Healthcare is arguably one of the largest and most complex sectors in America. It’s big business too.

According to the Centers for Medicare and Medicaid Services (CMS), in 2020 alone, health expenditure as a share of the nation’s gross domestic product reached an all-time high of 19.7%. And in terms of dollar value, CMS projects that national health spending will reach $6.2 trillion by 2028.

Although staggering, these figures are the perfect lure for innovative and savvy entrepreneurs and venture capitalists looking to develop and sell the next “big thing” in healthcare. Case in point, AmerisourceBergen recently launched a $150 million corporate venture capital fund for emerging healthcare companies.

A lot of money is being invested in medtech

"I believe that innovation is the catalyst to sustained progress and change, which is why AmerisourceBergen is committed to taking bold, innovative actions to achieve our purpose and drive long-term growth," said Steve Collis, CEO, chairman, and president of AmerisourceBergen.

Although an impressive sum, the fund pails compared to funding rounds raised by individual medtech companies like surgical robotics developer CMR Surgical. In June 2021, CMR Surgical said it had raised $600 million in a series D round. With that, hundreds of other funds and funding rounds have been announced over the past year. And the reason the funds have been flowing like water is twofold. The market is ripe for transformation, and the potential prize for those that succeed is astronomical.

Success can be elusive

“When looking at the sheer magnitude of the healthcare market, it’s easy for startup founders to hypothesize disruptive technologies that will yield giant returns on investment,” said Shannan Epps, president and CEO of Brightwork Consulting. “But those figures often serve as a mirage. The path to success within the healthcare market can be extremely elusive for those that don’t understand it.”

Brightwork Consulting is a Seattle, WA-based IT consultancy that helps healthcare organizations with large IT implementations, digital transformation initiatives, and technical resources. And having been in healthcare IT for more than 20 years, working within health systems and as an IT consultant, Epps has seen both sides of the health innovation coin.

Do your homework on regulations

“For medtech companies that want to develop tools and applications that fit within healthcare systems, a lot of homework needs to be done,” Epps said. “First, they must know the systems healthcare providers use inside and out. And secondly, they need to understand healthcare regulations.”

For example, a medtech startup that develops an algorithm to help healthcare professionals diagnose a disease or monitor a patient’s health. Seems simple enough, right? Just create a program that taps into patient data and alerts when an anomaly surfaces or when a known disease variable is detected. Any computer science expert specializing in artificial intelligence (AI), or machine learning should be able to program that in a few sessions, and it would be worth millions. Potentially billions.

But here’s the catch. FDA views those types of software applications as medical devices, which require FDA approval before they can ever be used within a healthcare setting. The reason is not that the administration hates technology. However, it’s because past AI-enabled products have resulted in inaccurate and even harmful recommendations for treatment.

“The regulatory framework governing software tools for patient monitoring and treatment is complex,” Epps said. “And to make it more confusing, the FDA regulates some, but not all, AI-enabled products used in healthcare. And the line between what needs approval and what doesn’t is often razor-thin.”

Because government moves slowly and innovation often moves fast, FDA is currently considering reviewing its process for AI-enabled medical devices.

A cautionary tale

In reference to how innovations and investments can quickly sour in medtech, the story of Proteus Digital Health serves as a cautionary tale. The makers of an ingestible sensor embedded within a pill to track medication usage filed for bankruptcy in 2020 after failing to raise the additional funding it needed to keep its operations going. The company’s Chapter 11 filings showed it had a liquidity problem in the months leading up to the pandemic. And its bankruptcy filings pointed to both the spread of COVID-19 and market conditions as reasons for why Proteus couldn’t find the money it needed.

Since its founding in 2002, Proteus raised nearly $500 million from investors and was once considered a healthcare unicorn. In 2014, MD+DI even counted Proteus among a short list of startups poised to change medtech forever. Its valuation stood at $1.5 billion before its collapse. Although COVID-19 was the scapegoat, the company’s failure to bring a product to market with the resources it had were mostly to blame.

Is your tech compatible?

“The other thing medtech startups need to consider is how their software applications might integrate with other systems,” Epps said. “A majority of healthcare providers deploy electronic health record (EHR) systems from one of three developers: Epic, Cerner, or Meditech. Epic is the current leader in the space.”

According to Johns Hopkins Medicine, Epic is the preferred EHR system within healthcare. It is used by more than 250 healthcare organizations nationwide and 45% of the U.S. population has their medical records in an Epic system. And that means an AI program that can predict patient outcomes based on data collected from an EHR would undoubtedly need to integrate with Epic.

Final thoughts

The truth is that the U.S. healthcare system is bloated and inefficient. Digital transformation can go a long way in helping relieve some of healthcare’s ailments. However, recovery will not happen overnight. And even though big money and big ideas are going into creating innovative antidotes each and every day, there are far too many checks and balances for change to happen quickly.

“Medtech startups and their investors need to understand that success usually will not happen overnight,” Epps said. “They need to be prepared to go for years without a profit, especially as regulations and other bureaucracies work to grind them down. However, those with the fortitude, resources and right ideas will ultimately win.”