Sharp declines in healthcare venture capital (VC) investment have fundamentally altered the digital health landscape for healthcare organizations. Healthcare leaders need to respond by resetting their digital health strategies.
Healthcare executives face a stark new reality in the digital health landscape. During and immediately after the COVID-19-pandemic, healthcare technology came to be seen as a panacea for addressing the systemic flaws in our delivery system. This perception spurred an explosion of venture capital (VC) financing and digital adoption:
- Virtual care adoption soared 78-fold early in the pandemic, signaling what many believed would be a permanent shift in care delivery.a
- “Digital front doors” promised a streamlined patient experience, with 77% of health system CEOs citing digital transformation as their top priority in 2021.b
- Remote monitoring and AI-enabled care management tools were seen as pathways to improved population health, driving a frenzy of investment activity.c
This collective momentum pushed VC funding to a record $29.1 billion in 2021, according to the healthcare technology firm Rock Health.d But the exuberance was short-lived. It has given way to a sobering market correction that has broad implications for all healthcare stakeholders. (See the sidebar “Digital health market reset by the numbers” below for details.)
The ongoing rationalization of the healthcare VC industry presents both challenges and opportunities for CEOs of health systems, health plans and employers in how they select and manage vendors, set their digital strategies and identify competitive market opportunities.
Strategic implications for healthcare leaders
The transformed digital health environment has the following significant implications for healthcare organizations.
1. Enhanced due diligence of digital health vendors is needed to mitigate going-concern risk of startups that with health systems.
This consideration has become mission critical. The dramatic pullback in venture funding has created significant stability risks for vendors. A 2023 survey found that 12% of digital health startups had less than three months runway and 46% had less than 12 months runway, making it clear that healthcare organizations face potential disruption on a previously unforeseen scale.e
This financial fragility poses serious, unforeseen disruption risks for healthcare organizations. This risk is particularly acute for health systems that adopted technology aggressively during the market peak. A 2022 CHIME survey found that nearly 60% of health system CIOs use more than 50 different point solutions (i.e., solutions designed to address a specific problem or need) for operational and clinical needs.f Since those days of aggressive investment, the wave of venture-backed company failures has already disrupted service for more than 1,200 healthcare organizations, transforming vendor assessment from routine diligence into critical risk management.
Executive action recommended: Adopt a structured vendor-assessment framework that extends beyond traditional contract metrics to include financial stability operational resilience indicators.
For example, Health First Health Plans in Rockledge, Fla., has a dedicated vendor management office that examines an array of key financial and operational metrics, from cash position to regulatory compliance, enabling the organization to identify significant cost savings, automate manual vendor assessment processes and mitigate risk to the parent organization.g
2. Contract structures are evolving, and leverage has shifted to buyers.
The shift among startups from a growth-at-all-costs mindset to a focus on survival has fundamentally altered negotiating dynamics between healthcare organizations and digital health vendors. As venture-backed companies struggle to maintain runway, they have become increasingly receptive to usage-based pricing and performance guarantees.
Roberta Schwartz
Roberta Schwartz, executive vice president and chief innovation officer at Houston Methodist Hospital described how her organization has addressed this concern:
Our “succeed fast, fail fast” model for innovation — including vendor collaboration — often involves out clauses, termination-for-convenience language or clearly defined expectations and performance metrics. Innovation is a fast-paced environment especially for health systems, which must stay nimble to meet unforeseen challenges particularly in the face of emerging technologies that have yet to be proven to scale at a healthcare institution as large Houston Methodist. Regardless of the technology, it’s imperative for both health systems and vendors to remain flexible and open-minded to cultivate mutually beneficial relationships.
Executive action recommended: Restructure vendor agreements to align incentives with outcomes and protect organizational interests. According to Peterson Health Technology Institute’s 2024 survey of health plans, employers and health systems, 79% of purchasers use risk-based pricing for at least some of their digital health contracts and 61% favor contracts of two years or less.h
Health systems should leverage this environment by restructuring vendor contracts to significantly reduce costs, secure warrant rights and preserve strategic capabilities.
3. Strategic talent acquisition depends on building internal capabilities at discount rates.
The widespread downsizing across venture-backed companies has created a rare opportunity to acquire experienced healthcare technology talent. The contraction of the venture funding market has fundamentally shifted employee preferences. A recent surveyby Ciel HR found that the average median tenure of employees at startups is only 2.3 years, and that 67% of startup employees now favor established organizations.iThis talent migration provides a compelling opportunity for healthcare organizations to build internal capabilities at a fraction of historical recruitment costs.
Executive action recommended: Proactively target key internal and other available health talent to build in-house capabilities that accelerate digital transformation and reduce dependence on vendors.
4. Realigning innovation strategy requires a focus on sustainable development.
The VC market contraction has prompted healthcare organizations to reassess how they approach innovation. Rather than racing to partner with venture-backed companies, organizations are finding greater success with measured internal development.
Mayo Clinic’s Solution Studio exemplifies this shift. Designed to streamline the innovation cycle, it enables the simultaneous launch of multiple solutions, significantly reducing the time required for development and implementation.j We see a similar trend in startup companies. Instead of developing AI capabilities from scratch, many smaller companies are working in partnership with large, capable AI companies to develop targeted healthcare applications (see, for example, Thrive Global’s partnership with OpenAI).k
Executive action recommended: Develop balanced innovation programs that combine the expertise of strategic external partnerships with robust and disciplined internal development capabilities.
5. Strategic corporate venture capital (CVC) can fill the funding gap.
The retreat of institutional VC investors from digital health since the height of their activity in 2021 has altered the funding landscape sufficiently to create distinct strategic opportunities for those venture capital firms backed by a strategic or corporate entity.
Rachel Feinman
Rachel Feinman, vice president of innovation at Tampa General Hospital and managing director of TGH Ventures described the effects of this change as follows:
Given the increasing commoditization of technology solutions in healthcare and the expanding role of Epic and other EHR vendors, health system venture and innovation arms have increased leverage and value for startups looking to break into the provider market. More so than ever before, innovative solutions must be purpose-built to meet the demands of the end user — whether it is a clinical workflow or a revenue cycle process. This gives health systems the ability to be selective on partners and to demand upside for co-development and early adoption. There is also increased value to startups in having a provider on their cap table as a signal to the market and a differentiator.
Given the increasing commoditization of technology solutions in healthcare and the expanding role of Epic and other EHR vendors, health system venture and innovation arms have increased leverage and value for startups looking to break into the provider market. More so than ever before, innovative solutions must be purpose-built to meet the demands of the end user — whether it is a clinical workflow or a revenue cycle process. This gives health systems the ability to be selective on partners and to demand upside for co-development and early adoption. There is also increased value to startups in having a provider on their cap table as a signal to the market and a differentiator.
Healthcare CVC investments now constitute more than 25% of all digital health funding, up from 20% in 2022.l This shift in leverage enables CVCs to secure stronger governance rights and more favorable terms. Recent data shows 85% of CVC deals now include board seats, compared with 35% in 2021. More important, companies with CVC investors are significantly more likely to achieve successful company sale or IPO than those backed solely by traditional VC.m
Executive action recommended: Establish or expand strategic investment capabilities to secure access to innovation, drive strategic alignment and generate financial returns.
6. Market consolidation allows for acquisition of strategic assets at reasonable valuations.
The compression in private market valuations has created significant acquisition opportunities. With healthcare IT multiples having plunged more than 65% from their pandemic peaks, strategic buyers can acquire capabilities at dramatic discounts.nThis environment offers strategic buyers among healthcare organizations an opportunity to consolidate point solutions, acquire strategic assets and accelerate their digital transformation at a fraction of historical costs.
Executive action recommended: Develop an acquisition strategy targeting capabilities that align with organizational strategic priorities, particularly those that can be integrated into existing platforms.
7. Rationalized point solutions allow for a streamlined digital portfolio.
The digital health market reset has made it clear to many industry observers that the proliferation of point solutions during the 2021 boom created unsustainable complexity. Point solutions are further challenged by the security risks that they may bring into corporate environments and the progress that is being made by standard insurers in integrating improvements into core offerings.
Many employers are actively rationalizing their digital health vendor footprint, reflecting both cost pressures and integration challenges. For healthcare organizations, this rationalization creates an opportunity to streamline vendor relationships while demanding deeper integration from remaining partners.
Rahul Joglekar
Rahul Joglekar, head of digital partnerships at Sutter Health in San Francisco, said:
We continue to be very pragmatic in assessing the market and making strategic investments. In areas where we believe we are the natural owners and have unique expertise, we are building scalable options organically (such as in our chronic care management suite) In other areas, we continue to engage in strategic collaborations with companies to provide answers for today’s needs, while co-developing and building ones for tomorrow. A key element of incubating and sustaining long-term partnerships with digital health companies is doing the homework upfront.
We continue to be very pragmatic in assessing the market and making strategic investments. In areas where we believe we are the natural owners and have unique expertise, we are building scalable options organically (such as in our chronic care management suite) In other areas, we continue to engage in strategic collaborations with companies to provide answers for today’s needs, while co-developing and building ones for tomorrow. A key element of incubating and sustaining long-term partnerships with digital health companies is doing the homework upfront.
That means having a shared vision, system buy-in with executive sponsorship, operational and technical readiness, information security and effective ongoing governance, which Joglekar said enables Sutter Health to build a strong foundation and maintain a disciplined focus on long-term scalability and impact enterprisewide.
Executive action recommended: Conduct a comprehensive audit of digital health vendors to identify redundancies, integration challenges and opportunities for consolidation. Use the findings to streamline your portfolio, reduce risk and concentrate resources on solutions that deliver enterprise-wide value.
8. AI implementation requires a focus on practical applications with clear ROI.
The AI landscape requires particularly careful evaluation, given healthcare’s complex history with AI adoption. The first wave of healthcare AI companies often promised broad transformation but struggled to deliver measurable value. For example, IBM Watson Health’s $1 billion investment in healthcare AI ended in the division’s sale to Francisco Partners after struggling to deliver promised clinical benefits, and Babylon Health’s AI symptom checker, once valued at over $2 billion, faced scrutiny over accuracy concerns before the company’s eventual bankruptcy.o
The market correction has driven a shift toward focused, operational AI use cases that can deliver concrete ROI. Some large employers — including Boeing and Microsoft, which are already deep into AI in their core businesses — report early success with AI applications in benefits navigation and network optimization. This evolution toward practical applications over broad platforms reflects the market’s renewed emphasis on sustainable economics.
“It is most assuredly white-knuckle time in healthcare with threats coming from every direction,” said Richard Zane, chief innovation officer at UC Health in Colorado.
These threats come not only from the contraction of the VC bubble, Zane said, but also as much, if not more, from ever increasing pressure from payers and pharma that are “seemingly immune to any limitation on unchecked consolidative power, exponential increases in regulatory and reporting burdens from state and federal government, including real threats to 340B legislation not to mention site neutrality.”
Zane said UC Chicago’s unwavering focus is always on executing its strategy to continuously improve patient care, quality and access by eliminating waste and judiciously deploying technology to bring intelligence into decision making and automate whenever possible.
Richard Zane
Looking to the future, Zane said:
However one defines AI — be it rules based logic, machine learning, prescriptive intelligence, computational linguistics or ambient AI — we need to substantively decrease the reliance on humans to perform routine and mundane tasks. Think administrative automation in revenue cycle, talent acquisition, supply chain, registry reporting, etc., and surface actionable intelligence to humans making life and death decisions like recognizing sepsis or deterioration. In essence, we are tripling down on deploying intelligence. At the end of the day, healthcare can no longer be the last bastion of industry where deploying technology increases cost and complexity.
However one defines AI — be it rules based logic, machine learning, prescriptive intelligence, computational linguistics or ambient AI — we need to substantively decrease the reliance on humans to perform routine and mundane tasks,” Zane said. ”Think administrative automation in revenue cycle, talent acquisition, supply chain, registry reporting, etc., and surface actionable intelligence to humans making life and death decisions like recognizing sepsis or deterioration. In essence, we are tripling down on deploying intelligence. At the end of the day, healthcare can no longer be the last bastion of industry where deploying technology increases cost and complexity.
Executive action recommended: Prioritize AI initiatives with clear operational metrics and ROI potential, focusing on automated administrative processes and clinical decision support with quantifiable outcomes.
The path forward: 5 strategic imperatives for healthcare innovation
Healthcare organizations have a rare opportunity to reshape their approach to innovation and technology adoption by understanding and acting on the implications of the current landscape for digital health. Success, however, depends on the extent to which they acknowledge and embrace five strategic imperatives.
1 Implement robust vendor assessment frameworks that combine financial due diligence with operational readiness to evaluate vendors. Health First’s structured assessment program offers a proven template, demonstrating how systematic vendor monitoring can prevent costly disruptions while identifying opportunities for success in strategic negotiation.
2 Leverage strengthened market position to restructure vendor relationships. The success of many health systems in structuring equity while reducing costs exemplifies how organizations can maintain access to strategic capabilities while improving incentive alignment with vendors.
3 Capitalize on the talent migration from venture-backed companies to build internal technical capabilities. Mayo Clinic’s experience recruiting product teams demonstrates how organizations can accelerate their digital transformation while reducing reliance on external vendors and ensuring sustainably high-quality in-house expertise.
4 Pursue strategic acquisition of assets and capabilities at attractive valuations. The market reset offers organizations the chance to acquire strategic digital health assets at discounted valuations. Whether through direct acquisition, strategic investment or corporate venture activity, organizations can secure innovative capabilities at a fraction of historical costs.
5 Approach AI implementation with measured optimism. The focus should be on specific operational use cases with clear ROI potential rather than broad platform plays.
Authors’ note: Morgan Health has made direct, non-controlling equity investments within the healthcare industry. Nothing herein should be construed as an offer to provide investment advice or investment advisory services and does not constitute any form of commitment or recommendation on the part of JPMorgan Chase.
Footnotes
a. Bestsennyy, O., et al., “Telehealth: A quarter-trillion-dollar post-COVID-19 reality?” McKinsey& Company, July 9, 2021.
b. Van Poucke, A., and Baran-Chong, R., 2021 healthcare CEO future pulse 10 actionable perspectives for healthcare leader, KPMG International, 2021.
c. Micca, P., et al., “Trends in health tech investments: Funding the future of health,”Deloitte Insights, Feb. 26, 2021.
d. Krasnianasky, A., Kaganoff, S. and Ramos, T.M., 2024 year-end market overview: Davids and Goliaths, Rock Health, Jan. 13, 2025.
e. DiTrolo, A., “HTN startup market conditions 2023 update,” Health Tech Nerds, March 25, 2023.
f. Hagland, M., “Survey: CIOs stressed in managing overabundance of systems, platforms,” Healthcare Innovation, Nov. 16, 2022.
g. VendorCentric, “Creating a disciplined and effective vendor management office to centralize and streamline vendor-related activities,” page accessed April 9, 2025.
h. Peterson Health Technology Institute, 2024 state of digital health purchasing a survey of health plans, employers, and health systems, 2024.
i. News Bureau PM, “67% of startup employees prefer established firms: CIEL HR survey,” People Manager, May 29, 2024.
j. Malloy, T., “Mayo Clinic Platform launches Solutions Studio,” Mayo Clinic News Network, March 12, 2024.
k. Landi, H., “OpenAI Startup Fund, Arianna Huffington back new AI health coach venture focused on chronic conditions,” Fierce Healthcare, July 9, 2024.
l. CB Insights, “State of CVC, Global, 2023 recap,” 2023.
m. Silicon Valley Bank, The state of corporate venture capital: 2024 report,September 2024.
n. Price. L., “HealthTech SaaS multiples down from x7.5 to x2.5 in 24 months on public markets” Nelson Advisors, July 15, 2023.
o. Landi, H., “IBM sells Watson Health assets to investment firm Francisco Partners,” Fierce Healthcare, Jan. 21, 2022; Lunden, I., “The fall of Babylon: Failed telehealth startup once valued at $2B goes bankrupt, sold for parts,” TechCrunch, Aug. 31, 2023.
Digital health market reset by the numbers
The contraction in digital health funding has been severe and widespread:
- Funding decline. The healthcare technology-focused firm Rock Health notes that in 2024, digital health companies raised just $10.1 billion, more than 65% below the 2021 peak.a
- Deal volume collapse. Transaction count fell to 497 deals through year-end compared with 740 in 2021, according to Rock Health.
- Down round surge. Carta’s State of Private Markets Report indicates that down rounds — funding rounds in which companies are valued lower than in previous rounds — rose from 6% of all financings in Q1 2022 to 19% in Q4 2024.b
- Unicorn extinction. There were 200 health tech unicorns minted between 2013 and 2023. Of the 53 that went public, 73% were trading at less than 50% of their IPO value, and 40% were trading at less than 20% of their IPO value.c
- Public market decline. Public market digital health indices show a greater than 70% decline in total market capitalization from 2021 peaks, with bankruptcies outpacing IPOs for the first time in digital health history.d
No healthcare subsector has been exempted from this market contraction. A quick tour through the headlines of the past two years is revelatory. Olive AI shut down after consuming $852 million.e And Forward Health closed all clinic locations despite raising $542 million, while Babylon Health declared bankruptcy, with a subsequent stock price collapse.f
Although some companies with proven unit economics and clear paths to profitability are finding capital, the terms have become more restrained, often involving insider rounds intended to stabilize companies. In other cases, adversity has led to strategic combinations. For example, Eden Health (which brought admirable digital capabilities to the market) was acquired by Centivo, integrating these capabilities under a strong cost-effective insurance product.g
Sidebar footnotes
a. Krasnianasky, A., Kaganoff, S. and Ramos, T.M., 2024 year-end market overview: Davids and Goliaths, Rock Health, Jan. 13, 2025.
b. Neville, A., and Dowd, K., State of private markets: Q4 and 2024 in review, Carta, Feb. 12, 2025.
c. HolonIQ, “78 health unicorns downgraded in our mark-to-market valuation scenario. From a $335B valuation herd, down to $181B,”Health intelligence Unit, March 30, 2023.
d. Polevikov, S., “Digital health in 2025: Expect massive public bankruptcies and a historic IPO drought – the COVID middle finger returns to haunt us,”AI Health Uncut, Jan. 7, 2025.
e. Olsen, E., “Health AI startup Olive to shut down,” Healthcare Dive, Nov. 1, 2023.
f. Lee, A., “Digital health startups facing bankruptcy or shutdown: Analysis of lessons from high-profile failures,” LinkedIn, Jan. 26, 2025.
g. Landi, H., “Centivo acquires virtual-first medical provider Eden Health to expand its reach with employers,” Fierce Healthcare, May 20, 2024.
Authors: Ezra Mehlman (Managing Partner, Health Enterprise Partners), Dan Mendelson (Chief Executive Officer, Morgan Health), and Kevin O’Leary (Founder, Health Tech Nerds).