Health IT Startups Make VCs Swoon

Venture capital investment in the health IT sector exploded last year, leaping to nearly $1.2 billion in 163 deals -- up from $480 million in 49 deals in 2011, and $211 million in 22 deals in 2010. That's according to Mercom Capital Group, a global communications and consulting firm that tracks the sector.

Mercom is also seeing a major shift in the focus of investments from companies with health information management solutions for providers to firms that make products designed to engage consumers.

"There's a lot of money going into health IT, especially the technologies that are consumer-focused: telehealth, personal health, social health, mobile health," said Raj Prabhu, managing director of Mercom, in an interview with InformationWeek Healthcare. "The majority of the money still goes toward healthcare provider-centric technologies. But it's almost balanced 50-50 now.

[ For more on the staying power of the healthcare IT industry, see Health IT Bubble Is No Bubble At All. ]

"The VCs are very comfortable with the Internet software companies," he added. "They understand the consumer side. They see the vast opportunities in things like the aging population on the telehealth side, and consumers engaging in healthcare."

Prabhu cited Castlight and GoHealth, two of the five companies that received the most VC funding in 2012, pointing out that they are bringing more transparency to healthcare by enabling consumers to make price and quality comparisons among providers and insurers. However, Castlight's service is being purchased mainly by health plans that want their members to choose less costly, higher-quality providers.

The only electronic health record (EHR) vendor in the top 5 is Practice Fusion. That suggests that investors are not necessarily interested in putting money into companies that can benefit from the government's Meaningful Use program. Nevertheless, the rapid growth rate in VC investment since 2010 coincides with the overall rise in health IT adoption since the government announced its EHR incentive program.

Here are the five health IT firms that raised the most money in 2012, along with the amounts they received:

-- Castlight Health, which provides Web- and mobile-based price and quality comparisons among healthcare providers: $100 million

-- 23andMe, which has a personal genome service: $58 million

-- GoHealth, an online portal that helps compare and shop for insurance coverage: $50 million

-- Kinnser Software, which sells clinical support software to home health companies: $40 million

-- Practice Fusion, a vendor of free Web-based EHRs: $34 million.

The top investors that participated in VC funding rounds last year were Connecticut Innovations, Founders Fund, Merck Global Health Innovation Fund, Qualcomm and West Health Investment Fund. While West Health has been investing in wireless and mHealth firms for some time, Founders Fund is the only investment company that has been in Mercom's top 5 previously, according to Prabhu.

Prabhu observed that the number of investors in the field doubled in 2012, including many VCs new to health IT. "It's like any other sector: when a sector is new and it's booming, every venture capitalist and private equity guy out there wants to make sure they don't miss out on what's going on."

It's also worth noting that pharmaceutical firm Merck recently showed its interest in health IT by partnering with the Regenstrief Institute in Indianapolis to research ways to use clinical data to personalize health care. Qualcomm, like other telecom firms, has been pushing into the telehealth and mobile health fields, Prabhu said.

M&A activity in the health IT field was "robust" last year, said Mercom's report. There were 163 transactions totaling approximately $7 billion, vs. 104 transactions worth $6.1 billion in 2011. Although the rise in transaction value was only 13%, in the majority of deals, the dollar amounts are not disclosed, Prabhu noted. "So I look at the number of deals, because that gives a better indicator of the activity. And that was up 50-60%. That's a pretty big leap."

Among the biggest M&A deals in 2012 were Sunquest Information Systems' acquisition by Roper Industries for $1.4 billion; the $1.25 billion acquisition of Thomson Reuters’ healthcare data and analytical solutions by Veritas Capital; and the $1.1 billion acquisition of M*Modal, a medical transcription services company, by One Equity Partners.

Other industry observers also see growing strength in heath IT. Malay Gandhi, chief strategy officer for Rock Health, an incubator for health IT startups on the consumer-facing side, told InformationWeek Healthcare, "We agree there is a lot of interest and momentum in the space overall. Our team tracks digital health funding and saw a 46% increase year-on-year, considering only the deals over $2 million."

Federal Meaningful Use Stage 2 requirements will make your medical organization more competitive -- if they don't drive you off the deep end. Also in the new, all-digital Meaningful Mania Part 2 issue of InformationWeek Healthcare: As a nation, we're falling short of the goal of boosting efficiency and saving money with health IT. (Free with registration.)