Apple Watch as an example of Digital Healthcare

Why Digital Healthcare Is a Massive Opportunity

Stephen Kraus | Leadership

Over the past couple of years, more than $4 billion of venture-backed capital has flowed into digital healthcare companies around the world. At Bessemer, we’ve certainly done our fair share of deploying capital in the sector. Most recently, for example, we co-invested with Georgian Partners in a company called Welltok that helps population health managers guide and incentivize consumers to optimize their health.

I’ll come back to Welltok in a minute. For now let’s just wrap our heads around all of that capital being invested. It’s a huge amount of money. All the more so when you consider that as recently as 2008, VC investment into healthcare IT (which is what we called the sector back then) topped out at just $250 million dollars. Talk about a massive ramp up.

Yet not surprisingly, for some people it’s a red flag. With so many new companies entering the market fueled by so much capital, talk of another tech bubble is inevitable. Plus, it doesn’t help matters that there are a number of clearly overvalued digital healthcare companies at the center of the storm.

Nevertheless, I’m bullish about the digital healthcare sector. Sure there may well be some price corrections and more stories of startups failing than making it big, but that’s true in any industry. I’m so optimistic because there are some great companies out there with amazing leadership teams. Plus it’s a massive market with the potential to shift trillions of dollars in value. When you consider that, and take a long-term view, you begin to see that pumping $4 billion into a sector that represents 20 percent of the economy really isn’t that big of an investment.

What’s Driving All of the Interest and Activity in Digital Healthcare?

To understand why there are so many entrepreneurs building digital healthcare businesses and why billions in VC dollars have been raised to support it, you need to consider two important and closely related market trends.

First off, there have been a number of regulatory changes in recent years that have fundamentally shifted the economics of healthcare. Whereas it used to be a fee-for-service system that rewarded patients being seen and actions being taken, we’re now seeing healthcare move toward a fee-for-value system that instead rewards outcomes and improved health status. That’s a game-changer.

In addition, and partly as a result, we’ve seen a massive increase in consumerization within the healthcare industry. Whereas under the fee-for-service system, patients were typically the one constituent left out of equation, in today’s world where outcomes matter, the patient is suddenly front and center, playing a much bigger role in managing his or her own health.

More so than anything else, these two changes in the market place have led to the massive interest in digital healthcare. You won’t be surprised to hear that Welltok, that company I mentioned earlier, is playing on both of these trends in a significant way.

Beyond the Trends, Technologies Come Together

Healthcare has never really been considered at the forefront of technology. Yet two tech trends are definitely starting to change all of that. The first is the rise of physical or applied technologies like the devices and wearables that are becoming an increasingly important part of our lives. Just think of your phone, watch, or Fitbit, and how they’re starting to be used for health. Technologies like these are fantastic, but the challenge they face is that they often wind up getting commoditized.

The second trend is the rise of what I think of as true information technologies or virtual technologies. They’re the ones that allow you to create value by aggregating data and information from a variety of sources to make it useful for end users. In the case of healthcare, those end users are risk entities, providers, and consumers. Importantly, good information platforms and technology don’t get commoditized. Instead, they expand in value as more people use them leading to more data and more insights.

One of the things that I like so much about Welltok is that it drives collaboration between both of these technologies, giving the best of both to healthcare consumers.

The Changing Face of Health Care

Although most of us still associate healthcare with going to the doctor, that notion is beginning to change as more and more of it moves online. That’s not to say that there won’t be doctors or hospitals in the future — there will always be a need for them — but rather that our relationship will them will change. New technologies will help ensure that people will become increasingly aware of their own health and how their daily choices and activities affect their overall health status.

Not only that, the way that healthcare is measured will change. The current thinking is that ROI is thought of as when a reduction in expensive medical care is achieved. However, if healthcare value equals the health status of a person divided by the input costs of achieving that status, then we shouldn’t just be looking at the expensive input costs. We should also be taking the the low-cost, high-frequency input costs into account. I’m talking about the ones that if their usage were expanded, would have a positive impact on overall health status and lowering costs. That’s exactly the type of benefits the companies like Welltok can deliver.

Digital healthcare is a rapidly growing, dynamic and fascinating sector. In the months and years ahead, I expect we’ll see huge changes in the way that people integrate technology into their daily lives to take greater control of their health status. With exciting companies like Welltok leading the charge, I think the opportunities are endless.