Digital health funding in Q1: Reading the signals for plan sponsors 

May 15, 2024

Investment in digital health in the US is something we keep an eye on at Mercer – it signals the pace of innovation in the healthcare sector and that has implications for employer plan sponsors. On the face of it, 2023 appeared to be a tough funding year for digital health start-ups, as evidenced by lower overall funding, fewer deals, and many announcements of lay-offs. Not since before the COVID-19 pandemic had we seen so few deals and dollars in the space. We’ve also been seeing the impact on existing health tech companies. The results are in for Q1 2024, and several sources (including Rock Health and CB Insights) are reporting a modest rebound in the US digital health segment. Q1 funding in the US for digital health was approximately $2.7B, compared to approximately $1.9B in Q4 2023.

The very large spike in investment in digital health from 2020-2022 was a direct result of low interest rates and huge interest in digital health solutions that would enable our society (including employer plan sponsors) to deliver access to health services in remote and virtual manners. As the economy turned toward the end of 2022, and through 2023, we saw the pace of investment dramatically slow, but in fact we view the investment levels in 2023 as a correction back to a pre-COVID-like market, which was characterized by modest growth year over year. 

Not surprisingly, deals are focusing on the role of AI in the solution and the ability of the startup to demonstrate outcomes.  We see this “right sizing” of investment reflected in employer behavior as well. Many companies implemented multiple digital health solutions between 2020 and 2022, and now that those solutions have been in place for at least a year, employers are closely evaluating the value that each vendor partner brings to the ecosystem.  

The market funding levels are a useful signal that helps determine the risk of possible turbulence among an employer’s vendor partners. The scenario could play out like this: a vendor partner has difficulty securing their next round of funding, forcing them to extend their current round or lower their run-rate through cost-cutting measures. This could include layoffs of staff that interact directly with members, or it could come at the expense of the product development, either of which will result in negative experiential outcomes for your members. Naturally, employees will associate a poor experience with their employer, as the employer is ultimately the ‘face’ of benefits.  

So what’s an employer to do?  

• Check your service level agreements and performance guarantees – make sure that the vendor is performing up to standard on an ongoing basis – don’t wait until your annual review cycle.  
• Make sure you have a measurement and evaluation plan in place that incorporates expected outcomes and how those outcomes will be measured.  
• Keep an eye on the news for announcements about specific companies achieving funding or experiencing layoffs to stay on top of potential risks to your plan ecosystem. 
• For new vendors you are considering, explore their financial stability and funding mechanisms as part of your evaluation process. 

Partnering with start-ups can be a valuable source of innovation, but naturally it is not without risk. As the market continues to correct back to pre-pandemic behavior, employers have an opportunity to ensure their portfolio of solutions is appropriately right sized. Additional insights on optimizing your ecosystem can be found here.