Digital health startups facing rapidly transforming business models in 2022

The Israeli digital health segment, regarded as a cutting-edge hub for innovation, is primarily focused on the U.S. health market. In the last couple years and more so in 2021, the market landscape and selling process have changed significantly, making it necessary for companies aspiring to become market leaders to validate and rethink their go-to-market strategies.

Surprisingly or not, most of the changes in the digital health market are not technological but in rapidly transforming business models and the emergence of new customer categories. It is more important than ever for digital health start-ups to have an in-depth understanding of the market dynamics and tackle a real business problem while being attractive (or at least neutral) to all relevant users and stakeholders.

Nadav Shimoni, Arkin Holdings. Photo: Courtesy

Notably, the U.S. health industry has been undergoing consolidation in many aspects. There are fewer independent or small clinics on the provider side, and more physicians are working as employees for large health systems. Additionally, insurers are also becoming health service providers or expanding into pharmacies. Retailers like CVS, Walmart and Amazon now offer a wide range of health services. Finally, almost all these care-providing organizations are now “hybrid”, with in-person and telemedicine services either developed in-house or based on partnerships.

In other words, telemedicine is starting to become a commodity without almost any apparent technological barriers to serve as a moat. Moreover, despite expectations that telemedicine would reduce inequality in access to care, it is currently far from being the case. Rather, individuals from higher socioeconomic backgrounds are the major users of telemedicine, thus creating overutilization of health services and increased costs. To some extent, it is reflected by the performance of the publicly traded telemedicine companies in 2021 (TDOC down 60%, AMWL down 80%).

Another example might be the emergence of new financial buyers. Traditionally, employers, commercial health plans, or the U.S. government paid for health solutions. However, many Americans have left structured employment in the last two years and don’t rely on their employers to purchase their health insurance. Furthermore, for those who are still employed, the growing percentage of HDHP plans (High Deductible, High Premiums, where the policy owner is the one who must bear a major portion of the costs and awards). This makes them more inclined to pay cash instead of activating their insurance as it would be much less expensive. This trends towards a growing market segment of individuals who are either obliged or prefer to pay cash and become both the user and the buyer.

Simultaneously, health plans and employers are becoming increasingly exhausted by the growth of the digital health ecosystem. They are bombarded with countless offerings from start-ups and thus tend to prefer broader solutions, the kind that can serve as a one-stop-shop for many of their problems.

Finally, despite the changes the American healthcare system has undergone and the increased burden due to COVID, it is still an old-fashioned market with substantially lower operational efficiency than other industries. For example, according to a McKinsey report from October 2021, administrative simplifications can save a quarter of a trillion dollars (equivalent to the entire cyber market size). Innovative start-ups can certainly contribute towards achieving these savings.

These processes are a new stage in the market's maturity, and it creates opportunities for new business models that were not previously available. Either targeting a growing segment of tech-enabled providers rather than traditional health systems, going after cash-paying customers as a direct to consumer play and later “flip” to enterprise clients (B2C2B) or be a part of a platform that aggregates a range of solutions (B2B2B) are some examples.

Finally, due to the large number of digital health companies that have raised significant amounts of capital in 2021 (more than 100 companies raised more than $100 million in a single round) and are now expected to use it for growth, coupled with the aforementioned customers reluctance to purchase point solutions, we already see a growing numbers of mergers and acquisitions. This trend is expected only to be heightened. This might serve as a unique opportunity for Israeli start-ups looking for an exit and can cater as a growth catalysator for larger players.

To conclude, 2022 seems like an exciting year for the digital health segment, with a meaningful opportunity for more Israeli companies to play a major role in this market. The more companies will be aware of the market dynamics and address a core business need, the better their chances to make the most of this opportunity.