GHA Q&A on Digital Health with Bass, Berry & Sims Attorney Angela Humphreys

Vertical: Digital Health
Author: JC Lupis
Date: July 2021
Sponsored by Bass, Berry & Sims

The Healthcare Private Equity Team at Bass, Berry & Sims has advised in over 150 private equity transactions in the healthcare industry over the past two years, including The M&A Advisor’s Healthcare & Life Sciences Deal of the Year (Over $1B) and Corporate/Strategic Deal of the Year (Over $1B) in 2020.

Here, Angela Humphreys, Chair of the Healthcare Practice Group and Co-Chair of the Healthcare Private Equity Team at Bass, Berry & Sims, talks with GHA Managing Director JC Lupis about digital health trends.

JC: Let’s start with a big question about digital health. Does the level of innovation, interest, and investment we’re witnessing represent a reimagining of the delivery of healthcare? Or will digital health solutions instead be supplemental, rather than essential, to healthcare?

Angela: I think digital health solutions will be supplemental but also essential.  Digital health solutions will never fully replace face-to-face provider to patient care.  That said, as the delivery of healthcare becomes more and more focused on patient engagement and experience, it will be essential for providers to adapt to the innovations provided by digital health in order to remain competitive in the marketplace.  We are seeing the digital health sector continue to shatter records for funding nearly every quarter.  The ideas, the companies and their investors are all poised to reshape the delivery of care.

I see digital health making its impact in two ways. First, digital health companies themselves are becoming care delivery companies. In mental health, for example, companies like Talkspace and BetterHelp use telehealth to deliver person-to-person therapy, expanding access to care for patients who may not have a local provider or who can’t visit an in-person therapist for other reasons. Second, traditional providers are integrating digital health into care delivery. The pandemic forced physician offices and other brick-and-mortar providers to quickly learn how to deliver care in new ways. That innovation isn’t going away, especially with traditional providers continuing to feel financial pressure. Providers will continue to look for more efficient ways of providing care under fee-for-service arrangements. And as value-based arrangements continue to grow, providers are seeking better ways of keeping patients healthy to lower the total cost of care. Digital solutions will be a big part of accomplishing those goals.

JC: As you mentioned, we’re seeing unprecedented levels of investment in digital health, with the COVID-19 pandemic acting as an accelerator. Is this sustainable or will we see a plateau soon?

Angela: I think we will continue to see growth in investment in digital health for the foreseeable future.  A couple of years ago, I heard someone say that we were in the first innings of the impact of digital health solutions on the healthcare industry.  I certainly don’t think we’re even close to approaching the seventh inning stretch.  As a general rule, the larger a fast-growing company or sector becomes, the more difficult it is to sustain that high rate of growth. Some of the drivers of growth in digital health investments may wane in the next few years. The high valuations may also signal a leveling off. At the same time, the fundamentals still suggest deep investor interest in digital health and healthcare generally. Given the size of the U.S. healthcare market, even relatively narrow niches offer a substantial opportunity for digital health companies.

JC: Given all of this investment, what’s the outlook for IPOs, M&A, and of course, SPACs?

Angela: With significant capital to deploy, private equity backed M&A is poised to continue in the digital health arena, likely somewhat unphased by traditional economic drivers.  Whether SPAC and IPO activity will continue at the recent pace likely will be determined more by overall market conditions and the general economic outlook.

JC: On the M&A front, do you believe that established industry players are likely to acquire smaller digital health firms or focus on building out their own new capabilities through venture funds?

Angela: The buy or build analysis is alive and well when it comes to digital health.  Established industry players will continue to evaluate the capital and human resources necessary to build out additional capabilities with a ramp-up versus a buy strategy with a more significant capital outlay with immediate synergies and a necessary timeline for integration.  Given the pace at which technology is evolving, I think, “Can I buy what I need now?” is probably the first question to ask.

JC: Switching gears, big tech players are making their presence felt in healthcare. Do you envision any specialties in which they may see an opportunity to own physical delivery systems? Are we likely to ever see iClinics? (Note that there are rumors that Amazon is interested in acquiring brick-and-mortar pharmacies.)

Angela: We are already seeing some companies in the chronic care management space tout “virtual clinics,” but those are generally supplemental to and not in place of in-person care that includes certain diagnostic and therapeutic components.  That presents an opportunity for digital health companies to partner with traditional healthcare services providers to manage the full spectrum of a patient’s care.

JC: On a related note, in which areas of healthcare do you see digital health as being potentially most disruptive? There seems to be a lot of potential in digital behavioral health, AI in radiology, and femtech, to name a few examples.

Angela: All of those are great examples.  As noted above, the management of chronic conditions is another area in which digital health has the potential to be disruptive.  Any aspect of a patient’s health that he or she has to monitor and manage on a daily basis is an area in which digital health can have a significant impact.  Chronic care management historically has involved a lot of manual processes and human attention needed, and when those solutions don’t scale, you end up with a situation where the economics would dictate that only the sickest patients with the most complicated cases get hands-on care management. Digital health companies like Livongo are bringing a consistent level of care management to those patients who otherwise received very little ongoing support. These approaches work because they keep tabs on the bulk of patients and work to keep them from experiencing an acute phase of their chronic illness. The examples you mention all fit this to a degree.

For behavioral health and women’s digital health, or femtech, a digital platform can be an initial access point for a patient waiting for a one-to-one appointment and an ongoing way to monitor their health between appointments. In addition to radiology, the application of AI to diagnostics, therapeutics, clinical decision support and drug design has the ability to impact the entire care continuum across specialties.

JC: As a counterpoint, are there any areas in which digital health’s potential is overhyped?

Angela: Primarily any suggestion that digital health will in large part displace many aspects of in-person care.

JC: One of digital health’s great promises is in healthcare access. However, the case can be made that these tools are bringing the digital divide to healthcare. Do you see the emergence of public-private partnerships to address this issue and are there opportunities for investors there?

Angela: Access to care continues to be an issue in rural areas in particular.  Public-private partnerships have the potential to materially improve access to care in these areas.

JC: In your view, how quickly are regulatory bodies adapting to the pace of change in digital health? There are still questions, for example, about the extent to which telehealth reimbursements will be made permanent.

Angela: It is a challenge for regulatory agencies to keep up, and the fast pace of change in digital health is only part of the explanation. These are agencies that have dealt mostly with traditional provider organizations for most of their history. Those organizations did not need to evolve rapidly until very recently and even then, not at the pace of the digital health sector. That shaped the way the agencies operated and how they historically responded to changes in the industry. Although the regulatory environment continues to lag behind the evolution of technology in the digital health space, progress is being made.

Regarding telehealth reimbursement parity and other emergency changes adopted during the pandemic, this experience suggests the agencies could move more quickly even when there isn’t a public health emergency. We may see some acceleration of rulemaking in digital health and other health policy areas as a result of this experience. Many of the temporary changes will continue as long as the public health emergency declared by the U.S. Department of Health and Human Services—renewed most recently in April—is in effect. The longer we work under these emergency rules, the more likely the case successfully will be made that government rulemaking can be appropriately streamlined. And, if enacted, the proposed CONNECT for Health Act of 2021, which has received bipartisan support, would, among other things, remove geographic restrictions on telehealth services permanently, expand what qualifies as an originating site to include an individual’s home, and expand eligible distant service providers to permanently include federally qualified health centers and rural health clinics.

JC: For investors in digital health, including private equity firms, are there any emerging regulatory issues to be aware of?

Angela: Privacy and security issues, including cybersecurity, continue to be at the forefront of regulatory issues that digital health companies face.  As healthcare becomes more of a “digital first” industry, companies need to be able to share data with other parts of the healthcare ecosystem, as directed by patients who are becoming more proactive participants in their care. Federal regulations are spelling out what healthcare providers must do on interoperability, information blocking and privacy when sharing data. All of those developments raise the stakes for protecting data, from accidental disclosure and cyberattacks alike.

For investors, data protection and safe data sharing must be monitored in portfolio companies and investigated in due diligence for acquisitions. Investors will want to watch closely as the industry works with federal agencies on these rules. In addition, the Office of Inspector General (OIG) updated its work plan in 2021 to include telehealth services.  This signals that with increased acceptance and reimbursement of telehealth services likely will come increased scrutiny of fraud, waste and abuse by government agencies.  Finally, an important regulatory consideration for investors is the government’s increasing willingness to target private equity sponsors in fraud enforcement actions against their portfolio companies.

JC: Last question: any bold predictions for this year and next?

Angela: Look for transactions that continue to blur the lines of where technology ends and “healthcare” begins, including strategic alliances, joint ventures or combinations between so called “tech companies” and more traditional healthcare services providers.

To learn more about the healthcare practice at Bass, Berry & Sims, please contact Angela Humphreys at ahumphreys@bassberry.com

For questions about this Q&A, please contact GHA Managing Director JC Lupis at jclupis@ghadvisors.net.