money, dollar

money, dollar

Digital health is an umbrella term that stretches to encompass a wide range of industries, services and technologies at the intersection of digital innovation and healthcare. These solutions include telehealth, virtual care, remote monitoring, digital therapy, diagnostic tools and many other innovative technologies aimed at improving care while reducing costs and engaging patients.

Investments in digital health have slowed, but experts suggest this is a temporary fix and that the digital health industry is still poised to make a significant impact on healthcare delivery. With investors looking to make smarter investments, we’ve taken a closer look at the legal and regulatory issues driving some of the market corrections and correspondence issues that can help investors and companies navigate the challenges and opportunities in digital healthcare investments during a panel discussion at our recent Healthcare Private Equity 2022 conference in New York.

Slow, not stagnant

At the end of the third quarter of 2022, there were 458 deals in the US digital health scene, totaling $12.6 billion in venture funding, a huge drop from 2021, when there were 736 deals totaling $29.2 billion dollars, according to the latest tracking report by Rock Health. But deals—even megadeals—move on.

In September 2022, CVS Health announced plans to acquire Signify Health for $8 billion. Optum, part of UnitedHealth Group, recently completed its $13 billion acquisition of data analytics and software company Change Healthcare. Don’t forget about Microsoft and Amazon entering the digital health space. Earlier in 2022, Microsoft closed on Nuance Communications, striking a $19.7 billion deal to acquire the cloud healthcare and AI software company. Amazon plans to acquire primary care network One Medical for $3.9 billion if the deal passes review by the Federal Trade Commission.

As the frenzy of innovation, investment and exits surrounding digital healthcare in recent years now streamlines to a sustainable pace with a focus on smart bets, investors will be looking for companies that can deliver on the promise of healthcare efficiency while recognizing that virtual care is not is a full-scale replacement for traditional personal medical services. In addition, they look for companies that demonstrate advanced compliance and recognize not only the regulatory environment in which they live, but also the regulatory requirements of their customers. Bankers speaking at McDermott Will & Emery’s Health Private Equity Conference in New York this year were somewhat bullish about the digital health sector overall. Although valuations have fallen significantly, the lower valuations have created an opportunity to invest in a strong business at a lower price if due diligence pays off. “If you liked digital health two years ago, it’s 40% off today,” noted one participant.

New York audiences agreed with this mixed assessment. In a survey asking about the state of digital health, 62% of respondents agreed with the statement that “investment opportunities abound if you know what you’re doing.”

Capitalizing on long-term opportunities will depend heavily on identifying a path to profitability for digital health companies, as well as understanding what those solutions look like at scale, how to get there, and how much capital is needed to achieve scale.

Data challenges

The success of digital health solutions, whether during a telehealth visit or through a diagnostic tool, depends on being able to access the right information at the right time. Unfortunately, access to complete and accurate data at the point of care remains a significant challenge.

Despite federal mandates to adopt electronic health records and some level of interoperability, access to a patient’s complete health history has been elusive. For example, information on transfers and discharges is often not available. One participant said that in certain sectors of health care, such as psychiatric hospitals, fax is still the main way of sharing information. At those facilities, administrators say it’s cheaper to pay the fine than to use the electronic health record.

There are recent federal rules that may begin to speed up data sharing. In May 2020, the Centers for Medicare and Medicaid Services (CMS) published Interoperability and Patient Access final rulewhich adopted new standards for the secure exchange of data within the Medicare and Medicaid programs, the Children’s Health Insurance Program, and qualified health plans issued through the Affordable Care Act’s federally facilitated exchange.

The rule also allows payers to require third-party app developers to certify certain privacy provisions and then release that information to patients, requires CMS-regulated payers to exchange certain clinical patient data with other payers upon request of the patient and begins a policy of publicly reporting clinicians and hospitals who engage in information blocking. The rule also requires hospitals, including critical access hospitals and psychiatric hospitals, to notify other health care facilities and providers electronically of a patient’s admission, discharge, and transfer.

Those provisions went into effect in 2021, but CMS announced later in the year that it would implement them enforcement of judgment on the payer-to-payer data exchange requirement until the agency can provide more details in a future rulemaking.

How this regulation is implemented will have a significant impact as more digital health solutions seek to use patient data to deliver better care. In particular, access to admission, discharge and transfer data is a powerful tool for companies seeking to deliver high-quality care to patients at home.

Data blocking is another concern, as players in the space seek to protect their data rather than enable the type of data sharing that can improve care coordination. Although the CMS regulation includes a provision for reporting clinicians and hospitals who engage in data blocking, there are no enforcement regulations in place yet.

Data verification

Another challenge in the digital health arena is the large number of narrow-minded solutions currently available, all of which use some combination of identified and de-identified patient data. The scope of these solutions is huge end users, whether it’s hospital, clinicians, payers (including self-insured employers) and life sciences companies, one participant explained. Instead, these users are looking for scalable solutions that offer multiple types of information in one place where that data is curated, collected and captured in compliance with regulatory requirements. This is a trend to watch that could lead to a consolidation of digital tools.

Finally, data due diligence, which includes assessing the availability and eligibility of data for intended uses under HIPAA and state laws, is a critical part of any investment in the digital health space. For example, the HIPAA Privacy Rule provides standards for de-identifying protected health information using either the safe harbor method or expert judgment. Although HIPAA requires removal of patient identifiers, provider information may remain (albeit in a more limited form with the statistical method in some cases). However, there is a different standard for de-identified information under the California Consumer Privacy Act. California law does not permit the disclosure of personal information about suppliers or workforce members. A digital health tool that could be used by consumers in California would have to meet both standards.

What next?

As investors look to the future of digital health, the opportunities are likely to be much broader than digital tools for managing low-acuity conditions. Instead, digital health has the potential to improve care coordination, streamline care delivery, and significantly reduce costs for patients with complex and chronic conditions who receive care from multiple providers in multiple settings. Remote patient monitoring, for example, offers clinicians the ability to understand what is happening with their patients between visits.

One participant suggested that digital health solutions are likely to flow into areas of healthcare that are major cost drivers, such as cardiology, oncology, chronic kidney disease and end-stage renal disease, as well as some neurological conditions. Patients have already embraced the convenience of digital health services in behavioral health care, and experts expect that patients with other chronic conditions will also flock to services and solutions that allow them to spend more time at home and less time traveling to clinics and waiting for providers.

One of the most exciting opportunities for digital health solutions is as an efficiency driver within the value-based care setting. Data-driven, technology-enabled care delivery can help providers and payers clean up the hundreds of billions of dollars in waste in the health care system. Although it is still early days, there are many opportunities for investment in digital health.

As we look over the horizon to 2023, we would expect a resurgence of investment in the digital health space, but with a concurrent and continued level of focused regulatory concern as this complex landscape continues to evolve.

Photo: CaptureTheWorld, Getty Images

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