what’s the magnitude and the pace of change within that ten-year period? There will be certain inflection points or triggers that might help accelerate that change or in contrast, elongate it. Those factors range from whether we have transformational regulation take hold, to the role of Big Tech or extra-industry players, to how much employers may upend the status quo, to whether providers and payers are going to significantly shift their business model. There are disruptive players in the digital health space that are looking to radically transform how the traditional incumbent health care models work. If some of those scale successfully, we may see this new future emerge more quickly. If they only make headway in pockets, it may be a 10–12-year journey.
Sean Duffy: In the 5–10-year time frame, the funding surge of digital health is going to result in huge businesses that deliver extraordinary value. There is no question in my mind. The path there almost doesn’t matter. So, I can’t say I know what’s going to happen with the market. I’d be in another business if I could predict that. The long-term trends point us in the direction of disruption, so if the world has gotten a little overzealous right now, that’s probably okay.
Bill Evans: Health care is fundamentally so large as a sector of our economy and so underinvested in terms of technology compared to any other industry that the opportunities to transform it and create tremendous value are just fundamentally huge. If that changes then I’ll change my tune. But right now, we’re still in the early and middle innings on transforming health care as a society. For any given privately held company, every investor has to ask themselves is the offering for securities in some venture backed startup priced to reflect those fundamentals or not? That’s true at all times.
Today, there’s a likelihood that we’re going to see some of the evaluations that are being offered go down. There are typically down rounds after periods of excitement and run up in any venture market. I think that’s quite possible for a fair number of companies at some point in the future, but with the fundamentals of transforming health care, we still have a lot of work left to do. And I think that there’s going to be a lot of well capitalized businesses that come out of this period who will be well positioned to carry that innovation on. The savvy investors and entrepreneurs are going to find each other during this period.
Raj Prabhu: A difficult question to answer, but I’ll take a shot at it. Just looking back 10-11 years, it’s good to see the numbers and trends in digital health adoption. When I look at them, there were only a few years where the funding kind of flattened a little bit, but we’ve never seen a significant decline in digital health funding. That being said, we’ve also never seen a spike like last year’s 70-80 percent funding increase year over year. If there is any bubble, I would say that would be the COVID bubble, meaning the COVID premium we got last year with regards to telehealth. That could flatten out a little bit as consumers go back and revisit their doctors and hospitals in person. The usage of telehealth apps will drop and then the revenues of these companies will start to slow down and that’s going to trickle down to the venture capitalists. They may start moving the money to other spaces within digital health. That is one area I think where I could pretty much predict we will see some sort of a slowdown in these technologies that got a boost solely because of COVID.
Aaron Martin, Providence
What does the SPAC trend mean for digital health funding?
Duffy: You’ll find a lot of diverging opinions on SPACs. My belief is SPACs are here to stay as a path to becoming public. You’re seeing consumer companies do direct listings to going public, you’ll see companies choose based on their goals and what they want to do. There are a lot of SPACs now and many of them are from quality sponsors. The advocates of SPACs carry around the philosophy that even great companies pursuing an IPO, you don’t know what happens the week of your road show. There could be an international conflict. Even for great companies, there are risks that having a SPAC could help mitigate. I think it’s here to stay. Like anything else, you’ll find huge variants. One SPAC is not another SPAC. The way they are structured, the people, the process, the underwriters—there is a wide variety. What’s happening right now is people are homing in on what the base case SPAC construct looks like as an alternate for a traditional IPO. It’s here to stay and digital health is an interesting target area for SPACs.
Evans: I don’t think we know as an industry what SPACs mean for digital health. The story is really being written right now. I think it’s going to be a 2021-2022 story. For now, we can say that there are more options than ever before in digital health for privately held companies to seek access to public markets, whether through reverse mergers, SPAC acquisition, direct listing, or traditional IPOs. We’ve seen all of those. The bigger sort of story is how you can capitalize as a company, there’s more flexibility than ever before. A few years ago, we went through an 18-month period where there were no IPOs. At the time we said, ‘Given the age of maturity of many of these companies, we don’t expect to see a lot of IPO activity but zero is too low.’ Now, I think the market environment has changed and there are more tools available, more receptivity and more paths to going public. That certainly changed the dynamic in a big way.
What should health care leaders in payer, provider and life sciences organizations know about this funding surge?
Prabhu: They should take digital health seriously. Before COVID, digital health was always there, it was a new thing, and a lot of funding was coming in. All that’s fine, but the payers and providers, did they take it seriously? I’m not sure about that. I think COVID has helped everyone take digital health really seriously. And they should do so from here on because digital health is here to stay. These companies are stabilizing and they are maturing. Telehealth reimbursement was an issue three years ago, but is it anymore? I don’t think so.
Not only do they have to take it seriously, but they have to keep up with it because startups are launching all the time and new technology is constantly emerging. You need to know what’s out there that is game changing and will help your organization increase efficiency or manage patients. The way you’re going to deliver care is changing every day as technology changes. You have to keep up with it. This is not a fad. It’s here to stay. Make digital health a part of your business operations and strategy going forward. If not, you will be left behind.
Duffy: Keep an open mind. From a strategy standpoint, how do you tool up your organization to listen, validate and vet without breaking things. And be clear on what you focus on and what you value. There will be some truths that matter. What are the clinical fundamentals? What is the evidence-based information you can lean on to support digital health implementations? Have you thought about validating clinical and economic outcomes? How are you thinking about your path to maturity from a compliance standpoint? Having the same process to listen and hear these digital health companies out as you have in the last three years isn’t going to work because the flood is here and it’s going to continue. Instead of building a dam, build a tributary for these things to happen in an organized, thoughtful way within your organization. The companies that do that will find the diamonds in the rough.
Martin: I hope it merely slows down. This is what every investor will tell you: ‘I hope it slows down for businesses to catch up with their evaluations.’ I wear two hats. I wear a hat as an investor and as a strategist and operator at a health system. Putting on my strategist/health system operator hat, I just told this to our executive team, but there will be a time where you’ll see a washout of some sort in this market. Do not let that make you feel justified in your incumbency or too comfortable. What that usually means is [the market is] strengthening the strong and capital starts to focus behind companies that are very effective. Out of the dot-com rubble came some of the most effective companies on the planet. Amazon. Google. The capital got concentrated behind a few winners and it tested the best management teams.