There are some corners of the digital health market that investors feel are a bit too crowded. In recent conference panel discussions and interviews, venture capitalists said it’s getting hard to differentiate startups among the sea of companies that have entered the telehealth and mental health spaces in the past few years, for instance. 

While the digital health sector might feel a little cramped in some areas, there are wide open spaces in others — and investors are ready to funnel money into companies looking to innovate these lesser-discussed aspects of care delivery and healthcare technology. These include Medicaid, patient-to-patient support and generative AI (AI that can produce content like text, imagery and audio).

But there’s no dearth of AI companies in healthcare — especially in digital health. In reality, most of them don’t actually deliver on their lofty promises to improve population health at scale or boost operational efficiency across health systems, charged Steve Tolle, general partner at HLM Venture Partners. However, in the past year or so, he has seen some new entrants in the healthcare field that are “actually leveraging AI in a very smart way.”

“I’m starting to finally see some investable companies in a space where there’s a ton of hype,” Tolle declared.

Realyze Intelligence, a UPMC spinout that uses data from the electronic health record to match oncology patients with clinical trials, is one of those startups. Tolle believes the company stands out from other AI startups because it is clear about the problem it’s trying to solve.

“They’ve got a very focused use case around clinical trials matching and recruitment that makes a ton of sense. And that kind of focus is actually hard to maintain for a founder who could be drawn into all kinds of conversations about where the business can go. Focus is a really hard thing to maintain,” he explained.

Another venture capitalist — Justin Norden, partner at GSR Ventures — agreed that the AI space is getting more exciting. Generative AI, under whose umbrella ChatGPT falls, is a category to which he’s paying particular attention.

Norden is eager to see how companies will apply generative AI to healthcare in the coming months, but he acknowledged there’s a possibility that the healthcare generative AI market could quickly become crowded.

“In six months, almost every pitch deck in healthcare will have some generative AI component,” he declared. “I think it is going to be a really interesting time because it’s one of the most transformational technologies we’ve seen in decades. And historically technology has mostly only increased costs and made providers’ lives harder within healthcare.” 

Norden appears to be referring to the EHR, which was supposed to generate efficiency but instead has caused widespread burnout among providers.

In Norden’s view, generative AI has real potential to alleviate healthcare’s burnout and staffing crises. Companies are already in a frenzied rush to find ways to embed large language models and ChatGPT into their products, and he believes many startups will be able to do this successfully. He expects to see an “explosion of adoption” of generative AI from health systems and other provider organizations in the coming months.

As for other areas within the digital sector that Norden thinks could use more innovation, he pointed to Medicaid.

“There’s been almost $20 billion in startup investment towards Medicare Advantage which has a roughly $300 million annual budget. This is contrasted with Medicaid, an area that generates almost $700 billion per year in terms of spending in the U.S., and only about $1 billion dollars of startup money is invested in that space,” he pointed out.

For companies that want to innovate the Medicaid space, there’s not a ton of competition, Norden said. He added that there’s also an “incredible need” for startups to focus on this space, as Medicaid beneficiaries often struggle with care access and poor health outcomes.

Similar to Norden, Lynne Chou O’Keefe — founder and managing partner at Define Ventures, which just raised $460 million in new funds — agreed that Medicare Advantage has garnered much more attention in the startup space than Medicaid has. But she thinks that there is still room for improvement in Medicare Advantage.

One of the most common themes observed in Medicare Advantage populations is loneliness, O’Keefe pointed out. She would like to see more startups tackling this issue.

“I think there are obviously some companies tackling loneliness, but I think they’re tackling it in a very certain way. I’m talking about creating community — both virtually and in-person — in an enterprise model. We need to scale that connection and those peer groups as we go forward. We also need to help each other and create more trust within the system,” O’Keefe explained.

Empowering patients may also help in the ongoing provider shortage. The country’s shortages of primary care physicians and nurses have reached crisis levels, but the healthcare system has yet to realize the potential that patients have to help the situation, O’Keefe argued.

“Patients who have had experiences and knowledge can help each other in certain use cases and certain areas. And we haven’t really driven community nor thought about that in a differential way. But it actually has been researched that peer groups can be very helpful,” she pointed out.

Something else that O’Keefe would like to see more of are well-designed consumer gateways. Startups like Hims and Folx Health are good examples of this, she said.

It’s a well-known fact that the way patients enter into the U.S. healthcare system is dramatically changing, O’Keefe pointed out. A lot of the more consumer-focused startups entering the market are filling in preventive care gaps left by the traditional healthcare system. These startups are also blending preventive care with wellness, which is “really important but has been overlooked by our current U.S. healthcare system,” O’Keefe declared.

Good user experience design is another feature of consumer-oriented healthcare companies that O’Keefe wants to see applied throughout the entire industry. Not enough startups know how to “merge enterprise, go-to market motion with consumer insight and thinking around products’ user interface,” she explained.

Overall, venture capitalists are still hungry for disruption — even amid the economy’s less-than-ideal situation, characterized by rising interest rates, increasing inflation and a major bank collapse. They just wish startups would pay more attention to areas that are often overlooked but in dire need of innovation.

Photo: phive2015, Getty Images