The mounting financial stress facing health systems is curbing M&A transactions among software and technology companies that focus on providers and payers.
Venture capital investments in healthcare information technology dropped to $451 million in the fourth quarter, a decrease of more than 75 percent from the quarterly average in 2021, according to the latest PitchBook report. In 2022, the value of venture capital deals in the healthcare IT sector reached $5.4 billion, down 35 percent from the year before. In private equity, deal count in 2022 also dropped 30 percent from 2021, according to the report.
“Health system leaders are preoccupied with stemming the financial losses and ensuring they have the operating cash to keep business lines open,” Rebecca Springer, senior analyst at PitchBook, wrote in the report. “They are, accordingly, hesitant to devote resources to unproven solutions or clinical improvements that do not deliver an immediate financial return on investment.”
The long sell cycle is another factor that contributes to the slowdown in healthcare IT deals. Health system sell cycles are typically around 12 months and require extensive administrative reviews. “In an environment wherein the demand for venture capital is significantly outpacing supply, administrators understandably worry that they will partner with a vendor only to see the company fold because it fails to achieve positive cash flow or raise additional capital,” Springer wrote.
Since the onset of the Covid pandemic, healthcare systems have been plagued by a shortage of workers and rising labor costs. Early signs have pointed to a hit to healthcare services involving generalist and multispecialty providers, and physician practice management. Not surprisingly, the sluggish economic environment is trickling down to technology providers serving the industry.
For example, electronic health record (EHR) and clinical information vendors are critical in the healthcare IT sector. Both deal value and deal count in EHR and clinical information have been declining since the second quarter, according to the PitchBook report. Start-ups specializing in EHR and clinical information raised only $84 million last quarter, the lowest since 2020.
Software companies that help healthcare providers improve operation efficiency have also seen a slow down in investment activities in the past year. These companies help support all administrative aspects of managing a healthcare practice, including managing supply chains and contracts.
The exit environment has come down from its peak in 2021. Last year, venture capitalists and private equity firms exited a total of 48 companies in healthcare IT, down over 50 percent from 2021 and down 34 percent from 2020. “This has a knock-on effect on private capital availability, because without substantial distributions from previous fund commitments, [allocators] lack new capital to deploy,” according to Springer.
