Digital Health Boom Spurs New Accelerators, Investment Funds

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Its no secret that digital health investments are booming. The industry is likely to close out 2014 with something north of $4 billion in new investments, more than doubling 2013’s $2 billion year. Now, in a sign that the money will continue to flow, major institutions are announcing new investment funds that are targeting digital health startups.

Last week, Milestone Venture Partners announced that it has raised its fifth investment round since its 1999 launch. The new round, $150 million in total, is Milestone’s first that will be fully invested in early-state digital health startups. The company expects to close its first investment from the new funds in Q1 or Q2 of 2015.

Along similar lines, McKesson Corporation, announced last week that it would commit several hundred million dollars to a new digital health investment fund, also focused exclusively on early-stage digital health startups. McKesson is already heavily invested in digital health through its own EHR system. Now, the company is doubling down on its digital health business, and has hired VC legend Tom Rodgers to lead its investment activities in the sector. Prior to working for McKesson, Rogers managed Cambia and Advanced Technology Venture’s digital health and medical device investment portfolios.

On  the accelerator front, Texas Medical Center and Village Capital held the unveiling ceremony for their new digital health accelerator program last Friday. Called TMCx, the program is currently accepting applications and the chosen group of startups will head to Texas in March. Angel investor group Keiretsu Forum also recently announced that it was launching its own digital health accelerator program, adding to the 100+ healthcare-focused accelerators that have launched in recent years.

Silicon Valley’s sudden interest in disrupting healthcare should come as no surprise. While it’s fun to imagine that entrepreneurs and VCs are burnt out with building advertisement algorithms and now want to do something meaningful, this is sadly not the case.

The money is coming now because there has been a sudden increase in demand for digital health solutions. The Affordable Care Act has added around 9 million newly subscribed patients to the healthcare market, a number that is expected to be matched during the 2014-2015 enrollment period. While the patient population is growing, the number of available physicians is not, so hospitals will need to be more efficient with how patients are cared for, and are turning to EHRs and other digital health tools to help.

At the same time, through new reimbursement models, the Affordable Care Act has changed how care is delivered in many communities. While most hospitals still operate under a “fee-for-service” care delivery model, a new “shared savings” option now exists in which hospitals are challenged to reduce the cost of care, while maintaining quality. If hospitals sign up for the new program and succeed in reducing costs, they share that savings with CMS. For these hospitals, there is a sudden need to shift their focus toward preventative medicine, and higher utilization of primary care. Population health, data analytics, and telehealth service providers are all seeing increased funding because of these changes.

Lastly, the Affordable Care Act introduced penalties for hospitals who have high patient readmission rates. If a patient comes to the hospital to be treated for a condition, and returns within 30 days needing additional care, the second visit will not be covered by CMS. Because of this change, health systems are now looking for digital health solutions that will help them risk-stratify patients before they are discharged, and then monitor their health once they have left the hospital.

Collectively, these changes have introduced new problems that digital health startups are lining up to solve. Digital health, and in particular population health, remote patient monitoring, telehealth, and EHRs, all saw increasingly-heavy investments between 2011 and 2014. What is yet to be seen is whether digital health startups will be able to deliver on the expectations of improved outcomes, reduced cost, and a better patient experience.


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