2021 was a record year for the digital health market, but the unique forces in the industry still pose challenges for founders and investors alike.
Digital health startups raised more than $29 billion in venture capital last year, nearly doubling 2020’s funding total, according to Rock Health. With lessened regulation, better reimbursement, provider adoption, consumer demand and an explosion in direct-to-consumer uptake, the market conditions were finally ripe for potential commercial success. From communication applications to telemedicine and at-home testing to digital therapeutics, there was an explosion of ideas and product launches.
That said, digital health does not act like other markets — even other regulated markets. Many entrepreneurs underestimate the stagnating forces and believe that with the right solution, a good story and enough capital, they can be disruptive. But there is a long list of well-established companies and well-conceived products that never made it.
Unique Healthcare Dynamics
Healthcare evolves at a glacial pace for a number of reasons. First and most importantly: Safety is paramount. We apply tremendous rigor to new treatment modalities so that we don’t cause adverse health events such as complications or death. Physicians on the whole are skeptical, and they commit to first do no harm. As such, they view changes through an evidence-based lens.
Healthcare is highly regulated — not only for safety but also for privacy and, because the government is the single largest underwriter, for cost management. The government sets reimbursement methods, terms and what is ultimately allowed, setting direction for the broader market. Further, through the Food and Drug Administration, the government sanctions health devices.
Lastly, healthcare funding mechanisms have historically removed consumers from exacting their power, causing a substantial disconnect between what consumers want and what the market offers.
The Pandemic’s Effect on the Digital Health Market
The COVID-19 pandemic was a catalyzing event for healthcare in many ways. It upended the market and broke through these historical constraints. Prior to the pandemic, there was little provider adoption of digital health, including telemedicine. There was no digital health reimbursement from Medicare and limited commercial benefit options or reimbursement. And there were interstate licensure barriers to performing some methods of digital health.
With an inability to provide in-person care, physicians’ pay was directly impacted, and therefore they were highly incented to find alternative means. Also, the government removed some barriers to reimbursement to avoid delays in care.
The pandemic opened Pandora’s box to such an extent that, in April 2020, telemedicine use was 78 times higher than in February 2020, and currently 13 to 17 percent of all healthcare visits across specialties is through telemedicine, according to McKinsey. Consumers are finally able to access care and monitor their health in ways that are convenient for them and are not just subject to what the healthcare establishment wants.
And there is no going back.
Digital Health Market Barriers
Despite the changes brought about by the pandemic, the same barriers that have always existed — provider adoption, interoperability and reimbursement by payers — continue through to today, making it difficult for startups to find adoption in the digital health market.
There is a limited number of physicians, and they have limited capacity to investigate new digital health technologies. By the nature of the volume of new devices and applications being pitched to their practices, there’s a real weariness to evaluate them all and make a decision regarding adoption.
That relates closely to the second barrier, interoperability. Again, physicians have limited availability and resources, so they want any solution’s data right at the point of care, in the electronic health record (EHR). They don’t have time to be switching back and forth across many applications, and they don’t have the capacity to integrate these apps into the EHR. They’re looking for that integration to have occurred already, which can be a significant expense for start
For many physicians and practices, there’s no reimbursement to adopt these technologies either, which creates an extra burden.
To overcome these barriers, it’s essential for digital health startups to find product market fit. To succeed, customers — whether they be payers, hospitals, providers, nursing homes or consumers — cannot simply want a product. They have to buy it, and the barriers to sale are high.
Entrepreneurs need to have a foundational understanding of their buyer and what it will take for them to not only pilot but purchase.
Heather Lavoie is CEO of Illume Advisors.