2021 was a mega year for digital health funding. With the COVID-19 pandemic driving huge demand for virtual and convenient services, digital health companies raised $29 billion.
This year funding has begun to slow, with $10 billion raised in the first half, and average investments dropping by 25%. Before cutting a check, investors are scrutinizing digital health firms’ financial and business fundamentals, ability to provide value, time to market, and ability to scale. Plus, it’s getting increasingly hard to differentiate in the fragmented market.
Innovative digital health companies can use this opportunity to sharpen their products’ market fit and scale sustainably across the ecosystem.
With members receiving healthcare across many stakeholders, scaling in health care is complicated. Challenges include complex regulations, misaligned stakeholders incentives, multiple decision-makers, unclear accountability for overall member health, and data and interoperability challenges.
Healthcare ecosystem and interdependencies
How to create scale and value during this difficult time
To not just survive but emerge stronger, digital health companies must create a value proposition that cuts through the noise, promote health equity, manage their capital burn, and strategically navigate the ecosystem. Here are seven key components to success.
1. Offer fit-for-purpose solutions
Digital health firms must tie outcomes to the customer’s mission and vision, promote health equity and their product should address a significant unmet need or priority. They need to demonstrate their solution’s value, scalability, and depth. It should be tailored to and drive outcomes for specific conditions (e.g., maternal care bundle, teen behavioral health interventions) and member segments (Medicare, Medicaid, commercial).
Since decision-making at many large buyers is decentralized, digital health players should tailor their approach within specific customers’ organizations. The case for value will look different depending on the business unit. At a health plan, for example, value to the chief medical officer will center on outcomes and medical cost reduction, while the P&L leader will prioritize market-share growth and simplified product design. It’s always helpful to test with a friendly client before pitching to new buyers.
Critical priorities of stakeholder groups
2. Prioritize spending to manage burn
Managing venture capital burn has become important. Digital health companies will need to ruthlessly prioritize their capability investments, talent hiring, and expansion spending based on the near-term value created and the level of the effort or spend. Solution execution discipline will need to be sharpened via tight implementation management and use of scalable deployment models.
3. Demonstrate outcomes and financial value for customer
To differentiate themselves, digital health firms must present a clear financial story that illustrates how they can increase revenue, decrease administrative and medical costs, and improve member outcomes. Promoting health equity is another clear differentiator.
Companies with a prior consumer base, for example, can demonstrate the value generated for specific member segments relevant to the stakeholder. Peer-reviewed studies add credibility.
4. Put skin in the game
Most customers are looking for digital health players willing to share upside and / or downside risk. Flexible business models that pay based on outcomes and value can help establish trust and transparency. Among the models are: payments tied to specific performance metrics (e.g., per-member, per-month payment gets activated once specific quality and engagement targets are achieved), partial risk (e.g., bundles for specific conditions), and global risk for a population. While global risk can be a stretch for most digital health companies, outcomes-based payment is a viable option for most players.
5. Drive platform plays
The healthcare ecosystem is rapidly moving toward a platform model to drive end-to-end member needs and rapid scaling. Some examples of platforms include condition management, member experience, virtual care, and clinical trials. Here are some plays digital health companies can make in this environment:
- Serving as a technology and services platform for innovators to build multiple solutions.
- Orchestrating curated solutions that plug into the platform, driving a common outcome for the customer.
- Building an end-to-end solution platform.
Each choice includes tradeoffs between level of innovation, degree of integration between solutions, and level of control on the market offering.
6. Integrate with customer ecosystem
Most buyers are tired of long migrations, technology debt, and operational disruptions. They are seeking digital health players that can offer plug-and-play solutions deployed with very limited disruption to day-to-day operations. To differentiate, digital health providers should offer:
- Ease of integration with the client’s technology stack, including core platforms and applications.
- A standardized playbook that lays out clear processes and guidelines to integrate with ongoing stakeholder workflows.
- Integration with the customer’s ecosystem partners affected by the solution and critical to driving value.
7. Consider partnerships to enhance value proposition
Digital health players can explore strategic collaborations across the ecosystem to gain additional capabilities or scale, serve as dedicated distribution channels, enable vertical integration models, or broaden their solution offerings. Collaboration models include standard contractual arrangements to deliver specific services, partial or full joint ventures around specific capabilities, and full mergers. Each model involves tradeoffs between value created and degree of autonomy.
What Next?
Digital health companies have a very important role in addressing the significant unmet needs that exist in the industry today, and pushing the industry toward better, more affordable care. Even with the slowdown, we hope these resilient companies will emerge stronger and use the opportunity to drive meaningful innovations.
Contact: rohit.nayak@pwc.com