Dive Brief:
- Health systems are a large market for artificial intelligence startups, but companies selling to insurers or life sciences firms create value more quickly, according to an analysis by venture capital firm Flare Capital Partners.
- Most AI startups selling their products to health systems haven’t progressed past early-stage investment rounds. Just over 5% of those companies have reached a Series C raise or later, compared with nearly 10% of startups in life sciences and about 16% of companies selling to health plans.
- The gap suggests AI startups in the life sciences and health plan markets have been able to create more value for their customers, according to Flare. But those sectors also have higher operating margins, and can likely devote more resources — and time — to scale AI products.
Dive Insight:
Still, health systems are a major target for AI startups, according to the report, which reviewed more than 4,000 venture capital deals.
Companies selling to health systems have raised more than $23 billion from 2014 though the end of 2023. Nearly half of that investment has gone to clinical care startups, which offer AI tools for imaging, clinical decision support and diagnostics.
That’s no surprise given the possibility that AI products could increase efficiency and help alleviate the pressures of high labor costs and worker shortages for health systems, the analysis noted.
But clinical care startups face additional challenges to reach later funding stages. They pose the highest liability risks to providers and would need to demonstrate high levels of accuracy and reliability, report authors Parth Desai and Jake Rubin wrote.
“This can lead to longer sales and implementation cycles,” they wrote in the report. “It can also be difficult to parse the value created by these solutions from decision-making by clinicians, who are ultimately liable for care outcomes.”
Still, there are other opportunities for companies pitching their products to health systems. AI tools that tackle financial or back-office work were more likely to reach Series C or higher funding rounds, especially those handling revenue cycle management or patient scheduling.
Clinical operations and throughput companies — which use AI to predict capacity or optimize discharges or transfers — haven’t raised as much capital as other categories, but they’re often some of the most mature, according to the analysis.
Overall, healthcare AI startups selling to health systems, health plans and life sciences companies have raised around $60 billion over the last decade, with the bulk of the investment collected in the last five years.
On the health plan side, 119 startups have raised $13.4 billion over a decade — smaller than companies targeting health systems, possibly because insurers are building internal tools or considering non-venture-backed products.
Nearly $9.5 billion went to startups focused on care management and clinical operations, which includes tools for handling utilization and prior authorization, risk adjustment and other work key to value-based care, the analysis found.
Other areas of focus for insurers include member self-service and care navigation products as well as network management. Keeping provider directories accurate and up-to-date — a common problem for insurers — is a good problem for AI, which can look through and fill in directory gaps, Flare said.
Automating claims operations and processing was one of the lower-funded value propositions for health plans, suggesting insurers are developing their own products or turning to non-healthcare technology tools, according to the report.