By Josh Gray
What lies ahead for innovative health technologies companies in 2023? Heading into 2022, we predicted a tough year for startups. If anything, we understated the situation: the funding environment is dramatically tougher, with little prospect of relief in the near future. We also anticipated that “early advocates using AI in controlled settings will lead the way to broader adoption at the point of care.” In actuality, the diffusion of AI in clinical practice is proceeding more slowly than we anticipated. Controversies surrounding the validation and performance limitations of the Epic Sepsis predictor have continued to have a negative impact on some user perceptions of the pace of AI adoption at the bedside. My colleagues and I at Health Data Analytics Institute support rigorous assessment of AI products as evidenced by our recent publication of our validation study in Anesthesiology.
Prediction #1: Another brutal year ahead for innovative health care startups
The venture-fueled expansion of health care startups came to a screeching halt in 2022. Between 2015 and 2019, health tech startups raised an average of $6.4 billion annually in venture funding (Rock Health citation) at an average deal size of $17.1 million. By 2021, investment nearly quintupled (to $29.2 billion!) while the deal size more than doubled, to $39.7 million. With enthusiasm for digital innovation at a fever pitch and investors fearful of missing out, entrepreneurs enjoyed easy access to funding and generous valuations on business propositions that were more grounded in vision than results.
The investment environment in the second half of 2022 could hardly be more different. Consider the fate of three companies hailed for innovation in 2020 and 2021. Bright Health is an insurtech company that IPO’ed in 2021; Oscar Health promised to use analytics to personalize care for individual beneficiaries; and American Well rode the COVID-driven telemedicine wave. All three of these unicorns failed to sustain their value propositions and have lost 90% or more of their value, losing investors billions of dollars. Reflecting the loss of investor confidence, there were 20 digital health IPOs in 2021 and none in the first half of 2022.
Not being able to count on public market exits, venture capitalists have cut way back on their investments, making it difficult for startups to raise capital that seemed a sure bet just a year ago. Many startups will need to stretch their cash reserves long enough to reach breakeven or at least until VCs are once again ready to write checks, which could be a long wait. Many health startups (Ro, Noom, Cerebral, and Cedar) have made significant layoffs and we can expect many others to follow suit. The scramble for revenue will be made still more challenging given the many health systems dealing with steep financial losses due to weak volumes and labor shortfalls, which are driving up labor costs and, in some cases, depressing volumes of elective procedures. During these contractive periods, it is harder to sell vision to investors; to the extent that investments get made, they will likely be with lean startups able to communicate clear compelling value propositions along with compelling business and clinical results. Others will have trouble surviving.
Prediction #2: More PCPs will pursue partnerships, not employment
The Center for Medicare and Medicaid Services (CMS) plans to migrate virtually all Medicare beneficiaries to value based care arrangements by 2030, and many commercial and Medicaid plans are following suit. Primary care physicians will play a pivotal role in this transition. Of all clinicians, PCPs are in the best position to manage chronic disease and minimize the number of high-cost acute events: the success of value-based care arrangements is highly dependent on the engagement of dedicated, high quality primary care providers.
Yet despite their central importance to the health care system, PCPs experience high rates of burnout and professional dissatisfaction. Those who attempt to remain independent find themselves struggling to survive given the high costs and administrative complexities of managing a modern practice. Many others have accepted employment in large health systems. Many of these employee physicians feel alienated because they have little control over their day-to-day practice and working conditions.
Consequently, we expect more primary care physicians to partner with firms that will allow them to practice independently while enabling them to profit from value-based care contracts. Companies like Agilon, Aledade, Caravan, and others do not employ PCPs but supply them with analytics, contracting support, and in some instances case management, equipping them to make the transition to value-based care manageable and lucrative. Of course, only some of these partnerships will be successful. But given the difficulties of remaining completely independent and the professional frustrations of employment, we think more PCPs will choose the option of partnering with companies that help them provide value-based care profitably, while remaining independent.
Prediction #3: Consumer-oriented corporations will increase market share by providing patients with better access
Have you, your family, or friends had to wait three months or (much) more for a primary care appointment? Have they struggled to find a new PCP when they move or when their old physicians retire? Mine have. Ambulatory care volumes have risen closer to pre-COVID levels, but during the pandemic, many providers cut back their clinical hours or left the profession altogether. As a result, patients are finding it harder to access care in a way that works for them.
Large, national brands are stepping to fill this void. Walgreens spent $5.2 billion to acquire Village MD and $9 billion to acquire Summit Health, a provider group with primary, specialty, and urgent care services. Walgreens currently has about 80 primary care locations and plans to have 1,000 by 2027. CVS, which owns Aetna, already has 1,000 Minute Clinics and more than 100 Health Hubs designed to provide primary care and to help patients manage their chronic disease. Walmart is a key health care provider in rural markets, providing full service primary care adjacent to its retail super centers.
These large companies are well positioned to provide patients with much faster access to care than they receive from conventional physician groups. They are deeply experienced in understanding and responding to consumer needs. This, combined with their growing expertise in digital medicine, allows them to provide patients with convenient, relatively low-cost care. Unless providers can ensure patients have fast access and a positive service experience, they should be prepared to lose patients to consumer oriented for-profit companies.