How the Virtual Care Landscape is Expected to Evolve Next Year

December 27, 2022 - The COVID-19 pandemic led to some of the most rapid changes in healthcare delivery seen in recent years, with care modalities like telehealth benefiting from the in-person care restrictions imposed by the public health emergency.

But telehealth use now appears to be stabilizing, with recent data showing little change in the share of medical claim lines linked to telehealth visits. Another report revealed that telehealth visit volumes dropped 37 percent since the second quarter of 2020. Further, 49 percent of patients who used telehealth in 2021 only did so once.  

In the past few years, amid rapid growth in adoption and use, the virtual care landscape has been characterized by record-high funding and fast-growing companies. But with the recent decline in demand for telehealth, experts expect a cooldown, or rather, a return to pre-pandemic levels of deal activity.

VIRTUAL CARE M&A, FUNDING ACTIVITY IN 2022

Though funding rounds and mergers and acquisitions (M&A) are still expected within the telehealth arena, they may not match the size and scope of those seen in the last two years.

According to Hal Andrews, president and CEO of market research firm Trilliant Health, year-to-date funding totals are much lower in 2022, reaching $12.8 billion, compared with 2021, when funding totaled $29.2 billion.

"Additionally, valuation metrics have declined over the past few quarters, resulting in lower deal volume overall and an increase in 'down rounds' in many cases," Andrews said in an email.

The third quarter of 2022 saw the lowest funding total in the past 11 quarters, with $2.2 billion raised across 125 deals, he added.

This decline in M&A and deal activity in the virtual care market segment was to be expected, according to Ashraf Shehata, KPMG's Healthcare and Life Sciences national sector leader.

"Because we were in such a heated growth trajectory in 2021, we obviously started to see it taper off through the end of calendar year '21," he said in a phone interview. "We saw it pick up again in the early part of this calendar year. And then it drifted back down to its normal averages."

Overall, telehealth was further integrated into core product design and service offerings in 2022, but according to Shehata, "it's still in the formative stages of becoming an institutional capability for the [health] systems."

Payers and retailers largely drove M&A activity, Shehata noted. Payers mainly had contractual relationships with telehealth vendors up until the pandemic. But in the years since, there have been payer moves toward owning the technology itself and integrating it into a health plan. One example is Cigna's acquisition of MDLIVE, which has provided health plan members access to virtual-first care and remote patient monitoring.

On the retailer side, Amazon has had a busy year, first acquiring virtual and in-person primary care provider One Medical and then shuttering its three-year-old virtual care business only to launch a new messaging-based service that connects users to existing telehealth companies.

Still, despite these moves by major healthcare players, Shehata has yet to see an emerging leader.

"I think that just shows that the market hasn't fully developed yet," he said. "Everybody is acquiring capabilities, entities, or contracting, but the market hasn't created an assimilation yet of the technology. I imagine in the early days of the internet, there were different web browsers and different search engines, and I think this is the normal cadence in the technology landscape, where we still have a lot of proliferation of services."

Jennifer Rost, partner at McKinsey & Co., echoed Shehata's thoughts on the slowdown in M&A and deal activity in 2022 and the movement toward integration.

"Part of the challenge we've seen in the past with the massive growth in digital health innovations has been more creation of silos and fragmentation in healthcare," she said in a phone interview. "So, what we've started to see now is more M&A and investment and activity around creating more of those integrated experiences."

This has taken place in the form of telehealth providers building out services in areas seeing high patient demand, like behavioral health. Rost noted that this year, many of the larger virtual health players built out behavioral health capabilities on their platforms. And even within the virtual behavioral health space, providers have been adding wellness and mindfulness services to their offerings.

Healthcare providers have also realized that while virtual care remains popular, it may not always be adequate for delivering care. As a result, another focus in 2022 has been creating hybrid models to integrate virtual care into in-person care workflows.

"Because while virtual care can be great, can be convenient, can solve a lot of healthcare challenges, it can't deliver all healthcare," Rost noted. "And so how do you create those seamless interactions is what we see a lot of focus on now."

WHAT THE VIRTUAL CARE ARENA WILL LOOK LIKE IN 2023

With the slowing down of deal activity and shifts in telehealth strategy among healthcare stakeholders, the virtual care landscape appears poised to break from the frenetic changes of the past two years.

For one, because of the decline in funding, digital health startups, including telehealth providers, may be more likely to welcome M&A proposals that allow them to join forces with other companies to increase product offerings, keep costs down, and offer liquidity to investors, Trilliant Health's Andrews said.

"Acquisition increases customer base, 'replenishes talent,' and builds confidence with investors looking for growth indicators," he added. "Acquisition also strengthens the value of a central enabling platform, which, in turn, improves internal efficiencies and lower[s] costs."

But Andrews further notes that the cash profiles of individual companies will ultimately impact the number of M&A transactions. Those with negative cash-flow profiles will be more likely to take the M&A route.

Among more traditional healthcare organizations, McKinsey's Rost believes we will see a focus on optimizing virtual care delivery models, enabling enhanced access to virtual care, and building up the underlying infrastructure.

"When we look at the data of where have virtual health visits actually really grown, a lot have come from traditional brick and mortar providers offering virtual health," she said. "So going forward, I also expect to see even more innovation in how those providers are accessing virtual care, integrating it into their care models as we get back to more of a new normal in healthcare, and integrating it with value-based care models."

In addition, Rost sees two types of virtual care model archetypes emerging. One model will focus on specific conditions or offerings and be direct-to-consumer. The other will be integrated hybrid care focused on chronic, primary, and behavioral healthcare services.

But, according to KPMG's Shehata, while the direct-to-consumer space will remain popular for smaller players, larger organizations will move toward centralization.

"All the big health plans are going to centralize their telehealth investments; all the big health systems will start to centralize their telehealth investments," he said. "And I think where you're going to see the emerging technologies is still going to come from the tech vendors and maybe the retailers."

Further, as health systems struggle with margin compression and payers prepare for aggressive rate heightening in the next several years, the demand for innovation and new technology integration will decline, Shehata added.

To navigate this new landscape, it will be necessary for providers and payers to employ strategies that solidify the value of telehealth.

"Really, really work to pin down the medical cost value of telehealth services," Shehata said. "We've got to find better uses to show that we're actually reducing the consumption of acute care services or replacing them with telehealth services rather than adding on."

Thus, moving ahead, the focus will be on making a business case for telehealth, especially as interest grows in virtual care segments like remote patient monitoring and telemental healthcare.

With virtual care becoming a key aspect of the healthcare delivery mechanism in the US, evolution is to be expected. Amid these changes are an array of opportunities for stakeholders to retool how healthcare is delivered.

"There are still ample opportunities for new ventures, new applications of the technology, and new demonstrations of business value," Shehata said.

Editor's note: A previous version of this article mistakenly referred to Jennifer Rost as Jenny Cordina. The article was updated with the correct name on Jan. 3, 2023.