2023 marked a challenging yet transformative year for the health tech and biotech industries. With VC investment in the sector down more than 50% from its peak in 2021, and underwhelming public market performance to boot, it’s hard not to feel caught in the “trough of disillusionment” that we referenced in our State of Health Tech Report a few months ago.
Despite these obstacles, the resilience and ingenuity of the founders with whom we meet and partner continue to inspire us on a daily basis. Groundbreaking advancements such as large scale AI models such as LLMs and LMMs and new drug categories like metabolic modulation via GLP-1s/GIPs will lead to better days ahead for both the companies we work with and the industry at large.
Once again, we turned to the experts at the heart of the industry—our portfolio founders—to glean insights on the year ahead in healthcare. Their perspectives, informed by firsthand experience and a forward-looking mindset, offer a unique window into the future of healthcare, highlighting the challenges, opportunities, and innovations we expect to shape the sector this coming year.
1. Tourist investors will leave healthcare—for now
After a notable decline in health tech venture investment in 2023 following record-breaking capital deployment during the COVID-19 pandemic, we predict that tourist investors will continue to pull back from the sector in 2024. In the first half of 2023, 71% of health tech investors were repeat investors in the industry as crossover funds and generalist tech firms transitioned away from the sector. Funding levels reflect these dynamics––in 2023, U.S. health tech startups raised approximately $11 billion in venture funding across 490 deals, PitchBook data shows. That represents an 18% decrease in total VC dollars year-over-year, and a 57% decrease from the industry's peak in 2021. This shift is occurring for several reasons:
- Looming concerns around the exit landscape for healthcare and waning confidence in public assets following challenges at former digital health darlings;
- Humbling realizations that healthcare isn’t all SaaS, and in many cases, requires services to tap into the largest market opportunities;
- An appreciation that despite the “$4 trillion headline TAM,” healthcare is fragmented and looks a lot more like 4,000 $1 billion markets.
We believe this feigned interest could be temporary, especially as we anticipate long-awaited IPOs, new opportunities from AI, and regulatory tailwinds on the horizon in 2024 and beyond. For these reasons, we believe the sector remains highly attractive to patient capital. Though the investment pace remains a far cry from the highs of 2021 ($29.2 billion) and 2022 ($15.3 billion), the ten-year arc of capital formation in the category remains encouraging. In the meantime, health tech will benefit from the support of a seasoned group of domain-expert investors who are committed to tackling the challenges of such a critical industry.
“As these investors leave the market and funding is tighter, there is a noticeable shift in funding toward companies with higher clinical rigor and evidence of their ability to create value for purchasers (payers, employers). This coincides with these purchasers also facing economic pressure to control their healthcare costs and thus raising the bar of evidence and credibility of claims that health tech companies can lower the total cost of care.”
- Sam Holliday, CEO of Oshi Health
2. Healthcare incumbents strike more partnerships with the innovation ecosystem
Newsflash: Healthcare is hard. For startups, sales cycles are lengthy and arduous. If you can survive long enough to get to a decision-maker, you may be met with decision-making committees governed by a dozen stakeholders, all of whom can say “no” but none of whom can say “yes.” These committees also pose challenges for the incumbents that maintain them, as it can be incredibly difficult to change the status quo or launch new products inside of a large, multi-generational healthcare organization.
In 2024, we predict that healthcare startups and incumbents will announce more partnerships. These partnerships will bring best-in-class startup product innovation to the superior distribution rails of a tenured healthcare company. From revenue sharing agreements to white-labeling, we expect the architecture of these partnerships to mature as a viable mechanism for scaling a business in healthcare. We have seen examples of this model working already: Abridge partnered with Epic, Turquoise Health partnered with Milliman, Oshi Health partnered with Willis Towers Watson, Headspace and FOLX partnered with Accolade, to name a few. As healthcare AI adoption progresses this year, we expect these partnerships will focus on both distribution and data, as incumbents house some of the most enduring and robust assets available today. We also can’t help but wonder if these partnerships will ultimately lead to acquisitions: a wave of partnerships between bigger tech companies and health tech start-ups raises the possibility that the former will approach the latter about joining forces.
“Our partnerships with respected incumbents in healthcare, such as Accolade and CIGNA, reflect a shared vision to innovate and enhance patient care. These collaborations allow FOLX to leverage Accolade's and CIGNA’s extensive reach and experience in healthcare navigation, while they benefit from FOLX's specialized expertise in serving the ever-growing LGBTQ+ community. Together, we're not just bridging gaps in care; we're setting new standards for inclusivity and tailored healthcare services.”
- Liana Guzman, CEO of FOLX Health
3. Proliferation of open-source models presents new opportunities for healthcare AI startups
In 2024, we predict that open-source as well as small, specialized models will continue to gain popularity. As we wrote in Six imperatives for AI-first companies, AI-first companies must adopt a flexible and modular stack in order to deliver superior performance, keep up with the pace of advancement in the field, and establish product moat. Leveraging publicly available, open-source models (e.g., models shared on the Hugging Face Hub, and/or closed-source, e.g., GPT-4 or Claude 2.1) benefits healthcare companies by providing transparency and full control over all aspects of model use and training, including forward-looking updates. Smaller, specialized models (open- or closed-source) will also offer more cost-effective and potentially less resource-intensive options relative to large foundation models like GPT-4, which will bolster the overall efficiency and profitability of AI startups previously beholden to expensive API fees.
Additionally, the open-source community for healthcare AI is maturing—a shift that’s lowering barriers to entry for health tech builders, yet challenging them to differentiate and defend their products in an environment where methods are no longer proprietary. With greater (and free) access to highly performant AI models, startups will be required to further differentiate product capabilities through robust fine-tuning with proprietary data, stellar user experience, seamless integration and deployment, and trustworthy model monitoring and safety protocols.
“Simple prompt engineering does not make for a sustainable product. As an extreme example, no client will transform and load all their data, standardize their workflow, clearly delineate the value––and then pay someone 50% to simply add a prompt and do an API call.”
- Mike Gao, CEO and co-founder of SmarterDx
4. Regulatory activity drives investment in data privacy, AI validation, and infrastructure monitoring
It’s conceivable that the next largest healthcare AI startup could be a compliance-focused platform for monitoring privacy, data, and model assets in the wild. Interestingly, cybersecurity is the top procurement priority for health system executives heading into 2024. We think this reflects extensive and enduring challenges pertaining to cybersecurity in healthcare, but also the new reality that AI is rapidly expanding the attack surface for adversarial attacks in many ways we don’t yet fully understand.
We are compelled by the leadership of organizations like the Coalition for Health AI (CHAI) that––on the back of the Biden Administration’s Executive Order––are collaborating with leading public and private institutions to develop and deploy standards and infrastructure for healthcare AI for safety and ethics spanning model development through real world monitoring. In 2024, we’ll learn more about the regulatory guardrails for healthcare and biomedical AI––such as the notion of nationwide healthcare AI assurance labs––and we’ll also deepen our frameworks for evaluating real-world performance of AI models in healthcare and life sciences. We predict that enterprise budgets will support procurement of technologies that facilitate management of privacy and data assets in an AI-first world, creating new categories for company creation and investment.
“In 2024, transparency and operational safeguards will take center stage as buyers and users prioritize not just the 'what' but the 'how' of AI integration. Newer Gen AI tools lower the barrier to incorporate AI into products but create an even stronger need for transparency on data / guardrails used to ensure successful operationalization."
- Mudit Garg, CEO and co-founder of Qventus
5. Longevity medicine goes mainstream
As longevity medicine captures consumer interest through concepts such as Blue Zones and Medicine 3.0 (as coined in Peter Attia’s book Outlive), we predict that there will be a renaissance in consumer healthcare that emphasizes preventative care models and longevity science in 2024. As individuals increasingly seek to delay their aging and extend their healthspan, a notable business opportunity is emerging for companies to develop products and services that leverage multimodal and longitudinal data to offer consumers a comprehensive view of their health and make personalized recommendations. Think of an AI personal manager for our health.
In addition to continued research in therapeutics and diagnostics that address the four horsemen of chronic disease: heart disease, cancer, neurodegenerative disease and type 2 diabetes. As this trend unfolds, we have yet to see how traditional “Medicine 2.0” will regulate and pay for longevity-focused medicine, health tech, and digital services. We believe minimizing false positives and incorporating learnings into these protocols is imperative to see these concepts and technologies go mainstream. Companies like Prenuvo on the direct-to-consumer side, and Rupa on the B2B2C and provider enablement side are at the forefront of this shift. This new category of Medicine 3.0 represents a broader movement towards data-driven, personalized healthcare that empowers consumers to take charge of their health, focusing on prevention and longevity as central goals.
“The healthcare and wellness industries are colliding. People want data-driven, personalized, and proactive care, and the world is racing to keep up. What we’ve seen with the longevity and personalized medicine excitement is just a sliver of what’s to come. Healthcare of the future will look very different and more proactive.”
- Tara Viswanathan, CEO and co-founder of Rupa Health
6. New wave of value-based care businesses will emerge in specialties where next-gen therapeutics, diagnostics, and payment models are taking flight
This year, we predict we’ll see continued iteration in value-based care (VBC) models focused on specialties like Cardiology, Neurology, Nephrology, and Oncology. Innovation will be propelled by evolving payment models and newly approved high-cost therapeutics and diagnostics. For example, we expect to see new companies rise to meet the need to diagnose patients with early-onset Alzheimer's and other neurodegenerative diseases after a new wave of neurodegenerative drugs like Leqembi are widely available. In 2023, we saw GLP-1s be called a ‘miracle drug’ by mainstream media for its impact on weight loss and early data on their impact on cardiometabolic outcomes, addiction, and delayed progression of chronic kidney disease. We expect to see discussions about FDA label expansion into cardiovascular disease and other comorbidities of obesity. In turn we would expect, like with any high-cost and complex drug, to see an opportunity for innovators to wrap-around service models in order to enable the best clinical protocols, improve adherence, and expand payer reimbursement of the drugs.
“2024 is going to be an exciting year in the treatment of cardiovascular disease enabling a transition to value-based payments. Novel therapeutics, such as the glucose-lowering GLP-1 receptor agonists, which have shown significant reductions of major adverse cardiovascular events and hospitalizations, will continue to have a meaningful impact on cardiovascular disease treatment and reduce overall cost. In addition, new advanced diagnostics and interventions will continue the shift of procedures from the inpatient to the ambulatory setting, which will drive significant value in patient care.”
- Aaron Snyder, CEO of US Health Partners
7. Increased pressure on Medicare Advantage gives rise to next-gen infrastructure companies
In 2023, we started to see pressure on Medicare Advantage plans in the wake of layoffs, star rating declines and rate cuts. We predict that pressure in this category will intensify, and new infrastructural solutions will emerge to support Medicare Advantage plans and VBC platforms. In particular, regulatory changes around risk adjustment data validation, the rollout of the Health Equity Index, and the intricacies of risk sharing among specialties are all areas ripe for technology disruption. As VBC continues to focus on improving patient outcomes while controlling costs, technology will play a crucial role in addressing these headwinds and enabling the successful implementation of VBC models. Companies like Navina and Fold Health focus on AI- driven risk adjustment and care plan automation at point of care, Accorded on contracting and actuarial intelligence, and Conduce Health for sub-segmentation and specialty care management. AI and software can help more effectively assess and risk, while ensuring equity and optimizing treatment outcomes.
“I remain long-term bullish and short-term bearish on VBC. I think the players all want to get here, but still don't have their own infrastructure in place to make it happen in the short term.”
- Russell Glass, CEO of Headspace
8. Commercial payers will push the value-based care agenda forward
Historically, the federal government has catalyzed VBC innovation through various Centers for Medicare & Medicaid Services Innovation (CMMI) programs such as ACO REACH, MSSP, and specialty-specific payment models in kidney care and oncology. However, the impending election cycle is likely to create uncertainty (hopefully temporarily) on these initiatives. We predict that commercial plans will step up in 2024 and fill the void in VBC market innovation. Self-insured employers and commercial players see continued cost pressure, and limited ability to drive cost management. We hope to see renewed interest in different payment models and shared risk contracts with providers. We started to see players like Aetna/CVS, United, Humana as well as some innovative Blue Cross Blue Shields like BCBSNC and BCBSMA leading the way. But we know there are others and expect more to follow.
“Employers with self-funded health plans are under increasing pressure to lower their healthcare costs and are losing faith in "point solutions" or traditional FFS provider networks from carriers as the answer. They are instead looking toward value-based contracts with innovative provider organizations, including scalable virtual clinics, for both primary care and now specialty care in high cost categories. We expect this to continue into 2024 so they can bring a network of these VBC providers to their employer customers and prevent specialty care from being carved out of their benefits or losing valuable employer customers who will move toward TPAs with better options to reduce total cost of care.
- Sam Holliday, CEO of Oshi Health
9. Ambivalence on impact of the Inflation Reduction Act continues
The Inflation Reduction Act’s unintended negative impact on patients will hit a fever pitch in news cycles, highlighting examples of pharma decisions to ditch potentially life saving research for rare disease patients as a result of disincentives to obtain approval for additional indications that would shorten patent life and open a product up to CMS price negotiation. We predict that multiple biopharma companies will publicly announce they are prioritizing a single large indication and drop “rare-to-common” strategies, similar to Relay Therapeutics’ decision to pause development of their drug RLY-4008 (lirafugratinib) in rare cancers and instead focus on a larger indication. Expect an increasing number of headlines touting lack of funding towards orphan diseases and a shift in investment away from convenient small molecule therapeutics. However, despite increasing political and legal pressure from industry, regulation won’t shift meaningfully during an election year and any changes in the law won’t come until 2025, if ever.
10. AI-driven drug discovery and development is center stage
As the AI wave continues to reach every technology sector in 2024, we expect that big pharma will embrace AI-first strategies for drug development, primarily through increased business development efforts. Pharma was swept up in AlphaFold mania in 2022 and dug deep into LLMs/ChatGPT in 2023. While pharma companies’ returns on internal research and development (R&D) aren’t what they used to be, biotech startup acquisitions are more recently fulfilling that role, yielding new technology, patents, and even forecasted sales growth for larger pharma industry giants. After dipping their toes in the “AI water” for two years, we predict that big pharma will dive deep into AI through a marked increase in business development activity with AI-first biotech companies in 2024.
“The biotech world has been abuzz with excitement over the potential of AI-driven tools in recent years, leading to the birth of numerous startups dedicated to harnessing AI for biologics drug discovery. AI is reshaping the biotech industry by powering the advancement of a new generation of cutting-edge biologics to the clinic.
- Jo Viney, CEO and cofounder of Seismic Therapeutic
11. Additional predictions from leaders in our portfolio
Abridge CEO and founder Shiv Rao MD: The enterprise will become increasingly fatigued by AI point solutions, and increasingly aware of potential regulation. They will still want (and need) startup level speed of innovation, and so will opt to focus on fewer companies who have the ingredients to meet the moment in the middle innings of enterprise AI: world class AI talent, proprietary datasets, and deep domain expertise.
Abridge CSO Zack Lipton: Generative AI in 2024 will be all about living, breathing systems where algorithms learn via interactions. The old-school partition of modeling practices from production systems will continue to break down as machine learning comes to rely more and more on interconnected technical-business processes where improvements are driven by data flywheels involving production data. For the last decade, progress has been driven by computation, algorithms, and giant pools of stale data. GPT, GPT2, and GPT3 all advanced leaps and bounds by throwing bigger models at more data on bigger machines. While so many people focus on ChatGPT as merely an “interface” change, it’s more than that. It’s a leap not only in how we experience the technology but on how we advance the technology. While the term “RLHF” might be used too often, too casually, and to refer to too many practices, many of which don’t involve any RL, the one big common thread is hill-climbing on human feedback, and actively soliciting supervised data based on human-reported failure modalities. This is already the norm at shops like OpenAI and will come to permeate the wider industry.
CopilotIQ CEO and co-founder David Koretz: Growing regulatory support will make COVID-era telehealth changes permanent. COVID laid bare the sad reality that we are ill-prepared to serve those most in need––older Americans living in rural areas and those with transportation or physical limitations. With the upcoming election season, politicians will be eager to demonstrate to older Americans that the message has been received by making the changes permanent and ensuring more equitable access to care.
Headspace CEO Russell Glass: Masters-level clinicians being reimbursed by Medicare is a big change that should open up more opportunity there, and incentivize more to accept Medicare for mental health.
HouseRx President and co-founder Tesh Khullar: PBM transparency and whether it will materialize in more than just a political gimmick in 2024.
Mural Health CEO and co-founder Sam Whitaker: In 2024, the FDA guidance will make diversity in clinical trials a leading issue that all study sponsors (Pharma, Biotech, MedDev) will have to solve with tangible solutions. Diversity in your enrolled participant population will be required to ensure that approved therapies are effective for the diverse US population that they will serve.
Plenful CEO and co-founder Joy Liu: Continued healthcare labor shortage and employee burnout (e.g. recent strikes) will increase investment in innovative technologies across both clinical and non-clinical functions.
Qventus CEO and co-founder Mudit Garg: In 2024, hidden tax of poor healthcare operations and its effect on patients, staff burnout and quality starts to become front of mind. The entire burden of unreliable operations falls today either on clinicians, solved by 'glue' roles like care navigators, care coordinators etc. or on patient's family to help navigate the system––in the process burning out clinicians, increasing cost of care and preventing optimal care to be delivered to patients.
SmarterDx CPO and co-founder Josh Geleris: AI data platform building and management drive significant costs of AI-first healthcare companies. We need to protect our customers’ data at all costs and also not lock it away so tightly that we can’t actually use it to provide services to them. There is an opportunity for better tooling that will enable AI applications to execute much more rapidly.