Digital health funding has remained stable this year, with AI startups increasingly capturing a larger share of venture capital. In the first half of this year, AI-focused startups captured the majority of digital health sector venture funding, with 62% of all venture capital investment in the sector goes to companies that use AI to do things like automate documentation, accelerate drug discovery, improve diagnostics, and drive patient engagement.
Investors are still focused on AI’s ability to solve healthcare problems, but are intensifying their scrutiny of AI companies as startups continue to fill the space, said Vig Chandramouli, partner at Oak HC/FT.
Customers also remain excited about AI, although this is more true for providers than payers, he noted.
“I think payers are still understanding what is considered AI and what is not considered AI, and there are legal definitions tied to contracting that are slowing things down. But in the meantime, I think providers have been willing to innovate and experiment,” Chandramouli said.
As health systems deploy more and more AI pilots, he said, they are starting to prioritize short-term, dollar return on investment (ROI), ideally six to nine months after going live. This “time to value” metric is becoming the number one way to evaluate AI startups, Chandramouli noted.
AI solutions that come to market must demonstrate tangible savings, such as lower nursing staffing costs or increased revenue, and they must do so relatively quickly, he explained.
“With environmental writing solutions, I think version one of many of the platforms was about burnout, reducing pajama time, and positive feedback from suppliers. Version two of that story, as those contracts roll over, is about hard dollar ROI, and hard dollar ROI is in the initial revenue cycle,” Chandramouli said.
Now, health systems are saying to AI companies, “We could pay you X, but we want to see a return on those dollars within a year of implementation,” he added.
Gone are the days when a startup could promise a return on investment within a couple of years, Chandramouli stated.
Overall, the purchasing process has changed since the pandemic, he noted. A big part of it has been the fact that AI startups are increasingly putting fees at risk, tying their payment to the return on investment achieved.
“Those who have the conviction that they can generate a strong dollar ROI will put their fees at risk. Because if you really do the math, option A is to do a pilot, invest a lot of internal resources and do it for about a year, and then maybe it converts, or just give it to it for free until you hit a ROI cliff,” Chandramouli explained.
And health systems are very willing to participate in these types of agreements, he noted, because the weaknesses are very serious. In their view, provider organizations are most interested in AI tools to improve nursing staffing, documentation and ramp-up cycle processes.
These organizations, particularly mid-tier systems, are prioritizing fast pilots that solve immediate problems, Chandramouli said.
Ultimately, he believes the next phase of digital health investment will be defined not by companies with the flashiest AI, but by those that can deliver measurable value in months rather than years.
Photo: Richard Drury, Getty Images
