Digital Health Q1’23: market updates, ViVe 2023, and trends to monitor
Before we dive into the key takeaways from ViVe 2023, a few data points on the current digital health market environment…
- Global investors, founders still bullish on the sector: despite Q4’22 being the lowest digital health funding quarter in five years, venture investors believe the overall ecosystem is still healthy and estimate that 2023 global funding will finish comparable to recent years at ~$15-25B, based on a GSR venture survey of 50 top digital health investors. Technology and healthcare are seen as the greatest investment opportunities for private market institutional investors in 2023, according to Adams Street Partners’ recent 2023 global investor survey, and a majority of VCs and founders believe digital health will be the most innovative field to fund over the next five years, based on Techstars' 2023 State of Innovation Survey. In the near-term, we think biotech and life sciences companies with high capital turnover and significant clinical and developmental risk are likely to see less interest from generalist digital health investors in the current market (despite having high upside potential)
- Q1’23 driven by select mega-deals in US: Rock Health’s recent Q1’23 analysis revealed US digital health funding closed with $3.4B across 132 deals, exceeding both Q4’22’s $2.7B and Q3’22’s $2.2B. Q1’23 included six megadeals from Monogram Health ($375M), ShiftKey ($300M), Paradigm ($203M), ShiftMed ($200M), Gravie ($179M), and Vytalize Health ($100M)—accounting for ~40% of the quarter’s total digital health funding (note: Rock Health excludes tech-enabled services and life sciences/biotech from their digital health definition)
- US growth-stage deals still in decline overall: even with several large rounds being closed in Q1’23, growth investments exceeding $50M into US healthcare companies have declined for four consecutive quarters, both in terms of values and counts. Based on our tracking of a variety of deal funding sources, the precipitous declines in growth-stage deal values over the past ten quarters have been particularly acute across the biotech, life sciences, and devices/services fields. On average, growth-stage investments have steadied to roughly 25-30% of the quarterly totals seen during the peaks of 2021 and early 2022 over the past three quarters
Figure 1: US healthcare growth deals (>$50m) by vertical – Q1’21 – Q1’23
Source: Lazard VGB Insights Note: Q1 2023 data shown through 03/27/23
- European biotech trending down: in Europe, where the digital health ecosystem is still in comparably nascent stages of development, healthcare deals continue to be driven by life sciences and biotech fundings. Similar to the US, overall quarterly values are down ~50-60% from 2021 – 2022 averages, which even at their peak, were merely ~10-20% of those seen in the US. Fewer mega-deals (>$500M) executed at later-stages further contributed to this disparity
Figure 2: Europe healthcare growth deals (>$500m) by vertical – Q1’21 – Q1’23
Source: Lazard VGB Insights Note: Q1 2023 data shown through 03/27/23
- Early-stage activity: Carta recently analyzed customer data to assess pre-money valuation and funding trends at early stages since Q1’21 across the digital health, enterprise software, FinTech, and consumer sectors. The key takeaway—early-stage investors are still bullish on healthcare innovation despite overall declines in activity. The disparity was even more favorable for digital health when comparing its early-stage valuation growth and cash raised against all other venture-funded sectors
Figure 3: Early-stage pre-money valuation changes by sector (Q1’21 – Q1’23)
Source: Carta Insights
Figure 4: Seed-stage median cash raised / pre-$ valuations by sector (Q4’22)
Source: Carta Insights
- Public market valuations: a16z recently published an optimistic write-up and regression analysis that concluded healthcare companies are not structurally undervalued in the public markets. Companies such as Oak Street (pre-acquisition), Agilon, and Veeva stand out as highly strategic assets with some of the largest positive residuals when comparing total enterprise value to the Rule of 40 (revenue growth rate + profit margin). Others like Doximity, R1, Progyny, and One Medical (pre-acquisition), look similar to high-performing enterprise software peers such as Datadog. In other words, healthcare is not uniformly tarnished in the public markets despite recent IPO underperformance; companies with high efficiency scores and strong unit economics receive similar valuation premiums from public investors as do enterprise, FinTech, and consumer companies
- Macroeconomic impacts: Turbulence in the broader economy and rising interest rates have contributed to several downstream impacts to healthcare stakeholders:
- health systems are under acute financial stress from cost inflation and many carry sizeable operating losses, making them less focused on executing new investments without a clear path to near-term ROI
- high industry demand for venture and growth investments, with less readily accessible supply in the market, makes health systems who often carry 12+ month sales cycles concerned that VC-backed vendors will struggle to maintain their commitments and execute on strategy
- VC-backed exits have become harder to realize with turbulent public markets and increased costs of capital – healthcare IT exits totalled 29 in 2022, down from 54 in 2020 and 65 in 2021
- Subvertical funding – a mixed bag: we believe funding for telehealth and mental health tech startups is suffering from: 1) signs of saturation in the marketplace following a rush of new solutions launched and funded during the pandemic, and 2) consumers becoming loyal to platforms tested and adopted during the pandemic. That said, demand remains robust (see Section 1), signalling a maturing market
- Telehealth – at $1B, Q4’22 saw the lowest quarterly funding to telehealth startups globally since Q1’18, however, this was still second to enterprise healthcare IT among all digital health categories tracked by CB Insights
- Mental health – global investments in mental health startups fell over 50% in 2022. By deal count, mental health tech funding counts dropped to a 12-quarter low despite patient demand remaining at all-time highs as market leaders (Headspace, Lyra, Meru) entrench themselves
- Provider-enabling software – ranging from tools to address ongoing workforce challenges or AI to supplement practice management workflows, investors surveyed by GSR Ventures indicated provider-enabling software will be a focus area for high-potential ROI deals in 2023
- Clinical areas of focus – investors surveyed by GSR were most bullish on oncology, mental health, neurology, and primary care transformation as clinical areas of interest
Source: PitchBook, Inc. “Q4 2022 Launch Report – Healthcare IT,” CB Insights – “2022 State of Digital Health,” Carta, GSR Ventures; Data from Pitchbook Data, Inc., Crunchbase, Axios Pro Rata, Fortune Term Sheet
Figure 5: Select Q1’23 global venture and growth healthcare fundings
Source: Pitchbook Data, Inc., Crunchbase.
Themes emerging from ViVe, and some companies taking advantage of them…
In the following sections, we dive into eight themes highlighted at ViVe that are likely to impact the digital health ecosystem over the next 12+ months:
- Post-pandemic trends are still transforming the industry: virtual care demand is falling, while behavioral health remains a clinical priority for consumers. Retailers are encroaching on primary and low-acute care markets through hybrid delivery models and M&A expansion
- Consumers seeking loyalty, personalization: providers and payers seeking to excel on patient retention and growth metrics are investing in customer engagement and experience solutions that create retail-like, personal experiences for consumers
- Improving the revenue cycle: healthcare executives are prioritizing RCM optimization in the wake of the pandemic, as slow recovery in visit volumes and procedures continue to challenge health systems’ financial well-being. Coding, billing, and payment processing are the most frequently-outsourced segments of the revenue cycle, while others remain ripe for disruption
- Data sharing key to progressing outcomes-based care: new regulatory and technological tailwinds are making data and interoperability key to enabling patient centricity and the transition to value-based care payment models
- The evolving role of AI in healthcare – augment, assist, automate: the healthcare industry’s pervasive need for workflow automation and prediction-laden insights makes it a breeding ground for new AI use cases; healthcare received the most private market AI funding of any sector in 2022
- Hybrid, chronic condition, and specialty care solutions in demand: care delivery is increasingly moving to the home and other hybrid settings, while primary care innovation and disruptive technologies addressing clinical areas such as oncology, neurology, and women’s health are focus areas for investors in 2023
- The talent and skills crisis demands software solutions: staffing and workforce issues that accelerated during the pandemic remain a top concern of healthcare executives; simply adding overtime hours and hiring additional frontline and non-clinical staff are insufficient to overcome the structural and financial challenges the industry faces, creating a need for clinician- and back-office-enabling software solutions to reduce worker burnout
- Governance, privacy, and security in focus: healthcare organizations are increasingly under attack from ransomware and rogue threat actors, and several high-profile incidents in the past two years have cost major health systems billions of dollars. Industry experts believe stakeholders must act to adopt a zero-trust architecture as part of a comprehensive security posture backed by AI
1. Post-pandemic trends are still transforming the industry
- Behavioral Health: COVID-related care (testing, treatment, and vaccination) is driving the appearance of a post-pandemic surge in care volumes. When omitting COVID-related services from US healthcare utilization data, behavioral health visit volumes are up 16.8% from Q1’19, while all other healthcare encounters are down by 6.2%, and most health systems are still experiencing sub-average visit volumes compared to pre-pandemic norms
- Telehealth: virtual care demand – which universally peaked during the height of the pandemic – has seen sharp declines across the US and now varies widely by patient profile. Volumes have declined in over 95% of metro markets since the highs of the COVID era (Q1'20 – Q1‘21), and the national average has declined 35%. Another headwind for telehealth is the recent DHHS announcement that telehealth will no longer be considered an excepted benefit, ending COVID-era emergency policies and reinstating full HIPAA regulations. Millennials remain avid adopters, while older patients are returning, disproportionately, to in-person physician visits as shown below:
Figure 6: Changes in US telehealth visit volumes by age group, Q1’20 – Q1’21 to Q1’21 – Q1’22
Source: Trilliant Health
Despite the gradual reduction in telehealth more broadly, the long-term trend is likely to persist as an integral part of care delivery in the US. McKinsey estimates that $250B in outpatient spend could potentially be shifted to virtual settings through advancements in more complex care models, such as virtual specialty care, longitudinal virtual care, and virtual diagnostics
- Retailers: big-box and e-commerce retailers are more active in healthcare than ever before, competing on price and service delivery with each other in ways traditional health systems have never had to defend against. This is creating new challenges for traditional health systems, primary care providers, and their relationships with specialty providers and other stakeholders
- Limited services, better prices: despite CVS’s recent expansion into more chronic care management services, most services delivered at CVS, Walgreens, and Walmart locations are low-acuity primary care services that can be delivered at scale. Their national brick-and-mortar presence enables them to offer superior prices and convenience for commodity services (check-ups, flu tests, serum panels, etc.)
- Outcomes-focused: Walmart recently announced a 10-year partnership with UnitedHealth Group to provide value-based preventive care for Medicare-eligible consumers using co-branded Medicare Advantage plans. Retailers are seeking to lead the value-based care discussion, beginning with primary care transformation
- Market expansion through M&A: Walgreens, CVS, Walmart, and Amazon are in a multi-billion dollar arms race to expand their primary and hybrid/home health footprints across the US through M&A, with more activity likely to come in 2H’23
Sources: Trilliant Health: “2022 Trends Shaping the Health Economy” and ViVe 2023 presentation
2. Consumers seeking loyalty, personalisation
Healthcare delivery models are in the midst of a transition accelerated by the pandemic; technology is powering novel approaches to meet patients’ needs in affordable, convenient ways, and patients are increasingly seeking on-demand, personalized insights into their health. The consumerization of healthcare is well-underway, exemplified by the explosion of consumer-facing applications coming to market and growing adoption amongst the population; two in five US adults now regularly use digital health applications, and two-thirds of healthcare consumers expect a retail-level experience with each medical encounter, according to recent Guidehouse research. However, less than 10% of payers and providers have a well-designed roadmap to achieving consumer-centricity.
Yet, as shown in the recent Rock Health survey results below, consumers are not ready to abandon traditional doctor-patient relationships when it comes to receiving diagnoses, health information, and treatment.
Figure 7: Consumer degree of trust in sources of health information (2022)
Source: Rock Health
Personalized care has become a key determinant of patient loyalty, making it also a top financial priority for payers and providers. According to a recent Redpoint Global survey, 75% of consumers wish their healthcare experiences were more personalized, but 71% still report frustrations throughout their patient journey.
Discussions at ViVe highlighted several opportunities to improve patient engagement and care personalization:
- Focusing on loyalty drivers: executives from Northwell Health and b.well Connected Health discussed four key pillars of consumer loyalty in healthcare:
- Access and transparency to all of their health data in one place, along with that of family members
- Ability to have personalized communications – patients want alerts and reminders consistent with the advice they receive from their providers, and suited to their individual health needs
- Automated navigation across all care settings
- Family care-partner connectivity
- Customer experience key to patient retention: In a recent Accenture survey, nearly 80% of provider switchers cited navigation factors – including difficulties in doing business, bad experiences with administrative staff, and inadequate digital solutions – as primary reasons for leaving. The rate of switching for ease of navigation factors was nearly double that of a poor clinical experience, reflecting the growing adoption of a consumer mindset among patients when seeking care. 49% of payer switchers say that experience factors made them leave. These factors included inaccurate or inconsistent information, unanswered questions, poor experiences using digital tools, customer service issues, and discomfort with how payers used their personal data
- Using digital front doors: Digital front doors are used to replace or supplement tasks traditionally performed in-person or manually with digital offerings. Depending on a health care organization’s offerings, consumers can use digital front doors to research care options, identify providers, schedule appointments, and navigate to the care access point (virtual or in-person), thereby limiting customer journey painpoints
- Creating patient identities to drive engagements: Providence Health has proven the importance of focusing on patient identity and engagement by building a consumer-facing solution that enables both providers and patients to input data, creating a holistic view of the patient beyond the limited information contained in a typical EMR. Investment into this personalization program increased monthly active users on the platform 341% YoY in 2022, and boosted monthly retention rates from 36% to 43%
- Reimagining the pharmacy experience: Amazon is investing in efforts to reinvent pharmacy interactions for patients, focusing on upfront price transparency, savings, and easy refills through its Amazon Pharmacy service. Amazon’s strategy to target the prescription market is clear – pharmacies are a clear example of fragmentation detracting from the customer experience. A Massachusetts Health Policy Commission found that patients only used manufacturer-sponsored coupons 15% of the time they were available to them. This is emblematic of what plagues the industry as a whole – powerful tools exist, but there is a gap between the development of transformational technologies and durable access to them
Sources: Deloitte, Cigna, Rock Health, Amazon, Association of Health Care Journalists
Figure 8: Select VC-backed patient experience-enablers
Sources: Pitchbook Data, Inc, Lazard VGB Insights
3. Improving the revenue cycle
Revenue cycle management (RCM) sits at the top of the list of investment priorities for providers in 2023, based on recent research from KLAS and Bain & Co. Providers of all forms and sizes struggle with cash collections and manual-intensive processes to manage their revenue cycles. This problem was illuminated during the height of the pandemic as economic pressures and stay-at-home orders drastically reduced visit and surgery volumes.
RCM is a complex, interwoven series of interactions between patients, providers, and payers – and it’s rife with inefficiencies. End-to-end RCM automation is practically an unattainable goal for most providers, making it dependent on each group to assess their RCM process and identify their areas of vulnerability, particularly related to tracking AR/AP, cash collections, and reconciliations.
As the reimbursement landscape increasingly shifts from traditional fee-for-service to value-based care models, it is essential that providers optimize their RCM operations.
Figure 9: Key steps in the revenue cycle
Sources: Experian Health, Enter Health
Three major themes affecting the future of RCM operations were highlighted at ViVe and at the RCM Virtual Summit last September:
- Patient financial conditions are evolving: the landscape has changed dramatically as best-in-class revenue cycle organizations, who previously only had to focus on maximizing collections, now have to leverage each and every patient engagement opportunity as a way to boost the total lifetime value of a customer. Consumers are shopping around for the best experiences, and the variables when choosing a provider have expanded beyond the clinical site
- Physician education and upskilling needed for denial prevention: when organizations rely on their physicians and other clinicians to do the bulk of medical coding – and this will increasingly be the case in a VBC-centered healthcare environment – then physician education is vital to reworking and ultimately preventing claim denials
- Resolving accuracy in billing and coding: an MD Audit analysis of billions of dollars of denied claims found that the average healthcare system can save up to 20% of its overall revenues by making sure coding is done accurately and removing wasted time spent on duplicate claims, missing modifiers, and billing issues. The opportunity costs of not investing in AI, coding solutions, and other automation software will likely be too steep for large healthcare organizations to ignore
With the heightened economic headwinds, there appear to be opportunities for tech providers to capture additional segments of the RCM cycle, while the four processes that currently dominate the outsourcing market (coding, billing, payment posting, payment processing) are likely to remain a viable entry point for new software companies.
Sources: RevCycleIntelligence, MD Audit, Bain & Co., KLAS
Figure 10: Revenue cycle outsourcing by function
Source: The Everest Group
Figure 11: Select VC-backed RCM companies
Sources: Pitchbook Data, Inc, Lazard VGB Insights
4. Data sharing key to progressing outcomes-based care
Central to the discussions at ViVe 2023 was the need for solutions to enable greater data sharing and interoperability capabilities across the healthcare industry. Vendor fragmentation has long been an impediment to optimizing care coordination; HIMSS data shows that the average hospital must exchange data between 16 different EHR vendors across their affiliated provider organizations.
Recent actions from regulators and industry leaders, including the CMS interoperability mandate and the formation of coalitions such as CommonWell and Carequality, are accelerating adoption of data sharing practices while also surfacing new concerns around privacy and security of patient information. New federal rules passed under the Cares Act last October require healthcare organizations to give patients unfettered access to their full health records in digital format. To date, DHHS has approved six “Qualified Health Information Networks” (QHINs), one of which is the VC-backed provider Health Gorilla.
There has been a proliferation of private market funding funneling into tools that enable more seamless patient data exchange – in the last two years alone, over $3B of venture capital dollars was invested into interoperability-related companies. We think the ongoing regulatory tailwinds are likely to further accelerate this trend, particularly with adjacent solutions innovating in data analytics, management, and privacy/security.
We are also seeing significant advances in how organizations are using existing infrastructure pipelines to share data – there has been an over 200% increase in clinical document exchange between providers on the CommonWell Health Alliance, and an over 60% increase in providers joining Carequality.
While we see pervasive awareness of the industry need, several foundational challenges persist that could benefit from disruptive, tech-enabled remedies:
- Data collection and health equity: most of the patient data collected today inherently is biased towards only those populations with the access and capability to interact with digital tools and participate in patient surveys. The industry has yet to crack the code on representative patient data collection, however corporate leaders including BCBSA are now calling for industry-wide adoption of standardized data collection to improve care in underserved communities
- The benefits to the patient and provider must be tangible: adoption is a two-way street: providers need to maintain low switching costs and minimize disruption to operations from any new integration or implementation, while patients need to feel in-control of their data and have visibility into the benefits of sharing it externally
- More is not necessarily better: quality over quantity is key to making effective use of interoperability capabilities. The more data that is shared, the greater the burden for stakeholders to manage. To succeed in a value-based care environment, providers need to leverage high-quality, focused data sets that harness disease-specific expertise
Some challenges for health systems to adopt and integrate interoperability solutions include:
- Lack of standardization: many providers and healthcare systems use customized EHR systems that can be hard to convert to a standard format and shared with others, even when using APIs
- Varying data requirements: organizations need to follow different rules and regulations depending on what type of care they provide and where they're located, so the datasets collected are not always congruent
- Legacy systems: healthcare organizations with older legacy systems face the dual challenges of modernizing their systems while also meeting interoperability requirements
- Budget restrictions: some health organizations may lack the financial or technical resources needed to invest in the technical resources needed to build a truly interoperable system
Sources: IBM, Fierce Healthcare, ViVe panelists representing Centene, ResMed, Highmark Health, Invitae, Health Enterprise Partners, Forbes/Integra Connect, HIMSS Analytics
Figure 12: Select VC-backed data and interoperability companies
Sources: Pitchbook Data, Inc, Lazard VGB Insights
5. The evolving role of AI in healthcare – augment, assist, automate
The two industries that have made the least productivity gains over the last 40 years – as measured by the change in the prices of goods and services relative to overall CPI levels – are higher education and healthcare. Yet, the healthcare industry stands to be one of the greatest beneficiaries from the introduction of AI-enabled tools. The application of AI into the healthcare system is bifurcated along two fundamental paths: one of immense opportunity – due to the many healthcare workflows that involve prediction (making them natural fits for ML applications) as well as risk, due to that fact AI applied in error could directly impact human lives.
In 2022, healthcare AI technologies attracted the most funding among all sectors in the private markets, based on data collected by Stanford University for its 2023 AI Index Report:
Figure 13: Private investment in AI by focus area: 2022 vs. 2021 ($B)
Sources: Pitchbook Data, Inc, Lazard VGB Insights
The present: lowest common denominator applications
Panelists at ViVe believed AI’s most plausible use cases today are to assist and augment clinician/provider decision-making and to automate back-office, administrative tasks. The first question for stakeholders evaluating AI solutions to answer is what problem is the AI designed to solve? Healthcare organizations can’t afford to only focus on the latest and greatest – most models available today were developed and trained on very specific data to solve one specific problem.
Sample practical use cases emerging in clinical settings include:
- Automating repetitive tasks: using AI with RPA can help accomplish tasks that require minimal human intervention or judgment
- Example: If a provider is attempting to look-up a medical record from an EMR while agents are working in a secondary system, an AI model can grab that record and open it in the secondary system, streamlining the efficiency of real-time record modifications
- Judgment efficiency: tasks that require human judgment can still be augmented to enhance productivity with AI-powered tools
- Example: Hospital systems’ clinical integrity departments employ registered nurses to analyze documentation in EMRs to ensure it aligns with what they are noting during clinical interactions. A powerful AI model can constantly pre-scan patient records looking for discrepancies and flagging them to nurses to ensure accuracy for billing and patient follow-ups
- Health monitoring: AI can continuously monitor a patient’s entire census, including everything from sleep patterns to body chemistry markers
- Example: Providers and surgeons can leverage an AI model along with clinical decision algorithms to continuously monitor their post-op discharge patient population. Models can instantly detect signs of risk – such as cardiac or respiratory failure – and flag it to the treating physician
- Results consistency: AI models can establish a baseline level of clinical competence for staff with varied experience, helping to balance out the strengths and weaknesses of the workforce
- Example: When using a model with AI-powered camera technology used for patient positioning during radiological scans, the image quality and noise, coupled with the reduction in radiation to the patient, can create superior outcomes than if done unassisted
The future: how will generative AI be adopted?
Generative AI – which is still in its honeymoon phase – has been labeled a game-changer for the healthcare industry. Median pre-money valuations of generative AI deals across sectors have risen to $90M so far this year, up from $42M in 2022. Yet, there was broad consensus among industry executives at ViVe that fully automating any workflow associated with care delivery using generative AI carries significant risk. Adoption, even for the most digital-forward healthcare organizations, will ultimately depend on a set of key questions:
- Can the tool deeply integrate with key workflows and existing systems?
- How auditable is the AI-generated output?
- Is the AI partner clinician-led, such that there’s deep understanding of user needs?
- Does the technology support patient-centered use cases?
- Is the technology 100% AI-powered?
Abridge is one company injecting generative AI into clinical care environments by transforming ambient conversations into draft notes. This application of AI is intended to remedy the inefficiencies caused by doctors having to write multiple notes for different end customers (patients, colleagues, payers), giving them less time to focus on patient-centric care.
Insight Partners believes generative AI’s opportunity in life sciences is massive, highlighting use cases such as synthetic data creation for clinical trials, to generative protein designs based on protein folding models to accelerate drug discovery, to research summarization of academic papers. As with all generative AI applications, ultimate effectiveness will come down to adoption and data access – those in life sciences will have access to sensitive clinical and patient datasets that create natural barriers to entry, allowing them to develop finely-tuned models as long as data sharing and interoperability trends persist.
Sources: IBM, Fierce Healthcare, Insight Partners, Harvard Business Review, ViVe panelists representing Centene, ResMed, Highmark Health, Invitae, Health Enterprise Partners, Abridge, UPMC, Fortune Term Sheet/Pitchbook Data, Inc.
Figure 14: Select VC-backed AI-enabled healthcare companies
Source: Pitchbook Data, Inc, Lazard VGB Insights
6. Hybrid, chronic condition, and specialty care solutions in demand
The US averages just 5-7% of total healthcare expenditures for primary care services, while 90% goes towards disease management and treatment. 40% of adult Americans neither maintain primary care relationships nor have access to home visits or after-hour care, and a majority report inadequate care coordination with specialists and hospitals. Experts at ViVe emphasized healthcare is a continuum – virtual, hybrid, and specialty care models will be an integral part of the future, but are unlikely to fully replace brick-and mortar care.
- Virtual/hybrid care: panelists at ViVe agreed the industry underestimated the potential, possibilities, and value of virtual care post-pandemic, and didn’t properly plan for the surge in chronic conditions and behavioral and mental health issues that followed. UnitedHealth Group’s claims data from 2022 showed that 95% of claims for virtual care were from local providers (vs. national virtual-only providers). This speaks to the trend of hybrid care as the future model for personalizing the patient experience while preserving existing provider-patient relationships
- Home care: the shift to the home and community care centers remains a top priority for patients, payers, and providers as hospital capacity challenges combine with growing patient preference to “age-in-place." Prudent regulation, appropriate reimbursement, and technology to simplify administrative complexities and improve coordination will be critical to achieving this and other outcome-driven care delivery models. McKinsey estimates that over the next three years, Medicare beneficiaries could see 3 – 4x more care in their homes if home care capabilities continue to develop into viable and at-scale offerings; this would represent up to $265B dollars or more of Medicare spend on care delivered in the home in 2025
- Social Determinants of Health (SDOH) and Gen Z: 80-90% of SDOH occur outside of healthcare settings, speaking to the importance of continuous, hybrid care practices. Gen Z patients report a higher rate of unmet social needs, making them a key customer for providers and payers to engage. A McKinsey study found that 58% of Gen Z’ers report two or more unmet needs related to income, food, housing, transportation and other SDOH. Approximately 55% of Gen Z’ers report they have a primary care physician (PCP), whereas 67% of millennials, 76% of Gen X’ers, and 84% of baby boomers have a PCP, according to Accenture research
- Chronic conditions: according to the CDC and RAND, roughly 60% of the US population is living with at least one chronic condition and 42% are managing multiple chronic conditions—which contribute to 90% of the nation’s $4.1T in annual health care expenditures. Treatment for patients with multiple chronic conditions currently accounts for an estimated 66% of US healthcare costs
Sources: ViVe panelists representing Tomorrow Health, Babylon, Teladoc, UHG, and 7wireVentures; McKinsey, Accenture, Altera Health, IBM
Figure 15: Select VC-backed hybrid/specialty care companies
Source: Pitchbook Data, Inc, Lazard VGB Insights
7. The talent and skills crisis demands software solutions
Healthcare systems across the US remain overwhelmed post-pandemic; for the second year in a row, staffing and workforce issues were labeled the overwhelming priority concern for hospital CEOs in an annual survey released by the American College of Healthcare Executives. BCG estimates that the US will lose $290B in GDP annually beginning in 2030 if the current rates of lost wages due to unfilled jobs and declines in healthcare labor participation rates persist. Shortages of registered nurses and technicians, and burnout among non-physician staff, were labeled the greatest near-term threats.
Couple this with broader trends of aging patient and provider populations, along with longer average life expectancies, and we would need to hire over 124,000 physicians by 2033 and add 200,000 nurses per year to meet demand, based on American Hospital Association analysis.
Economically, health systems are in stuck an unwinnable position; costs are skyrocketing with rising inflation, and hospital margins remain slim. From January ‘19 – January ’22, labor costs per adjusted discharge rose 20% due to employee burnout, salary inflation, and personnel shortages. Health systems can no longer rely on price increases, volumes, or mergers to remedy the situation; the answer must come from tech-driven productivity.
Bessemer Venture Partners’ (BVP) thesis is that while linear strategies (i.e. hiring more clinicians) are no match for these nonlinear problems (e.g. increasing life expectancies, aging providers and patients, burnout), they will still be a part of the solution. Using a product-led growth mindset, there is significant opportunity to deploy software more effectively to re-architecture the roles and responsibilities of various healthcare worker types and drive efficiencies in the system.
BCG and BVP highlighted several tailwinds supporting software companies working to address the provider labor crisis:
- Market opportunity: selling to healthcare and life sciences companies represents a massive TAM – 14% of the US workforce works in healthcare (1 in 7 US workers, or 22M people)
- Job growth: healthcare jobs represent half of the top 30 fastest-growing jobs in the US over the next decade. Over half of these jobs are in care delivery, and the remaining are in operations and administration
- Test cases are working: when Anthem partnered with Ianacare, an end-to-end family caregiving platform, employees reported an 83% increase in productivity and a 30% decrease in stress and burden. Similarly, services like Papa (online marketplace for on-demand, non-clinical caregivers for the elderly) and HopSkipDrive (an app that allows patients to schedule rides on-demand with a market of “CareDrivers”) are addressing one of the most challenging aspects of caregiver work: continuous monitoring
Sources: Bessemer Venture Partners, American Hospital Association, Boston Consulting Group
Figure 16: Select VC-backed healthcare workforce optimization companies
Source: Pitchbook Data, Inc, Lazard VGB Insights
8. Governance, privacy, and security in focus
The cyber threat landscape in healthcare has expanded and evolved drastically over the past three years. Since the pandemic, we have seen a rise in the method, sophistication, and frequency of attacks, as well as new attackers emerge. Healthcare suffered over 300 breaches in the first half of 2022 alone, with an average price tag of $10.1M, and has incurred the highest costs of any industry for 12 years in a row.
Extending beyond nation state- and hacker-sponsored attacks, ransomware attacks on healthcare organizations are gaining prominence, and attackers are benefitting from the gig economy they have created for themselves. A prominent example was the ransomware attack launched late last year against Medibank, Australia’s largest health insurance provider. Ransom criminals accessed roughly 9.7M customers’ personal information, including names, birth dates, and contact information, along with health claims data for almost 500,000 customers.
At ViVe, much of the security discussion revolved around identity being the central battleground. Password-laden attacks increased from 567 per second in 2020 to 1,287 per second in 2022. Additionally, the time allowed for an organization to contain escalation of an attack has shrunk drastically – it now takes roughly one hour from when a user clicks on a phishing link for an attacker to get full access to their inbox and private data.
Panelists outlined the future of securing health organizations into two critical components:
- Zero-trust architecture: a strategy that assumes every device and unverified access point should be treated as a threat vector; there are four components to zero-trust implementation, with identity management being at the center of the framework:
Figure 17: Steps to zero-trust implementation
- Comprehensive security posture powered by AI: Microsoft recently released launched a “Security Co-pilot” tool to help cybersecurity professionals identify breaches, threat signals, and better analyze data using OpenAI's latest GPT-4 generative AI model. At ViVe, the company endorsed use of the tool in large healthcare organizations due to the power of its threat intelligence – Microsoft is actively tracking more than 50 ransomware actors and more than 250 unique nation-state cybercriminal organizations to assess 65T threat signals daily. Another vendor, SailPoint, is focusing on AI-driven identity security to fight healthcare data breaches. Given the diverse user population in healthcare (physicians and non-employees like affiliate physicians, contract nurses, students, and researchers), AI can be leveraged to automate the manual-intensive task of credential provisioning and oversight.
Sources: ViVe panelists from Microsoft, CDW; Rock Health, TechCrunch
Figure 18: Select VC-backed governance and security companies
Sources: Pitchbook Data, Inc, Lazard VGB Insights
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