Healthcare Private Equity in 2022: Challenges and Opportunities for Digital Health Investment

Health


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Digital health is an umbrella term that stretches to capture a broad swath of industries, services, and technologies at the intersection of digital innovation and healthcare. These solutions include telehealth, virtual care, remote monitoring, digital therapeutics, diagnostic tools, and many other innovative technologies aimed at improving care while lowering costs and engaging patients.

Investment in digital health has slowed down, but experts suggest this is a momentary correction and that the digital health industry is still poised to make a significant impact on healthcare delivery. With investors looking to make smarter investments, we took a closer look at the legal and regulatory issues driving some of the market corrections, and the correspondence issues that can help investors and companies navigate the challenges and opportunities in digital health investment during a panel discussion at our recent Healthcare Private Equity 2022 conference in New York.

Slow, not stagnant

At the end of Q3 2022, there were 458 deals in the US digital health arena totaling $12.6 billion in venture funding, a huge drop from 2021, which saw 736 deals totaling $29.2 billion, according to the latest tracking report from Rock Health. But deals – even mega-deals – are still moving forward.

In September 2022, CVS Health announced plans to acquire Signify Health for $8 billion. Optum, part of UnitedHealth Group, recently completed its $13 billion acquisition of the data analytics and software company Change Healthcare. Don’t forget about the entrance of Microsoft and Amazon into the digital health space. Earlier in 2022, Microsoft closed with Nuance Communications, inking a $19.7 billion deal to acquire the healthcare cloud and AI software company. Amazon plans to acquire the primary care network One Medical for $3.9 billion if the deal can make it through scrutiny from the Federal Trade Commission.

As the fever pitch of innovation, investment and exits surrounding digital health in recent years now rationalizes to a sustainable pace with a focus on smart bets, investors will be looking at companies that can deliver on the promise of efficiencies for the health care system, while recognizing that virtual care is not a full-scale replacement for traditional in-person medical services. In addition, they are looking for companies that demonstrate compliance sophistication and recognize not only the regulatory environment they live under, but the regulatory demands of their customers as well. Bankers who spoke at McDermott Will & Emery’s Health Private Equity Conference  in New York this year were somewhat bullish overall on the digital health sector. Although valuations have pulled back meaningfully, lower valuations have created an opportunity to invest in a strong business at a lower price if the diligence bears out. “If you liked digital health two years ago, it’s 40% off today,” one panelist remarked.

The New York audience agreed with this mixed assessment. In a poll asking about the state of digital health, 62% of respondents agreed with the statement that “investment opportunities abound if you know what you are doing.”

Capitalizing on long-term opportunities will depend largely on identifying a path to profitability for digital health companies, as well as understanding what these solutions look like at scale, how to get there, and how much capital is needed to achieve scale.

Data challenges

The success of digital health solutions, whether during a telehealth visit or using a diagnostic tool, are dependent on being able to access the right information at the right time. Unfortunately, accessing complete and accurate data at the point of care remains a significant challenge.

Despite federal mandates on the adoption of electronic health records and some level of interoperability, access to a patient’s full health history has been elusive. For example, information on transfers and discharges are frequently not available. One panelist said that in certain sectors of healthcare, such as psychiatric hospitals, the fax machine is still the main way that information is shared. At those facilities, administrators say it is less expensive to pay the fine than to implement use of the electronic health record.

There are recent federal rules that could begin to accelerate data exchange. In May 2020, the Centers for Medicare and Medicaid Services (CMS) published the Interoperability and Patient Access final rule, which adopted new standards for secure data exchange within the Medicare and Medicaid programs, the Children’s Health Insurance Program, and qualified health plans issued through the Affordable Care Act’s federally-facilitated exchanges.

The rule also allows payers to ask third-party app developers to attest to some privacy provisions and then pass that information on to patients, requires CMS-regulated payers to exchange certain patient clinical data with other payers at the patient’s request, and begins a policy of publicly reporting clinicians and hospitals that engage in information blocking. The rule also requires hospitals, including critical access hospitals and psychiatric hospitals, to electronically notify other healthcare facilities and providers about a patient’s admission, discharge, and transfer.

These provisions went into effect in 2021 but CMS announced later in the year that it would exercise enforcement discretion on the requirement on payer-to-payer data exchange until the agency could provide more details in future rulemaking.

How this regulation is enforced will have a significant impact as more digital health solutions seek to harness patient data to provide better care. Access to admissions, discharge, and transfer data, in particular, is a powerful tool for companies seeking to provide high-quality care to patients at home.

Data blocking is another concern as players across the space seek to protect their data rather than enable the type of data exchange that could improve care coordination. Though the CMS regulation includes a provision to report clinicians and hospitals that engage in data blocking, there are no enforcement regulations in place as of yet.

Data diligence 

Another challenge in the digital health arena is the sheer number of narrow-point solutions that are currently available, all using some combination of identified and de-identified patient data. The volume of these solutions is overwhelming end-users, whether it is a hospital, clinicians, payers (including self-insured employers), and life sciences companies, explained one panelist. Instead, those users are looking for scaled solutions that offer multiple types of information in one place where such data is curated, collated, and captured consistent with regulatory requirements. This is a trend to watch that could result in consolidation of digital tools.

Finally, data diligence that includes evaluating the availability and eligibility of data for intended uses under HIPAA and state laws, is a critical piece of any investment in the digital health space. For instance, the HIPAA Privacy Rule provides standards for de-identification of protected health information using either a safe harbor method or expert determination. Although the HIPAA standard requires removal of patient identifiers, provider information can remain (though in more limited fashion under the statistical method in some cases). However, under the California Consumer Privacy Act, there is a different standard for de-identified information. The California law does not allow disclosure of personal information about providers or workforce members. A digital health tool that could be used by consumers in California would need to comply with both standards.

What’s next?

As investors look to the future of digital health, opportunities are likely to be significantly broader than digital tools to manage low acuity conditions. Instead, digital health has the potential to improve coordination of care, streamline care delivery, and significantly lower costs for patients with complex and chronic conditions who receive care from multiple providers across multiple settings. Remote patient monitoring, for instance, offers the chance for clinicians to understand what is happening with their patients between visits.

One panelist suggested that digital health solutions are likely to flow into health care areas that are the major drivers of spending, such as cardiology, oncology, chronic kidney disease and end-stage renal disease, as well as some neurological conditions. Patients have already embraced the convenience of digital health services in behavioral health care and experts anticipate that patients with other chronic illnesses will also flock to services and solutions that allow them to spend more time at home and less time traveling to clinics and waiting for providers.

One of the most exciting possibilities for digital health solutions is as a driver of efficiency within the value-based care setting. Data-driven care delivery aided by technology could help providers and payers to chip away at the hundreds of billions of dollars of waste in the health care system. While still early, there are many opportunities for investment in the digital health area.

As we look out over the horizon to 2023, we would anticipate a rebound of investment in the digital health space but with a simultaneous and a continuing level of focused regulatory diligence as this complex landscape continues to evolve.

Photo: CaptureTheWorld, Getty Images



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