Software overload could boost digital health M&A

Software overload could boost digital health M&A unknown

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Employers, insurers and providers are awash in digital health products that purport to streamline operations and patient care, from navigation tools to virtual therapy and fertility support.

But the wealth of vendors is overwhelming buyers, who are increasingly looking for one-stop shops that can handle more of their needs in one place, paving the way for increased merger and acquisition activity in a pared down funding environment, experts told Healthcare Dive.

The digital health sector boomed over the past decade, reaching a fever pitch in 2021 when U.S.-based startups raised more than $29 billion across over 730 deals, according to advisory and venture capital firm Rock Health. A 2021 report from the Iqvia Institute for Human Data Science found more than 350,000 health-related apps were available to consumers, and 22% were disease-specific.

But investment has since declined from its post-pandemic peak, which could leave some digital health startups, including point solutions, strapped for cash and more amenable to dealmaking.

Buyers of digital health products like health plans, employers and providers are on the lookout for companies that can provide more than one offering, which could leave point solutions at a disadvantage.

“Vendor management becomes very difficult for the buyers, whether they be employers or payers, and figuring out how to manage all those relationships and getting those to scale, it can be challenging,” said Sari Kaganoff, general manager of consulting at Rock Health.

But there are opportunities for point solution companies to compete without caving to consolidation — if they can fix a significant healthcare challenge for purchasers and prove return on investment.

The key is to be a complete product that handles an entire patient journey from start to finish for buyers, said Justin Norden, partner at GSR Ventures, an early-stage digital health venture capital firm.

“The thing we always ask ourselves when thinking about investment, or working with our own startups later is, ‘Is this a feature? Or is this a full product solution?’” he said. “And what gets you really in trouble is if you're just a feature and you need to be put together with a bunch of other things.”

“Startups in that category, especially in today's climate, are in trouble,” Norden added.

Funding dips, M&A spikes

Coming off a period of intense investment activity in the wake of the COVID-19 pandemic, digital health funding has cooled, putting the sector on track for its lowest investment year since 2019, according to a quarterly report from Rock Health.

Less available money on the private markets creates the perfect storm for M&A. Many companies raised capital during the peak of the digital health funding boom in 2021 and early 2022, and they’ve been waiting for the market to improve to raise more money, Norden said. If companies are unable to raise, some may choose M&A.

In the first half of the year, digital health M&A stayed fairly low, according to Rock Health’s report. But that doesn’t mean deals won’t happen, said Kaganoff. Conversations from potential acquirers about targets and from smaller companies that are looking to be bought are happening, but that activity isn’t reflected in the data until a deal closes.

“I do imagine that it'll be a bigger wave as we move forward,” she said. “And I don't think that's a bad thing, I think that's a good thing. It streamlines things for customers, and hopefully provides a good exit for the founders who put the work into building their product.”

Point solution companies may be particularly ripe for M&A because digital health purchasers are looking for complete platform solutions instead of stringing together a number of point solutions.

“I would just say that the argument for enterprise solutions is stronger, which intuitively would make the argument for vendors coming together stronger. Obviously, the offset there is you have to consider capital market conditions and other variables,” said Donald Hooker, analyst at Capital One Healthcare. “But I think trends in the marketplace towards one-stop shop vendors would suggest opportunities for successful acquisition stories.”

Healthcare is a risk-averse industry, and purchasers like providers, employers and health plans may be more likely to add an additional tool from a company they’re already working with that offers multiple products. That means one less vendor to deal with, and purchasers won’t have to onboard a new company, Norden said.

“There's this element of, if you found a company you like and it's working and it's scaling and your patients or consumers are happy with it, you want to scale that relationship versus adding a bunch more on top,” Kaganoff said.

Digital health M&A slows so far in 2023

Month-by-month digital health acquisitions, Jan. 2021 to June 2023

Buyers are overwhelmed by point solutions

It can be challenging for point solutions companies to cut through the noise with purchasers who are often fatigued by the amount of software available to them, experts said.

And point solution companies — which may focus on managing one condition like diabetes or handling one problem like providing a risk score for mental health conditions — are at a disadvantage compared to companies that offer multiple tools. For example, virtual care giant Teladoc Health offers chronic condition management, but also behavioral healthcare and primary care, which could be attractive to digital health purchasers who have multiple point solutions instead.

Health systems in particular are managing a number of vendors and competing priorities.

“You have hundreds and hundreds of contracts that you're managing, and you just lose control. Renewals come and go, and you just don't have the bandwidth to evaluate, is the solution really adding value?” Hooker said.

Health systems faced slim margins during the pandemic, and — though the situation has improved — many hospitals are still underperforming due to pressure from ongoing stressors like high expenses and inflation, according to consultancy Kaufman Hall.

So hospitals need to see a clear return to invest in digital health products, Hooker said. They may prefer vendors they already trust, which gives an advantage to companies that can offer more than one tool. Plus, they could get a better deal on price if they buy more from the same vendor.

And if a digital health vendor isn’t solving one of the biggest problems for a large health system, it’s less likely for them to become a high enough priority to score a meeting with purchasers, Norden said.

Employers have tended to be the biggest purchasers of point solutions, and may have needed to see less return than providers and health plans would, Norden said. But that could shift in a more constrained economic environment.

“When they're making cuts across the board, sometimes benefits are part of that. And so I think we're actually going to see a contraction in digital health companies who had employers for a while as well,” Norden said.

On the flip side, point solution companies argue they offer benefits that competitors with a range of offerings can’t provide.

“All-in-one solutions run the risk of doing a lot of things badly, instead of doing one thing really well and driving real savings."

Maayan Cohen

Co-founder and CEO, Hello Heart

Consolidation is one path for point solutions, but companies could also offer more ways to connect their tools with a larger ecosystem, said Mark Luck Olson, CEO of digital musculoskeletal care company RecoveryOne.

That could mean thinking creatively about distribution, like partnering with primary care providers or other first stops for healthcare. RecoveryOne also allows buyers to brand their tools like their other solutions and use application programming interfaces to more seamlessly transition between other programs, he said.

“To me, the opportunity with digital is to not just throw people over walls as they demonstrate other conditions, but actually bring them together into integrated clinical pathways,” Olson said. “So the consumer — no matter how many conditions they have, no matter how complex — is still experiencing a single experience with a single brand and a single workflow.”

Companies that offer musculoskeletal help plus mental healthcare or chronic condition management may have a head start when selling, but it’s complex to build a system that tackles a number of specialty areas without putting some navigation work on the patient — just like the traditional healthcare system, he added.

Plus, a multi-condition company may not deliver returns for all the conditions they cover, said Maayan Cohen, co-founder and CEO of cardiovascular care firm Hello Heart.

“All-in-one solutions run the risk of doing a lot of things badly, instead of doing one thing really well and driving real savings,” she wrote in an email.

Some specialties, like mental healthcare, are broad enough to be handled on their own, said Katelyn Watson, chief marketing officer at teletherapy company Talkspace. But that means including care for a wide range of conditions across several modalities, like offering therapy as well as psychiatric care.

“There are certainly companies out there that only do medication, or they only do therapy, or they only focus on one aspect of mental health,” she said. “I do think that will be challenging, because, as it relates to mental health, you really do want to put everything under one umbrella.”

Digital health point solutions might have more luck pitching their products to specific departments or groups within buyers rather than the company as a whole, said Rock Health’s Kaganoff.

There are also opportunities for companies that are focused on a problem that isn’t being managed well by larger platform players, or tools for more niche populations or therapeutic areas, as long as they’re still big problems that payers and employers need to solve.

“Often they’ll start with point solutions, and then those point solutions will either grow or merge or get acquired by larger offerings,” she said. “But there's always that moment, the first few years, when it is a new and novel thing that makes sense to be a standalone.”