After the outbreak of the COVID-19 pandemic, a surge of investor funds flowed into the digital health sector, and healthcare providers rapidly deployed telehealth capabilities, driving the rapid adoption of health technology. However, compared to the investment boom at the peak of the pandemic in 2021, funding has significantly declined, and some companies shut down operations in 2023. Despite this, industry interest in emerging technologies remains strong this year—especially in the potential of artificial intelligence to streamline operational processes and reduce the administrative burden on clinical workers.

As organizations continue to advance their digital transformation, cybersecurity remains a major challenge. According to related reports, healthcare data breaches have exposed the sensitive personal and health information of hundreds of thousands of patients.

Experts say this year may be a period of consolidation for the health technology sector. Healthcare providers and payers will focus on integrating digital tools across their organizations, and industry observers may see data on effectiveness and outcomes emerge after years of digital health investment.

Alex Lennox-Miller, lead healthcare IT analyst at market intelligence firm CB Insights, believes 2024 may reflect more of an evolution of existing technology rather than disruptive innovation. He said, "The pace of technological change in healthcare over the past few years is unprecedented in my experience. Even without absolutely game-changing technological breakthroughs, maintaining this pace alone would be a huge victory for the entire healthcare industry."

Mergers and acquisitions may rebound as digital health investment normalizes

Investment in digital health companies began to decline in mid-2022 and fell to multi-year lows last year. High interest rates have limited the fundraising capacity of venture capital, while lower valuations and a frozen IPO market have further reduced available funding for startups. However, experts point out that this decline is not a total collapse of the industry, but rather a return to normalcy after the investment surge in 2021. Digital health funding levels this year will be similar to 2023 and may begin to recover—especially in the second half of 2024—but the funding spigot is unlikely to fully open.

As lower funding may push startups toward deals, industry consolidation is also expected to accelerate in 2024. Experts believe that digital therapeutics, mental health service providers, and weight-loss companies could become attractive acquisition targets. Jennifer Goldsack, CEO of the Digital Medicine Society, said that high-quality products capable of solving specific healthcare problems may represent the best opportunity for consolidation. She said, "What we want to see is consolidation, adopting best practices and the best technology, bringing the best teams together to truly provide complete solutions to healthcare challenges, rather than fragmented tools." She noted that buyers of digital health products are tired of managing numerous point solutions, so high-quality products that can integrate into more comprehensive tools are extremely valuable—especially for healthcare giants like CVS Health or startups that completed massive Series D rounds years ago. This also helps separate the strong from the weak.

Cheryl Cheng, founder of venture capital firm Vive Collective, said that as some digital health startups funded at the peak of the investment boom have been operating for several years, the industry is expected to see data on the effectiveness of these solutions in improving healthcare access and quality. She said, "There will be a clear divergence between companies that have built truly robust clinical models, have good unit economics, and can scale, and those that may still rely on pandemic tailwinds."

Building the infrastructure for healthcare AI

In 2023, discussions about the potential of AI in healthcare reached a peak, especially generative AI technologies capable of creating new content such as text or images. Tech giants like Google, Microsoft, Oracle, and Amazon released new products last year aimed at handling operational tasks and reducing administrative burdens. But generative AI is still in its early stages. Sunny Kumar, partner at digital health venture capital firm GSR Ventures, said the industry is still in the exploration phase regarding how to best utilize the technology. He said, "Take the mobile platform as an example. When the iPhone was launched in 2009, no one would have told you that the industries it would disrupt most deeply would be the taxi industry (like Uber) or the mapping industry (like Google Maps)."

The infrastructure behind AI has yet to be built, including how to effectively integrate tools into healthcare systems, how to set and follow appropriate safety and compliance standards, and how product buyers can understand the sources of training data. Vive's Cheng said that hype and capital inflows in this field may decrease in 2024, and developers will focus on nurturing the seeds sown last year. CB Insights' Lennox-Miller noted that transparency will become increasingly important this year, especially for clinical decision support tools or algorithms that assist in claims assessment. Last year, lawmakers heard testimony about insurers using algorithms to predict patient care needs, and advocates argued that these algorithms led to claim denials and forced patients to pay out of pocket or navigate the appeals process themselves. Humana, Cigna, and UnitedHealth were all sued last year for using algorithms to process claims. Lennox-Miller said, "Frankly, your transparency itself needs to be transparent. If you just show how the algorithm works, and it's merely a mathematical formula or an extremely complex set of documents, that's not helpful."

Regulators focus on cybersecurity standards

Experts say healthcare organizations need to take cybersecurity seriously this year and may face increasing regulatory pressure to curb data breaches. Over the past five years, data breaches at healthcare organizations have become more common. The HHS Office for Civil Rights found that large breaches reported to the agency increased by 93% between 2018 and 2022, while breaches involving ransomware surged by 278%.

Cyberattacks initially targeted large healthcare systems, but now smaller providers and business associates have also become targets. Amy Magnano, partner at law firm Morgan Lewis, said attackers are becoming more sophisticated, using AI and machine learning tools to refine their attack methods, including crafting more deceptive phishing emails. She noted that more states may enact their own healthcare cybersecurity regulations in 2024. New York proposed draft rules for hospitals last November, aimed at protecting facilities and maintaining operations during cyberattacks, while state budget funds were allocated to help hospitals upgrade their technology systems. Magnano said California, Washington, or other states with more established medical record requirements may be inclined to enact related regulations. But providers may prefer improved infrastructure, funding, or guidance over fragmented regulatory approaches. She said, "Each state's privacy laws are slightly different. So, in terms of preventing cyberattacks, I'm not sure whether state-level regulation can truly improve this issue."

HHS has also indicated its intention to raise cybersecurity requirements for hospitals through Medicare and Medicaid, and released a concept paper in December outlining strategies to obtain new authorities and funding. Jennifer Goldsack of the Digital Medicine Society said that despite good intentions, many hospitals are already operating on thin margins—especially rural healthcare institutions that need to maintain operations to ensure community access to care. She noted that with fines and litigation damages following data breaches, providers' risk considerations may have already shifted. More challenging still, cybersecurity experts are not easy to find. Tina Wheeler, partner and U.S. healthcare leader at Deloitte, said some healthcare systems have turned to outsourcing cybersecurity teams, especially smaller institutions that cannot afford large in-house staff. Goldsack emphasized that regardless of the approach, healthcare organizations need to focus on improving cybersecurity practices among all employees, because a single weak link can lead to a data breach. She said, "Your security is only as strong as the weakest link. Don't assume that having three excellent cybersecurity experts in leadership can secure the entire healthcare system in the digital age."