GSR Ventures, a $3 billion assets under management venture firm investing in early-stage digital health companies, is an unusual venture firm: The partners all are former practicing physicians and former successful healthcare technology entrepreneurs themselves.
This hands-on experience in the industry gives them the opportunity to bring their medical knowledge and business-growing experience into their investment strategy and process – with the ultimate aim of improving patient care and outcomes.
Dr. Justin Norden is a partner at GSR Ventures. Healthcare IT News sat down with this digital health investor to talk about digital health investment trends during the pandemic and where he sees funding trending in 2022 and beyond. Norden is particularly passionate about funding companies focused on the Medicaid population – a traditionally tricky and often ignored area.
Q. What has been one digital health investment trend during the COVID-19 pandemic, and why is it important?
A. Out of the $15 billion invested in digital health in 2020 and $29 billion in 2021, on-demand healthcare – including telemedicine streaming video or text-based visits with a healthcare provider – has been the single largest trend, although it is still just the tip of the iceberg with all of the funding activity occurring now.
Before COVID-19, a few companies, such as Livongo, made a splash in the digital health community by going public – Livongo in July 2019. Yet, if you polled physicians, health system executives or patients, they likely would either have never heard of the company or not known what their solution offered.
Fast-forward to March 2020, for the first time, physicians, patients and administrators were forced to utilize digital health tools, and companies like Teladoc and Amwell were rapidly adopted. When a global pandemic required that non-emergency care be delivered at a distance, all stakeholders bought into new solutions.
Telemedicine, remote patient monitoring and digital front door technologies that once were fringe, became mainstream. While telemedicine visits have dropped significantly in percentage of overall visits from the peak, the consumer awareness created during that time cannot be overstated.
Healthcare is a notoriously conservative industry – COVID-19 fundamentally accelerated the adoption of many technologies forward by at least a decade.
Q. What has been another digital health investment trend during the COVID-19 pandemic, and why is it significant?
A. Mental health is an area where investment accelerated during the COVID-19 pandemic, even beyond telehealth visits with therapists and other mental health professionals. Although the consumer perception and stigma around mental health was starting to change before COVID-19, the pandemic generated widespread acceptance and adoption of mental and behavioral healthcare services.
Furthermore, patients and providers were encouraged to try novel technology solutions. Digital solutions also have a distinct advantage over their in-person counterparts, and not just in a pandemic setting.
For example, in research studies I conducted as a clinical investigator at Stanford University, we showed that when given the option between in-person and virtual care for mental healthcare, study participants tended to choose telehealth. Virtual visits were selected five times more often for anxiety and depression complaints than in-person – and this was for pre-pandemic encounters between 2015 and 2017.
Notably, since 2018, mental health has been the top clinical indication to receive investment, growing from $1.4 billion that year to $5.1 billion in 2021, according to Rock Health. Most of the funding was invested in consumer-facing telehealth platforms, such as Lyra and Cerebral, as investors recognize that patients prefer virtual visits with their mental health professional, which is what we found in our research.
While the growth of telehealth platforms has been substantial, a more exciting area of investment in mental health is in digital therapeutics. Companies like Pear Therapeutics, Limbix, Applied VR and Click Therapeutics are treating people with clinically validated and FDA-approved (or pending) digital interventions.
These solutions are essential going forward because it will not be feasible to train enough providers to meet the mental healthcare demand, whether in-person or online. We need digital health solutions that can increase the number of patients who have access to treatment and support, increasing the number of patients a provider can safely treat.
For many years, mental health has lagged between physical health both in access to treatment and reimbursement – this is despite the mandates of the Mental Health Parity and Addiction Equity Act of 2008. Worse yet, COVID-19 has exacerbated mental and behavioral health issues.
Substance use disorders, in particular, have worsened during the pandemic, as more than 100,000 Americans died from drug overdoses in a 12-month period between 2020 and 2021. Fortunately, government, investors and startups are working together to close some of these care gaps.
By loosening the requirement that a clinician must conduct an in-person visit before prescribing an opioid use disorder medication (Ryan Haight Act), startups have made treatment more accessible. Furthermore, startups have shown through telehealth and digital interventions that they can improve treatment adherence at twice the rates seen in traditional brick-and-mortar clinics, which means companies like these have the potential to save countless lives.
Q. Where do you see digital health funding trending this year?
A. Digital health funding will continue to increase, although it will not double as in previous years for several reasons. While a record number of digital health companies went public through various methods in 2021 – 23 in just one year compared to a total of 26 from 2011 through 2020 – they fared poorly in the market. By some definitions the digital health field lost almost 70% of its market cap, or $180 billion.
The incredible excitement in digital health due to the trends I’ve discussed, such as on-demand care and digital adoption by consumers and physicians, created a mismatch between market valuation and actual financial performance. Companies such as One Medical and Oak Street Health were trading at near software company multiples – approximately 15-times their revenue – when in reality these are service businesses with a technology interface that should be trading at three to five times their revenues.
Typically, when we see public markets come down like this, private valuations starting with later-stage financings will fall in the months to come.
Over the long term, however, digital health has just begun to scratch the surface of addressing the $4 trillion healthcare industry in the U.S. In fact, digital health companies only account for less than $10 billion of that $4 trillion in spending.
While 2021 may have been a public coming-out year for digital health companies, these first-generation solutions were actually service companies with a bit of technology – which the market belatedly realized. The next generation of digital health companies will be true technology-first companies that can truly scale across our healthcare ecosystem.
Q. You are passionate about funding companies focused on the Medicaid population – a traditionally tricky and often ignored area. What’s happening in this area of digital health?
A. The disparity in care received by those who can pay and those who can’t always plagued me as a medical professional. While in medical school, we might learn every protocol for how to dose a hypertensive medication, and yet we would not spend any time ensuring these patients have access to or can afford these medications.
Furthermore, in training we would move between premier research hospitals, like Stanford, to safety-net hospitals and witness the incredible inequality in resources available to both patients and providers. Medicaid patients, unfortunately, often have the fewest resources, both to self-manage their health as well as access to high-quality services.
Hospitals are faced with impossible decisions. Ultimately, because many health systems follow the motto “no margin, no mission,” they must limit their patients with Medicaid to cut their losses and ensure access for commercially insured patients whose health plans make up the gap.
Not only is this population difficult to manage for the existing care system, it is even harder for startup entrants. Compared with Medicare or other populations, Medicaid patients often have more complex social determinants of health and can cycle in and out of beneficiary status.
These two things together make longer term investments in someone’s health very difficult and often showing no ROI. Worse yet, payment and regulation differ from state to state, making it much more complicated for digital health companies to automate and scale their solutions for this market.
Despite these challenges, I am still excited about digital health investment for Medicaid populations for several reasons. First, new technologies can fundamentally change the cost of delivering high-quality care while improving care access for patients in geographically dispersed areas.
While historically digital adoption of these technologies was not widespread, today among patients with Medicaid and their providers, these digital health tools have become adopted. Finally, with COVID-19, people now expect to be able to interact digitally, saving significant time and cost.
Another reason for my excitement is 70% of Medicaid lives are now covered through arrangements by Medicaid managed care organizations. As these groups receive capitated payments and are contracted to provide care within a budget they have more payment with their spending toward social determinants of health or other interventions that might not fall within a traditional fee-for-service paradigm.
As a computer scientist going through medical training, I felt trapped doing repeatable tasks that could be automated instead of delivering compassionate care to every person who needed it.
The reason I stepped away from clinical practice is that I believe, through technology, we can deliver a higher quality of care regardless of the patient’s health status or economic situation. In the coming years, I expect to see many more companies working to solve this problem.