Potential Next Steps – Where to Invest…

Emerging healthcare technology themes quickly reveal themselves at this time of year with the frenetic JP Morgan conference and the industry chatter leading up to the HIMSS (Healthcare Information and Management Systems Society) conference, which is in full swing in Orlando this week. It is also a time to reflect on some of the industry milestones from the prior year. All of this is made more complicated this year by the priorities of the new administration, which have yet to be clearly articulated.

It certainly appears that on the heels of the investor euphoria in 2014-2015, that the healthcare technology sector went through an appropriate period of assessment and consolidation in 2016. Now with the broader public equity markets setting new highs on a regular basis, the momentum from the movement to value-based care should endure with an even greater emphasis on de-regulation, price transparency and increased patient responsibility. Arguably, if V1.0 of the healthcare technology sector was triggered by the HITECH Act of 2009 (Health Information Technology for Economic and Clinical Health Act) which mandated the implementation of EMR infrastructure touching off the explosion of consumer digital health apps, the sector is now entering the V2.0 phase. Much of the commentary today is focused on “AI” (artificial intelligence) and “VR” (virtual reality) solutions to make the healthcare system “capital light” to drive meaningful operating efficiencies from the significant investment of the past three years.

A cottage industry has been created since November 9, 2016 to predict the future regulatory framework for healthcare. If there is an emerging consensus, it tends to center around a handful of core themes. It certainly appears that burdensome federal ACA mandates are under fire which will lessen the role of the federal government while moving more power to the states (likely via block grants). Individual mandates and age band requirements that increase cost of coverage for the young and healthy are likely to end. Much of the Republican commentary seeks to correct what is not working such as leveling subsidies to avoid significant price increases, create greater consumer choice and to move away from narrow networks. And it is quite clear that there are several third-rail features which will not go away such as allowing for pre-existing conditions, allowing children until the age of 26 to stay on their parent’s plans, and retaining a set of consumer protections such as prohibition on annual and lifetime coverage limits.

By implication then, there are several exciting market opportunities that should develop over the next few years. Quite clearly value-based payment models will endure, such as MACRA (Medicare Access and CHIP Reauthorization Act) and MIPS (Merit-based Incentive Payment System) which were implemented in 2016 by CMS (Centers for Medicare & Medicaid Services) to reward providers for efficiency and quality. Products and service to assist the healthcare consumer will be important with wider adoption of HSAs, greater price transparency and other reward systems all underscore the industry embrace of “personalized” healthcare. Expect to see greater innovation in the Medicare Advantage marketplace with the increased convergence of health and wealth management. According to Fidelity Investments, the average 65-year old couple on Medicare will still spend approximately $260,000 during their remaining lives. Below summarizes certain in- and out-of-favor healthcare technology opportunities.


In 2015 total healthcare costs per capita in the United States exceeded $10,000, a notable milestone. In aggregate, the cost of private health insurance, hospital care, physician and clinical services, and prescription drugs in 2015 increased 5.8% over 2014 levels to total $3.2 trillion. Across all sectors of healthcare, there was $12.5 billion of venture capital investment in 2016 according to Dow Jones VentureSource which was a decline of 25% from 2015, largely due to significant decline in biotech investments.

The healthcare technology sector continued to see robust investment activity. According to Rock Health, there were 296 venture financings although the amount of capital invested declined slightly to $4.2 billion from $4.6 billion in 2015. Interestingly, the average round size declined 8.0% in 2016 to $13.8 million. The stage of financing activity revealed another important dynamic in 2016 as just over 50% of all transactions were considered to be Seed or Series A financings. There was a marked increase in the percentage of Series B financings and importantly, nearly 15% of investments were bridge financings. Arguably, 2016 was the period of rationalization given the tremendous amount of investment activity in 2014 and 2015; companies in 2016 either hit their initial milestones and were able to raise a Series B round in 2016 or were less fortunate and were bridged to a more narrow set of endpoints, most likely to a sale. Monthly data provided by Fairmount Partners showed a notable and consistent deceleration in financing activity in 2H16 as well, perhaps tied to uncertainties stemming from the presidential election.


Just three categories accounted more than $1 billion of overall financing activity in 2016: genomics and sequencing ($410 million), analytics and big data ($341 million), and wearables and bio-sensing ($312 million). The next three most activity categories included telemedicine, digital medical devices, and population health management, which underscores the diversity of products and services in the healthcare technology sector. This activity also highlights the V2.0 phenomenon the industry is now entering as more sophisticated solutions are being developed to drive actionable insights that will improve clinical care at lower costs.

This past year continued to see robust M&A activity in the healthcare technology sector as well. According to Fairmount Partners, there were 160 M&A transactions, which while slightly down from the 183 in 2015, was markedly greater in terms of disclosed transaction value – $16.0 billion versus $8.2 billion, respectively. The average revenue and EBITDA multiples paid in the disclosed transactions were 4.4x and 13.1x, respectively. A majority of these M&A transactions included companies selling solutions into the provider space.

The public markets were less forgiving in 4Q16, in large measure due to the regulatory uncertainty. After a very strong 3Q16, the Leerink Healthcare Technology/Services public stock index declined 9.3% this past quarter, ending the full year only slightly positive (up 1.7%), effectively surrendering the gains for the first nine months of 2016. The 4Q16 pain was limited to two specific categories in the index: PBMs/Distributors (down 18.7%) and Providers (down 17.2%). The Healthcare Technology and Brokers categories were both ahead more than 20% for the year, possibly indicating who the net winners and losers might be under TrumpCare.

As we head into healthcare technology V2.0 phase what might be expected over the course of 2017? With some fanfare, late in 2016 Rock Health shared the results of their recent consumer health survey that digital health had reached a “tipping point” as approximately half of all respondents had adopted at least three types of digital health products (which was up dramatically from the 19% in 2015). A majority of respondents wanted a copy of their medical records, 87% wanted to control who has access to their healthcare data, and 39% expressed strong willingness to pay health expenses out of pocket.

Recognizing that there are still another 28 million Americans uninsured, and the new regulatory framework is still a long way from being promulgated, the following are just a few possible developments that drive a number of our investment themes. Exciting start-ups are being launched to address these opportunities.

  • Transparency of provider networks will underscore the move to more consumer-centric purchasing behavior. New tools and services will be developed to facilitate the consumer assuming more financial ownership as to assessing both outcomes and quality (value)
  • More distributed healthcare delivery models will emerge to take advantage of new telehealth and multi-channel interactions. Provision and access to care will be made more affordable and convenient through the usage of passive and “always on” monitoring platforms and support systems. Traditional “bricks and mortar” providers will manage significantly more patients per square foot of real estate
  • Brands will become even more important
  • Advent of specialized clustered service offerings around certain chronic diseases (mental health, diabetes, end-of-life, fertility) will be bundled and branded
  • Personalized and precision medicines will continue to be developed along with better diagnostic tools (and regulators will struggle to catch up). This will transform everything from drug discovery processes to clinical decision support.
  • Continued convergence of the management of both health and wealth will bring financial institutions closer to the healthcare industry, with potentially some fascinating partnerships emerging
  • Technology companies will continue to develop broadly horizontal management platforms for consumers to manage health and wellness needs


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3 responses to “Potential Next Steps – Where to Invest…

  1. Michael,

    Off topic perhaps, but I would be interested in your take on investment activity in the growing home healthcare and hospice industry. My experience as a transactional lawyer was solely in media and communications–so I pretty much only know what I learn here and elsewhere on the internet… but I now have several business development clients who practice health care law and am trying to get educated. Two of these firms have identified home health care as a very promising target, given trending medicare incentives. Any thoughts?

    Betsy Munnell

  2. David O'Flynn


    Great article.

    In my opinion, ACA Repeal is a little bit like Brexit – we know something is going to happen, but we don’t have the specifics.

    I think your conclusions are broadly correct: we will see changes in terms of medicare expansion and the mandates etc. We may see changes in terms of reducing block grants and DSP’s which would impact providers, and by extension, suppliers. We may also see cuts in preventative services, which is worrisome. However, the move to outcomes-based payment models in widely supported in the medical community and it just might endure.

    I think there are huge opportunities in consumer-facing healthcare technology, which I define as that which affects healthcare consumption or delivery. If we want to slow that $3tn train, we’ve got to invest in prevention, delivery and engagement.

  3. donalddodge

    Great article! Insightful and thorough. My hope is that the incentives and penalties that CMS used will remain, and expand. Lots of opportunity there. Also, transparency around cost, quality, and choice for end consumers should become more important.

    Chaos creates opportunity 😉

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