Digital health companies aren't just growing — they're evolving. Here's the latest shift underway.

Welcome back to Path to Recovery, a newsletter that will bring you weekly conversations on how the health care profession will recover from one of the most significant crises of our time. Click "subscribe" above or follow along using #PathtoRecovery .

Here’s what we’re talking about this week.

Whenever I ask readers of this newsletter what you want to see on these pages, I get a lot of requests for coverage of digital health. And it’s not hard to understand why: every year, funding for digital health startups reaches a new record and 2021 was no exception. Rock Health, which tracks digital health deals, points out that digital health funding surpassed the previous year’s high-water mark in the first six months alone — and also saw a record number of deals.

It’s undeniable that the COVID-19 pandemic created a huge appetite for digital health solutions from both health systems and employers, for everything from virtual care, to staffing shortages, to connecting people with mental health providers.

But there’s another shift underway in the digital health space, and that’s a market that’s maturing, says Jacob Effron , a principal at Redpoint Ventures. Larger digital health companies have started to purchase smaller ones. And the talent pool has gotten more seasoned; there are more people than ever who have lengthy resumes in the digital health world, a space that has traditionally cast a wide net into adjacent areas of health care and tech to find employees.

I asked Effron about the trends he’s watching this year. Here’s what he highlighted:

• There’s been a recent increase in companies that help specialists transition to value-based care, or risk-based payments (something that Alignment Healthcare CEO John Kao also called out in our conversation last week.)?
• Healthtech is catching up to fintech in terms of funding and number of deals. More startups are raising Series A or B rounds, and their growing clout means they’re finally getting acquisition interest. Larger companies can scale faster than smaller ones and approach potential health systems with more developed products.
• Veterans from the first generation of digital health companies are now founding their own companies with a deep understanding of the space.

Of course, not all of these companies will live up to the hype. Digital health companies that struggle are often the ones that can’t integrate effectively into health care’s legacy systems and workflows (clunky as though may be, it’s hard to be a disruptor here.)

The next inflection point will likely occur over the next three to five years, Effron predicts, when we might start seeing this latest generation of digital health companies look toward making their initial public offerings. And then, as Effron said, “The public markets will have their say.”

The other thing I’ve been watching this week is the strike at Stanford Health Care and Lucile Packard Children’s Hospital. The strike is especially notable coming just weeks after 8,000 nurses at Sutter Health held their own one-day walkout. Kaiser Permanente in November also narrowly averted a strike after reaching a deal with its 50,000 nurses and medical staff.

It’s likely we’ll continue hearing about similar tense collective bargaining negotiations. Hundreds of health care contracts, covering at least 207,000 workers, are expiring this year across the country, Bloomberg reported in January. And the renegotiations are coming at a time when health care workers are reaching crisis levels of burnout, and staffing shortages remain a top concern for administrators.

The strikes in Northern California have also been notable for the way both health systems have played hardball. After Sutter nurses ended their one-day strike, the Sacramento-based hospital operator said they couldn’t return to work until four days later (arguing that it had already committed to outside staffing coverage for five days.) And Stanford, meanwhile, said it will cut health care benefits for striking nurses, a move that’s sparked plenty of outrage, even beyond its own nursing workforce.

Click below to read what nurses had to say: