This year's digital health IPOs' strong performances have increased confidence in market
Recent digital health IPOs have put in strong performances, and with the potential to revolutionise healthcare the market looks favourably at the industry. The healthcare industry is behind many others in terms of technological implementation, which leaves room for new companies to develop new cost-effective and efficient technologies.   
A relatively small group of people from underwriting banks on Wall Street define the market’s appetite for the year’s IPOs. And right now, sources say, those people are thinking happy thoughts about digital health and other health-related IPOs.

Why now? The quick answer is that the most recent handful of health IPOs have been strong performers. Fitbit (fitness wearables), TeleDoc (telemedicine), Evolent Health (hospital analytics), and Press Ganey Holdings (patient surveys, information) each came out above the original offer price on opening day.

But there may be another, deeper, sentiment that’s settling in. Technology will play a huge role in fixing health care.

Today, the health care industry is often compared — unfavorably — to other industries in terms of the state of its information technologies.

“The thing about health care is that it’s a $3 trillion industry, and the computer systems used in the industry are probably the worst in terms of its twenty-first century-ness of it, maybe second only to education,” said Stephen Kraus of Bessemer Venture Partners. “My partners in other industries almost laugh at the green screen computer systems used in health care — it’s literally stuck in the 1980s.”

There’s no question that the health care industry is rife with costly inefficiencies and waste, but that doesn’t necessarily mean the industry is ripe for disruption. It’s a slow-moving industry that evolves workflows and technologies slowly, and sticks to them. Health care providers are overburdened, too, making it very hard to drop everything and set up a new computer system.

“Investors are buying the core thesis that tech will finally start to automate the bloated health care industry,” said Jeff Tangney, CEO of the doctor networking service Doximity. Tangney has been around health IT since co-founding his first company, Epocrates, back in 1998.

The regulatory environment has created some strong tail winds for digital health companies.

Health care reform and new value-based and population health reimbursement models are gradually changing the economics of health care — that is, they’re changing the way providers are getting paid. Provider organizations need to use all kinds of analytics and engagement technologies to care for entire populations of people in a cost-effective way.

Investors may be seeing that these forces aren’t going away. Wall Street may feel more confident about health care IPOs given the recent political climate around health care reform, which seems far less in flux than it was a year ago.

“I think interest is driven by widespread recognition that the incentives changes and information liberation catalyzed by the Affordable Care Act are working and going to persist for the foreseeable future,” said Bob Kocher, a partner at Venrock, which invests in digital health companies.

The importance of the Obama Administration’s huge victory with the Supreme Court win in King v. Burwell can’t be overstated. The decision removed a major challenge to the right of the government to implement the ACA. There was a sense of decisiveness around the decision. It seemed to announce “Obamacare is here to stay.”

Kocher: “Now that the Supreme Court has settled the legal disputes and people are realizing that the upcoming election is not going to lead to a Senate majority that could repeal and replace the ACA, investors are fully committing to backing start-ups that benefit from the fact the healthcare will grow to upwards of 22 percent of GDP over the next decade and adopt lots of new technology in this process.”

Before joining Venrock, Kocher served in the Obama Administration where he was one of the key shapers of the Affordable Care Act.

Bessemer Venture Partners’ Kraus said the current warm feeling about digital health companies might have less to do with court decisions and recent IPOs, and more to do with the natural maturation of the digital health space.

“Health care reform and regulatory changes — one of which was the HITECH Act (Health Information Technology for Economic and Clinical Health) — have poured billions into the digital health space, so it’s no surprise that disruption-minded entrepreneurs [are] jumping in,” Kraus said. “So it’s not surprising that these digital health companies that started five or six years ago are now maturing and accessing the public markets.”

And the fun may be just getting started, Kraus believes. “I think we’re in innings one, two, and three in the game. I think you’ll see five health IPOs every year for the next ten years,” Kraus said.