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Dive Overview:
Healthcare systems are a big market for artificial intelligence startups, but companies selling to insurance companies and life sciences companies are creating value faster, according to an analysis by venture capital firm Flare Capital Partners. Most AI startups selling to healthcare systems have not closed early-stage investment rounds. Only just over 5% of these companies have raised Series C or higher, compared with about 10% of startups in life sciences and about 16% of companies selling to health insurance. This difference suggests that AI startups in the life sciences and health insurance markets are creating more value for their customers, according to Flare. But these sectors also have higher operating margins and are likely able to devote more resources and time to scaling their AI products.
Dive Insights:
Still, health systems are a prime target for AI startups, according to the report, which examined more than 4,000 venture capital deals.
Companies that sell products to health systems raised more than $23 billion between 2014 and the end of 2023. Nearly half of that investment went to clinical care startups offering AI tools for imaging, clinical decision support, and diagnostics.
This is not surprising, given that AI products have the potential to increase efficiency and ease the pressures of rising labor costs and talent shortages in the health care system, the analysis noted.
But clinical care startups face additional challenges to reach later stages of funding: They bear the highest liability risk to health care providers and must demonstrate high levels of accuracy and reliability, wrote report authors Parth Desai and Jake Rubin.
“This can lead to lengthy sales and implementation cycles,” they wrote in the report, “and can also make it difficult to analyze the value created by these solutions from the decision-making of clinicians who are ultimately responsible for care outcomes.”
Still, there are other opportunities for companies pitching their products to health systems: AI tools that address finance and back-office operations, especially those dealing with revenue cycle management and patient scheduling, were more likely to reach Series C or higher funding rounds.
Clinical operations and throughput companies, which use AI to forecast capacity or optimize discharges and transfers, haven’t raised as much funding as other categories but are often the most mature, according to the analysis.
Overall, healthcare AI startups that sell products to health systems, health plans and life sciences companies have raised about $60 billion over the past decade, with the bulk of the investments coming in the past five years.
In the health insurance space, 119 startups raised $13.4 billion over the decade, but that’s smaller than companies targeting health systems, likely because insurers are building in-house tools or considering non-venture-backed products.
About $9.5 billion was pumped into startups focused on care management and clinical operations, including tools to handle utilization, prior authorization, risk adjustment and other operations important to value-based care, according to the analysis.
Other areas insurers are focusing on include member self-service and care navigation products and network management. Keeping provider directories accurate and up-to-date is a common problem for insurers, but a good problem for AI that can look up and fill in gaps in the directory, Frear said.
Claims and processing automation is one of the less-funded value propositions for health insurance, according to the report, suggesting that insurers are building their own products or turning to non-healthcare tech tools.
