2023 look-ahead: Boring is the new black

As we round the corner into 2023, crystal ball season is in full swing. AKA, chestnuts are roasting and keyboards are cranking out predictions for the year to come. This year, there’s an extra dose of economic uncertainty, and digital health innovators are looking for perspective beyond calls to batten down the hatches. Instead of offering a finger-to-the-wind assessment of what the future holds, this post aims to capture the themes keeping digital health leaders up at night and to offer a mini-almanac of actionable steps to take moving into 2023.

Looking ahead, here are the top five themes we think should be on executives’ agendas:

Managing a moving target
Exploring M&A opportunity
Navigating revenue volatility
Investing in people
Shoring up privacy

1. Managing a moving target

Managing cash in this environment is becoming increasingly complex. Companies are feeling the effects of contractionary conditions, and objective #1 is keeping the lights on. The stock market has been shaky, mortgage rates are up, and inflation is hovering uncomfortably high. Venture capital funds are sitting on large dry powder reserves, yet deployment of these funds has dragged—for global VC funding generally and digital health specifically. Everyone will have to operate through a recession for at least the first half of 2023 (we’re trying to be optimistic here), and customers and funders will be slower to open their pocketbooks. Businesses have already pulled out the cost-cutting scissors, snipping away at non-essential activities and vendors. Moving forward, organizations will need to be in “conservation mode” while simultaneously investing in innovation and a realistic picture of healthy growth (i.e., profitable growth).

What to do about it

Run a lean operation: Streamline non-essential expenses to ensure you are preserving cash while maintaining investment in resources that tie directly to growth
Establish standards for vendor performance: Set deliberate thresholds for ROI and clinical effectiveness for current and prospective vendors
Leverage go-to-market (GTM) partners: Explore GTM pathways that include external partners in order to share resources and reduce financial risk
Continue to innovate: Deliberately pursue an innovation strategy (yes, even in tough times) by improving the core

2. Exploring M&A opportunity

We recently shared a deeper perspective on M&A trends and strategic archetypes in digital health, so we’ll keep this focused on the M&A opportunity for 2023.

2023 will make M&A more appealing for both builders and buyers. Builders that may not have been sold¹ on the idea of an acquisition exit strategy may be more open to it as VC funding is deployed at a slower pace. Startups will be “shopping themselves” to weather upcoming economic storms and avoid shaky public investment markets. On the flip side, buyers will see a wider range of startups for sale and relative drops in acquisition price. This consolidation wave will be especially strong in crowded spaces with point solutions that lack true differentiation (e.g., low-acuity digital behavioral health). We’ll be keeping an eye on Big Tech, “middle children,” and maturing digital health players who will be on the hunt for what they can acquire and scale in 2023.

What to do about it

Seize the opportunity: Evaluate the range of relevant potential buyers or sellers and capitalize on the market timing and environment, if aligned with your strategic goals
Steer clear of shiny objects: Select targets based on careful assessment of the opportunity’s fit with your strategy, mission, and values rather than headline chasing
Set the stage for integration: Establish a clear strategy and roadmap for managing the newly acquired teams, assets, and technologies
Plan for the leftovers: Be clear-eyed about what you’re acquiring (i.e., not everything will be perfectly integrated) and have a go-forward plan for the parts of the acquisition that are not aligned with your strategy

3. Navigating revenue volatility

Innovators are looking for a “better way to healthcare”—that’s the heart and promise of digital health. However, to survive and thrive they need to create products that customers value for their efficacy and ROI. B2B buyers are facing significant margin pressure. That means tighter budgets, slower vendor evaluations, and increased ROI thresholds. This is especially true for provider organizations, many of which are battling tight (or negative) margins. Employers are structuring contracts for digital health benefits based on real engagement and usage, so not all projected future revenue will actually hit the books.

B2C players are feeling the crunch as consumers deal with inflation, household debts, and rising healthcare and living costs. In short, companies operating in a consumer-facing model need to prove their ROI too. Notably, some B2C companies—especially those that can demonstrate cost savings—have already accelerated their pivots toward (slightly) greener B2B pastures.

Regulators are adding hurdles to revenue pathways as well. Health systems and providers are grappling with a flurry of potential Medicare reimbursement cuts and waiver program uncertainties. Digital health, life sciences, and medical device players are dealing with rolled back emergency use authorizations (EUAs), and reimbursement rates for digital health products—especially those that can’t prove their clinical value—are likely to see adjustments in coming days.

What to do about it

Establish your worth: Ensure that ROI and clinical efficacy are well proven and documented, and that your solution and sales collateral align with the highest priorities of your existing customer base
Tap into new revenue streams: Get creative about growth by exploring additional sales channels and adjacent customer segments to de-risk your revenue position
Consider new business model opportunities: Evaluate strategic moves toward completely new verticals (e.g., B2C → B2B) to diversify revenue streams
Brace for regulatory pressure: Establish scenario-based plans in advance of reimbursement cuts and EUA rollbacks

4. Investing in people

Tech layoffs have dominated news cycles in 2022. At least 20,300 U.S. tech workers were laid off in November alone and more than 100,000 since the beginning of the year. Health tech companies haven’t been immune to these trends, and traditional healthcare players have seen significant layoffs and talent shifts as many clinicians are deciding to leave. Health systems also continue their battle with provider burnout and staffing shortages. Approximately 80% of nurses report their units are inadequately staffed and 87% say they feel burned out. Investors are taking note—for the first time ever, non-clinical workflow solutions (e.g., robotic process automation) represent the top-funded value proposition so far in 2022.

What to do about it

Engage with the influx of available talent: Tech layoffs and healthcare talent shifts present an opportunity for digital health companies as product builders and clinicians look for their next opportunity
Structure for success: Align employment, talent development, and hiring decisions with your strategy—the goal is to be well positioned for the near term without undermining future growth
Deploy tech to augment staff: Evaluate the range of workflow solutions for staffing and administrative support and explore how tech (e.g., clinical decision support solutions) can alleviate the burden on clinical teams

5. Shoring up privacy

Privacy and trust are big ticket concerns. Organizations are projected to spend $188.3B on information and risk management products and services in 2023 (an 11.3% increase over 2022) due to increases in zero-trust network access, cloud-based models, and remote work. However, data breaches are particularly damaging to healthcare players—hitting bottom lines, reputations, and patient safety. According to Rock Health’s 2021 consumer adoption survey, 71% of patients trust physicians with their data; yet, providers and other stakeholders struggle to keep their data secure. Healthcare suffered 300+ breaches in the first half of 2022 alone, with an average price tag of $10.1M—the highest of any industry for 12 years in a row. Venture funding and acquisition activity have heated up as a result (e.g., Mandiant, Medcrypt, Medigate, and CyberMDX).

Trust and security sit atop regulators’ priority lists too. As databases become more interoperable, regulators will crack down on commercial surveillance, lax security, and data monetization practices. Similarly, privacy and security concerns are likely to influence product approval decisions—in addition to more traditional expectations (e.g., clinical evidence generation).

What to do about it

Make security and trust C-level priorities: Ensure that privacy and clinical efficacy are monitored at the highest levels of the organization to build customer trust, ensure FDA approval (if needed), and avoid regulatory backlash
Invest in cybersecurity infrastructure: Thoughtful investments are less costly than breaches—staff training, data governance, cloud security, and digital identity should be among the first areas of focus
Prepare for the worst: Approach security breach scenarios as a “when” rather an “if”—make sure there is a thorough emergency response plan in place

Looking ahead

Yes, 2023 may be messy, and “boring” might be your best case. However, keeping your eyes on the ground below may cause you to fall behind. Innovators who are deliberate about their financial survival strategy, M&A and revenue opportunities, talent needs, and privacy infrastructure will have major advantages in 2023. The best teams will continue to position themselves for the next wave of opportunity and eventual market upswing.

Share your hot takes on the moves we’ll see in the year ahead—30-second survey here. You could see your perspective in a future Rock Weekly (anonymized, of course)!

Rock Health Consulting advises leading organizations on their digital health strategy and the evolving healthcare market. For digital health insights tailored to your needs, drop us a note at advisory@rockhealth.com.

Footnote

Dad joke pun intended.