Between ViVE and HIMSS, much of healthcare IT has spent the waning days of winter perusing rows of vendors in expo halls. As the digital health market has matured over the last few years, the shiny objects on display seem to be fewer and farther between. Companies that were selling overvalued vaporware are increasingly disappearing, either going out of business or (much like my old, beloved Honda Fit) getting acquired for the technological equivalent of spare parts.
At the same time, and not necessarily coincidentally, investors and health systems alike have become savvier buyers. They have a far better understanding of what digital health products they actually need, as opposed to the products that look good in a pitch deck but will only add clinical, operational, or technical complexity. The side eye the industry is giving generative AI is a good example of this: Executives are happy to automate payment processing or clinical documentation, but they maintain healthy skepticism about most other use cases.
This maturation of the market is a good thing. Health system buyers are a lot less likely to get fooled, and they’re a lot more likely to get something that complements – if not directly integrates with – the clinical systems and workflows they already have in place. Meanwhile, the products that pass the test continue to get noticed. Instead of playing 4D chess to convince the market they’re The Next Big Thing, they can just explain what they do and why customers choose them. In other words, they can let the results speak for themselves.
That said, I worry the market for digital health vendors to sell to is shrinking. One reason is increased competition. As market-leading products gets better, those around them strive to improve as well. (I wish the 2024 Boston Red Sox were taking this lesson to heart, but that’s another topic for another day.) As the also-rans burn out or fade away, the bar gets higher for everyone else.
Smart vendors will be able to respond to competitive threats. They always have. I’m not sure they can respond as well to the other challenge that’s looming: A shrinking customer base.
Everything’s bigger in enterprise IT
There are oodles (official, technical term) of categories of digital health vendors who find themselves essentially competing with technology giants. Epic is beefing up analytics. Microsoft is pumping resources into ambient clinical voice. Google is striving to be a longitudinal patient record, among other things. Oracle is trying to bridge gaps between EHR and non-clinical systems like ERP. Everyone’s focusing on process automation.
Large hospital systems have longstanding relationships with these big vendors. They can support the scale of their implementations, not to mention the computing needs of their research efforts. It’s a lot easier for them to add a few line items to an existing contract for a new product (even if it costs more) than it is to ramp up a pilot with an unproven (to them) product.
In fact, a recent report from KLAS and UPMC found 70% of health systems are planning to adopt AI tools from their incumbent EHR vendors. That’s bad news for anyone pitching a standalone AI solution, no matter how firmly founders believe they are uniquely positioned to solve a problem . Plus, as an experienced developer put it on Twitter, incumbent vendors know their customers’ needs a lot better than a startup that can only speculate from afar.
On the other hand, small hospital systems (especially in rural areas) are literally trying to keep the lights on. They’d be interested in automating RCM if they had an actual IT department instead of two Help Desk employees trading morning and evening shifts. They’d be interested in SDoH data ingestion if there was a qualified data scientist living within 100 miles willing to accept a nonprofit’s salary. They’d be interested in a digital front door that increases acquisition and retention rates if they weren’t losing money on every new patient they got.
A shrinking customer base
That leaves digital health vendors to compete for the middle: The hospitals that aren’t too small to fear going out of business in a few months and aren’t too big to already have massive contracts with Big Tech in hand. These are great organizations to pitch. By and large, they know they have work to do, they’re committed to changing for the better, and they’re willing to take a chance on scrappy startups that remind them a lot of themselves.
The problem, to borrow from Pearl Jam’s “Porch,” is that market trends suggest there ain’t gonna be any middle any more. The uncertain future of the small, independent hospital has left many leaders to consider acquisition as the only option for staying open.
That will leave digital health vendors in a bind. Small hospital systems may fall in love with scrappy startups and their solution for any number of operational efficiencies, but their new corporate overlords are going to want everyone on the same enterprise-ready system. After all, it’s easier to manage one vendor and optimize one system than it it to juggle a dozen, especially if the software is merely adjacent to something as integral to operations as EHR, imaging, or RCM.
Ultimately, and unfortunately, it’s not going to matter how good the digital health solution may be. Unless the company is doing something truly transformational, it’s likely to lose out to the incumbent that has already shown executives it can deliver what it promised – or has enough leverage to walk away altogether if a customer is contemplating a standalone solution instead of turning on the incumbent vendor’s module that, philosophically if not technically, does the same thing.
Possible paths forward
I feel like this scenario leaves digital health companies with four paths forward.
Get in an enterprise app store and pray. This seems like a common strategy. On the face of it, it makes sense. Once potential customers see that you integrate with what they already have, your value proposition is a lot easier to prove. The challenge is making sure the new App Store Certified badges on your website don’t lead to complacency. Even if you’re the first vendor in your given market category (more on that later), others are sure to follow. The bigger danger with complacency, though, is that there’s no guarantee your gracious app store host isn’t thinking about how it can develop the same technology right into its application and, in a release cycle or two, quietly no longer have a need for you. (After all, as noted, most IT teams would rather manage another module for an existing application than a brand-new one, even if the new one is better, faster, stronger, etc.)
Get acquired by Big Tech. Hey, if you can’t beat ’em, join ’em. This route seems to make the most sense for companies that have done about as much as they can with the product they have without turning into a consulting firm. Offering services is a lot different than offering products. Even mature, grounded startups will struggle to compete – not just against standalone consultancies but also the armies of implementation specialists that Big Tech employs. Of course, it may be difficult for a company to admit it doesn’t have much left in the tank and is ready to be sold, especially if its founder is still heavily involved in day-to-day operations. (Then again, issuing minor improvements in multiple product releases in a row isn’t going to wow many customers, especially if they start to see Big Tech catching up to you.)
Stand your ground in a niche. Those vendor lists routinely published by CB Insights, KLAS Research, and the like are chock full of healthcare technology sub-markets. Sure, anyone with enough marketing money can create their own category. However, the bigger picture is a point that people smarter than me have made several times: Healthcare is in fact hundreds of billion-dollar markets, in large part because there are hundreds of processes that need to be optimized and modernized. Becoming a leader in a single niche – instead of, say, reinventing medical records or claims processing – may be a better recipe for success. (The challenge is if the niche turns out to be too small, as we’re seeing with a lot of condition-specific care management products. Even if they’re end-to-end, and even if they demonstrate fantastic outcomes, their value is sadly quite limited to a single condition.)
See what you can offer to other markets. This is admittedly contrary to my previous point, but there are certain healthcare problems – stuff like data aggregation, enrollment, engagement, and billing – that transcend the industry’s various vertical markets. (Here, I’m thinking provider, payer, integrated provider-payer, pharmacy, pharmaceutical, retail health, urgent care, and telehealth.) This is tricky: The value proposition for each healthcare vertical is different, as is the overall readiness and willingness to address the given problem. At the same time, if a digital health company can convince multiple stakeholders already working together that it has the chops to solve a shared problem, then it has a pretty compelling case to make for the larger market. (The key is already working together: Get the larger stakeholders to advocate for you on your behalf. That way, you already have a foot in the door and a cup of coffee waiting for you.)
It’s all about priorities
There’s no right answer for what those oodles of digital health vendors ought to do. Nor do the options outlined above guarantee success. Aiming to be acquired may look good on paper, but at a time when companies seem willing to lay off like 10% of workers before they can finish breakfast, eliminating the proverbial redundancies following a merger will be horrible for current morale and future recruiting.
Or, take pivoting into another market. Life science seems like a safe bet, as most firms are flush with cash and are crying out for more insight into patient needs and wants throughout the drug development life cycle. But can you support workflows that are likely unfamiliar to you – and can you add value above and beyond what the dozens of data aggregators targeting this market are already doing? Retail health and brick-and-mortar urgent care seemed like a safe bet, too, but then everyone realized it was not, in fact, magically profitable to create a brand-new entry point into the care delivery system two aisles over from the celebrity gossip magazines. (Everyone, that is, except the skeptics shouting that from the very beginning. Admittedly, I wasn’t one of them.)
As this is a free blog, I’m not a paid consultant, and my master’s degree is in history and not business administration, I can conclude with wishy-washy statements. If you’re a digital health vendor staring down your future, here’s my advice to you: Try to figure out what’s right for your company, your customers, your technology, and your people – and also figure out in what order you prioritize those four things. I doubt this will be easy, but I think it will help companies make an exit on their own terms.
Brian Eastwood 