Some healthtech investors are shifting from growth to value

By Adnan Qamar, consulting managing director, and Steve Gabster, senior manager, Deloitte Consulting LLP

As overall market activity surged during the COVID-19 pandemic, investments into health technology (healthtech) grew significantly, according to Deloitte’s analysis of Pitchbook deal data.¹ Over the past 18 months, however, investment volume has trended downward as investors weathered inflation, elevated interest rates, and greater uncertainty.² In this environment, we have begun to see a shift in investor strategies and priorities. Rather than focusing narrowly on growth potential, some investors appear to be prioritizing proven business models that have a demonstrated track record of healthy liquidity and sustainable revenue and profit (see Expectations for emerging technology markets). This can be broadly characterized as a shift from higher volume but smaller funding rounds in early-stage entities, to fewer and larger investments in more mature or expansion-stage organizations.

This trend appears to hold true among a broad spectrum of healthtech investors—from financial investors (e.g., venture capitalists and private equity), to large health care and life sciences firms, to non-traditional health care investors (such as retailers and technology firms). For each investor type, the healthtech space can offer unique value propositions. Investors might have different goals, such as reducing operating costs, achieving sustainable growth, or unlocking new value within existing operating models. Regardless, our analysis of Pitchbook data and experience in the market suggests that a growing number of investors are putting a renewed emphasis on the quality and durability of investments in healthtech.

Six priority areas for healthtech investors

Healthtech represents technology, software, and SaaS solutions used in a wide range of health applications, such as electronic medical record (EMR) platforms, telehealth, care-navigation platforms, hospital-at-home, decentralized clinical trials, and revenue-cycle software. We have been closely tracking the healthtech market for several years, specifically exploring market trends from 2018 to present with an emphasis on late-stage investment in the public and private markets (e.g., M&A, IPOs, and restructuring events). We reviewed Pitchbook data from this period and performed a key word-based cluster analysis to identify and examine investment themes and patterns that appear to be attracting healthtech investment dollars. Here is a look at what we consider to be the six primary investment segments for healthtech investors:

1. Revenue-cycle management: Increased use of artificial intelligence (AI) by payers—especially in utilization management and prior authorization—has led to more claims denials for clinicians and health systems.³ In response, a growing number of providers are following suit and are similarly turning to AI and automation to reduce claims-processing issues, improve revenue-cycle efficiencies, and decrease denials.
   
2. Next generation discovery and treatment: Bringing new drugs or therapies to market can be a time-consuming and expensive endeavor. Pharmaceutical companies spend an average of $2.3 billion—from discovery to launch—to bring a new product to market (see Measuring the return from pharmaceutical innovation 2024). However, the onset of new technologies has the potential to reduce both the cost and time to market as well as increase the effectiveness of treatments through enhanced personalization. AI, machine learning, and modern data platforms are being used by companies to develop new breakthroughs. The technology is advancing opportunities for rapid drug discovery, personalized medicine, and more inclusive and decentralized clinical trials.⁴
   
3. Fitness and wellness: AI-powered technologies, and an increasing number of consumer-grade wearable and fitness technologies, are opening the door to new types of conversations between patients and clinicians (44% of Americans own wearable health tracking devices).⁵ Furthermore, smartwatches, smart-rings, and other wearable devices are increasingly being paired with modern data platforms (see The future of clinicians in the era of consumer-centric health). As a result, managing personal health has expanded beyond the doctor’s office and includes more holistic and data-driven approaches through real-time health tracking, predictive analytics, and personalized feedback.
   
4. Smart devices: While some physicians might have initially resisted consumer-generated health data, that stance appears to be changing. As care teams navigate questions about consumer-grade devices and how to effectively manage and integrate these new data streams, a growing number of clinicians are recommending smart devices as a medical tool to help diagnose or manage certain conditions, or to monitor recovery after a surgical procedure.⁶ Smart devices may represent the next evolution of traditional medical technology (medtech) or regulated devices. These devices are frequently developed by traditional medtech companies, and are often integrated with additional sensors, connectivity, and data platforms. Such devices must adhere to regulatory standards and practices. As a result, there can be higher barriers to entry vs. the consumer-focused and less regulated fitness and wellness space. However, once approved, these medtech devices may fit more naturally into existing care team workflows and treatment plans.
   
5. Virtual health and care coordination: While the use of virtual health visits has dropped since the COVID-19 pandemic was declared over, the technology proved itself, and some patients became accustomed to the convenience. Furthermore, some of the same capabilities are being deployed in home health settings to enable remote patient monitoring and return patients more quickly to the comfort of their own homes.⁷ Alongside a growing integration into the broader health care ecosystem, virtual health and care coordination could help deliver seamless, efficient, and personalized patient care. The Centers for Medicare and Medicaid Services (CMS) recently proposed new billing codes⁸ for virtual health indicating this care delivery method may be here to stay.
   
6. Next-generation health care IT: Numerous aspects of health care IT systems are beginning to shift from legacy on-premise solutions to cloud-based solutions. Investors appear to be taking note.⁹ However, resilience and cybersecurity are paramount given recent cyber-attacks and outages that caused significant disruption in the industry.¹⁰ Investors are likely to be interested in technologies that can help avoid future disruptions. There is also increased focus on connectivity and interoperability of health data. Some health care stakeholders are investing in AI-enabled tools, integration layers, and platforms around EMR systems and are enabling technologies that can help drive insights and improve patient outcomes.
   

Framing investment opportunities through the lens of these six segments could help investors identify opportunities that best fit their value propositions and market patterns. Provider/payer-focused segments (e.g., revenue-cycle management and next-generation health care IT) attracted a disproportionate amount of investment in our early analyses. In 2024—outside of a few large take-private deals—there appears to be less interest in those areas. Instead, we have seen an increasing proportion of dollars flow into life science and medtech-adjacent spaces (i.e., next generation discovery and treatment and smart devices).

Some investors who entered the healthtech space during the market boom of 2020-2021 might be looking to offload some assets or reduce investment stakes that might no longer fit their broader portfolio. As these healthtech investors re-evaluate and update their portfolios, there could be an opportunity for both financial and strategic investors to find businesses that might fit better with their own investment theses, operational goals, and organizational strengths.

Conclusion

We expect that technology will continue to play an ever-increasing role in health care, which could create unique investment opportunities. Analyzing this market through the lens of our six healthtech segments—and understanding the recent trend toward quality and value—can be important in making successful, impactful investments.

Acknowledgments: Tyler VauDell, Ophelia Jiang, and Kathleen Antaki

Latest news from @DeloitteHealth

Endnotes:

^{1_{Shift to remote care pushes healthtech investment to new heights in 2020, Pitchbook, October 18, 2020}}

^{2_{Q1 2024 digital health funding: Great (reset) expectations, Rock Health, April 8, 2024}}

^{3_{Revolutionizing revenue-cycle management efficiency with AI, The American Hospital Association, May 21, 2024}}

^{4_{Inside the nascent industry of AI-designed drugs, Nature, June 1, 2023}}

^{5_{Put a ring on it: Understanding consumers’ year-over-year wearable adoption patterns, Rock Health, August 5, 2024}}

^{6_{Apple Watch Is becoming doctors’ favorite medical device, Wall Street Journal, June 29, 2024}}

^{7_{The next frontier of remote patient monitoring: Hospital at Home, Journal of Medical Internet Research, March 16, 2023}}

^{8_{What the CMS 2025 PFS proposed rule means for virtual care, TechTarget, July 22, 2024}}

^{9_{R1 to go private in $8.9 billion deal, Bloomberg, August 1, 2024}}

^{10_{Cybersecurity Incident: frequently asked questions, HHS, July 30, 2024}}

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Return to the Health Forward home page to discover more insights from our leaders.