Proliferation of digital health software may drive industry M&A consolidation

Employers, insurers, and healthcare providers are being inundated with a flood of digital health products claiming to optimize operations and patient care, ranging from care navigation tools to virtual therapy and fertility support services.

However, the sheer number of vendors has overwhelmed buyers. Experts told Healthcare Dive that buyers are increasingly looking for one-stop shops that can meet more needs on a single platform, paving the way for increased M&A activity amid a tighter funding environment.

According to data from consulting and venture capital firm Rock Health, the digital health sector experienced a boom over the past decade, peaking in 2021 when U.S. startups raised over $29 billion across more than 730 deals. A 2021 report from the IQVIA Institute for Human Data Science found that consumer-facing health apps exceeded 350,000, with 22% being disease-specific.

But since the post-pandemic peak, investment in the sector has declined, which could leave some digital health startups—including point solution companies—cash-strapped and more willing to engage in deals.

Buyers of digital health products such as health plans, employers, and healthcare providers are looking for companies that offer more than one service, which could put point solution companies at a disadvantage.

"For buyers, whether employers or payers, vendor management becomes very difficult. Managing all these relationships and scaling them can be quite challenging," said Sari Kaganoff, general manager of consulting at Rock Health.

But point solution companies still have a competitive opportunity and don't have to succumb to consolidation—provided they can solve major healthcare challenges facing buyers and demonstrate return on investment.

The key is to offer buyers a complete product that handles the entire patient journey from start to finish, said Justin Norden, partner at early-stage digital health venture firm GSR Ventures.

"When we consider investing or later working with our own startups, we always ask ourselves: 'Is this a feature, or is this a full product solution?'" he said. "If it's just a feature that needs to be cobbled together with many other things, then you get into real trouble."

"Startups in that category, especially in today's environment, are in a tough spot," Norden added.

Funding declines, M&A heats up

After a period of intense investment activity following the COVID-19 pandemic, digital health funding has cooled, putting the sector on track for itslowest investment year since 2019, according to a quarterly report from Rock Health.

Reduced availability of capital in private markets has created perfect conditions for M&A. Norden said many companies raised funds at the peak of the digital health funding boom in 2021 and early 2022 and have since been waiting for the market to improve to raise again. If companies can't raise, some may opt for M&A.

According to Rock Health's report, digital health M&A activity remained low in the first half of this year. But that doesn't mean deals won't happen, Kaganoff said. Conversations among potential acquirers about target companies and discussions from small companies seeking acquisition are ongoing, but these activities only show up in the data when deals are completed.

"I do think we're going to see a bigger wave as we move forward," she said. "And I don't think that's a bad thing; I think it's a good thing. It simplifies the process for customers and hopefully provides a good exit for founders who have put their hearts into building products."

Point solution companies may be particularly suited for M&A because digital health buyers are looking for complete platform solutions rather than stringing together multiple point solutions.

"I would just say the case for enterprise-level solutions is stronger, which intuitively makes the case for vendor consolidation stronger. Obviously, the offsetting factor is having to consider capital market conditions and other variables," said Donald Hooker, analyst at Capital One Healthcare. "But I think the trend toward one-stop vendors suggests there are opportunities for successful acquisition stories."

Healthcare is a risk-averse industry, and buyers such as providers, employers, and health plans may prefer to add additional tools from companies they already work with that offer multiple products. That means one fewer vendor to deal with and no need to bring in a new company, Norden said.

"If you find a company you like, it's working well, it's expanding, and your patients or consumers are satisfied, you want to expand that relationship rather than pile more on top," Kaganoff said.

Buyers overwhelmed by point solutions

Experts say it can be challenging for point solution companies to cut through the noise for buyers, who are often fatigued by the number of software options available.

Point solution companies—which may focus on managing one condition like diabetes or addressing a single issue such as providing risk scores for mental health conditions—are at a disadvantage compared with companies offering multiple tools. For example, virtual care giant Teladoc Health offers chronic disease management while also providing behavioral health and primary care, which may appeal to digital health buyers with multiple point solutions.

Health systems in particular need to manage a large number of vendors and competing priorities.

"When you're managing hundreds of contracts, you lose control. Renewals come and go, and you simply don't have the energy to evaluate whether this solution is really adding value," Hooker said.

Health systems facedthin marginsduring the pandemic, according to consulting firm Kaufman Hall, and although conditions have improved, many hospitals still underperform due to persistent pressures such as high expenses and inflation.

As a result, hospitals need to see clear returns before investing in digital health products, Hooker said. They may be more inclined to trust vendors they already work with, which gives companies offering multiple tools an advantage. Additionally, buying more products from the same vendor may lead to better pricing.

Norden said that if digital health vendors can't solve one of the biggest problems for large health systems, they are unlikely to become a high enough priority to secure a meeting with buyers.

Norden noted that employers have historically been the biggest buyers of point solutions and may require less return on investment than providers and health plans. But in a more constrained economic environment, that could change.

"When they cut spending across the board, sometimes benefits are part of that. So I think those digital health companies that had employers as their customer base will actually see contraction too," Norden said.

On the other hand, point solution companies argue they offer benefits that competitors with broad product lines cannot.

"A one-stop solution has the potential to do many things poorly rather than doing one thing very well and delivering real savings."

Consolidation is one path for point solutions, but companies can also offer more ways to connect their tools with the larger ecosystem, said Mark Luck Olson, CEO of digital musculoskeletal care company RecoveryOne.

That could mean thinking creatively about distribution, such as partnering with primary care providers or other first stops in healthcare. RecoveryOne also allows buyers to brand its tools as if they were other solutions and uses application programming interfaces to switch more seamlessly between other programs, he said.

"In my view, the digital opportunity is not just throwing people over the wall when they present with other conditions, but truly bringing them into an integrated clinical pathway," Olson said. "That way, no matter how many conditions a consumer has, no matter how complex, they still experience a single brand, a single workflow, a single experience."

He added that companies offering musculoskeletal help plus mental health care or chronic disease management may have a first-mover advantage in sales, but building a system that handles multiple specialties without adding navigation work for patients is complex—just like traditional health systems.

Moreover, a multi-condition company may not deliver returns for all the conditions it covers, said Maayan Cohen, co-founder and CEO of cardiovascular care company Hello Heart.

"A one-stop solution has the potential to do many things poorly rather than doing one thing very well and delivering real savings," she wrote in an email.

Some specialties, like mental health care, are broad enough to stand alone, said Katelyn Watson, chief marketing officer of teletherapy company Talkspace. But that means covering care for a wide range of conditions across multiple modalities, such as offering both therapy and psychiatric care.

"There are companies that only do medication, or only do therapy, or only focus on one aspect of mental health," she said. "I think that will be challenging because with mental health, you really want to have everything under one umbrella."

Rock Health's Kaganoff said digital health point solution companies may be more likely to pitch their products to specific departments or groups within a buyer's organization rather than to the entire company.

There are also opportunities for companies focused on problems that large platform players haven't managed well, or tools targeting smaller populations or therapeutic areas—as long as they remain significant issues payers and employers need to address.

"They typically start as point solutions, and then those solutions either grow, merge, or get acquired by larger products," she said. "But there's always a moment, in the early years, when it's a novel thing and it makes sense to exist as a standalone product."