Did the digital health bubble pop? CIOs weigh in

For many in the digital health space, the pandemic years were ones of increased funding, new startups and loose money. Recently, a dramatic drop in funding and layoffs are forcing health systems to deal with a very different digital health environment. 

The digital health Golden Age

During the pandemic, as patients became increasingly comfortable with digital tools, digital health companies hired new talent and expanded at a staggering rate.

In 2021, digital health reached new highs as the sector grew by 79 percent year over year to hit a record high of $57.2 billion, according to a report from CB Insights. 

In the fourth quarter of 2021 alone, there were 13 new digital health unicorns, or companies with valuations of at least $1 billion.

The low-interest regime led to a Silicon Valley flush with cash and investors eager to get in early on the next potential unicorn. As the clock turned to 2023, it became clear the check was coming due.

The slump

As interest rates climbed, designed to fight rising inflation, and the macroeconomic picture began to look murkier, Big Tech firms began laying off thousands of workers en masse. Many CEOs pointed to COVID-19-era overexpansion and over-hiring as justifications for trimming their belts.

Some large firms targeted their digital healthcare business units for cuts. Alphabet laid off 15 percent of its staff from its healthcare subsidiary Verily and discontinued its remote patient monitoring business. 

Recently, Merative, the health data company formerly known as IBM Watson Health, reportedly laid off 12.5 percent of its staff.

However, it's not just layoffs affecting established companies hurting the digital health market. Funding quickly dried up, making it harder for startups to get off the ground.

The fourth quarter of 2022 saw digital health funding fall to $3.4 billion, a five-year low. It was the first quarter since 2018 that saw no new companies achieve the vaulted unicorn status. 

Beyond the worsening economic situation, some telehealth startups were scrutinized for their data-sharing practices.

In February, a group of senators investigated telehealth startups Cerebral, Monument and Workit Health, expressing concerns that the companies could share health data with social media platforms for advertising purposes. 

The Federal Trade Commission proposed a $1.5 million settlement with GoodRx Holdings for allegedly sharing patient data to advertise on Google and Facebook. 

Layoffs, legal action and lack of funding have quickly changed the digital health market and its consequences could reverberate throughout the entire healthcare industry. 

What health systems need to know

Hospitals and health systems are increasingly interconnected with digital health companies. As many look to keep remote care offerings forced upon them by the COVID-19 pandemic, they must maintain tight vendor relationships with digital health companies.

For other health systems with active venture capital arms, they are looking to maximize return on investment in a suddenly upside-down digital health marketplace.

Despite the apparent market turmoil, some CIOs are confident hospitals will avoid fallout with digital health vendors.

"Many startups in the digital space will get knocked out, which will impact digital solutions that some healthcare delivery organizations have launched, but those vendors with strong solutions with demonstrable return on investment will continue, and relationships will be stable with those vendors," Zafar Chaudry, MD, CIO and chief digital officer at Seattle Children's, told Becker's. "Diminishing margins are forcing healthcare delivery organizations to focus on near-term needs and 'lights-on, doors-open' work — this will take the focus off digital health while healthcare delivery organizations recover."

Other CIOs are confident that the creative destruction of the market will give hospitals a clear picture of which digital health companies are worth maintaining relations with.

"Markets, in general, are pretty good about winnowing out or encouraging new entrants when the market is calling for it," said Randy Davis, CIO of Sterling, Ill.-based CGH Medical Center. "Most hospitals are pretty good at identifying the real players from those who are not. If funding realities create a shake-out in this segment, I see minimal impact, in general, on hospitals."

The economic situation in the digital health market mirrors the difficult financial picture facing many hospitals battling inflation, staffing challenges and diminishing reimbursement rates. 

"The drop in funding for digital health companies, I feel, is a response to the volatility in healthcare where over 50 percent of hospitals and healthcare providers have posted losses for 2022 and a bleak outlook for 2023," said Darrell Bodnar, CIO of Whitefield, N.H.-based North Country Healthcare. "The post-COVID-19 hangover, along with healthcare challenges with staffing, cash management, revenue volatility, and uncertain government-funded payers and regulatory program future, have really dampened the healthcare market. I feel it will likely stymy technology innovation when it's really needed the most."

On the health system venture capital side, some investors remain cautious but optimistic about the opportunities a reset digital health market presents.

"While we are seeing headwinds in today's market, we see this shake-out as necessary coming off the excesses of the pandemic period," said John Cooper, vice president of venture investment at Marietta, Ga.-based Wellstar Health System and head of venture at Catalyst by Wellstar. "We are optimistic about the opportunity this presents to innovation and venture firms like Catalyst by Wellstar that have dedicated resources with which to make investments in early-stage startups with solid business plans. We are bullish on our ability to create better care and market value even in today's challenging environment."

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