The Covid-19 pandemic has spurred rapid expansion among health tech companies, and new post-pandemic market realities mean it’s only a matter of time before some companies consolidate. In fact, investors predicted in recent years that M&A activity would increase, but it ultimately failed to materialize in 2024 or 2025.
But 2026 could be the year those predictions become reality. Consider the deals announced in just over a month:
- Musculoskeletal provider Sword Health acquires another musculoskeletal company Kaia Health for $285 million
- Spring Health acquires Alma, both mental health companies
- OCD provider NOCD acquires trauma-focused provider Rebound Health
- Women's health company Wisp acquires sexual health startup TBD Health
- OpenAI acquires health data company Torch for $60 million
One investor said the increase in trading volume signals the maturity of the industry.
“The acquirers are venture capital-backed digital health companies,” said Neil Patel, director of venture capital at Redesign Health. “They're not health systems, they're not defensive payers. That's a sign of category maturity. It's easy to compare it to the telehealth wave seven or eight years ago, when video technology became commoditized and became a land grab in distribution. We're not there yet. There's still real product differentiation. These deals are more operational. Each deal has its own logic: geographic expansion, category expansion, supply-side acquisitions.”
Investors expect more M&A activity throughout the year. However, the IPO market recovered slightly last year with the announcements of Hinge Health and Omada Health, and may not be as popular this year.
Why businesses merge
Keith Figlioli, managing partner of LRVHealth, believes there are two main reasons.
He said many digital health companies are merging to gain scale or extend their financial runway after struggling to grow rapidly, raise more capital or achieve cash flow breakeven. At the same time, larger, more established companies are “starting to see the real value in acquisitions, which often leverage unique capabilities or talent in AI to broaden their platforms.”
This seems to coincide with the acquisitions of Sword and Spring Health. A spokesperson for Sword told MedCity News that the company acquired Kaia to strengthen its leadership in artificial intelligence care and give the company access to the German market.
For Spring Health, the Alma acquisition brings established health plan relationships and in-network provider infrastructure, allowing the company to reach more patients.
“In mental health care, where demand continues to outpace supply, access alone is not enough,” said Adam Chekroud, president and co-founder of Spring Health. “Quality and continuity are equally important. Too many people experience disruption when they transition between coverage types or levels of care. Integrating complementary strengths allows us to build a stronger infrastructure that supports the delivery of consistent, high-quality care during these transitions.”
Define Ventures partner Chirag Shah agreed, saying mental health companies will benefit most from scale “because our ongoing supply-demand imbalance means larger companies benefit significantly from different payer relationships.”
Michael Greeley, co-founder of Flare Capital Partners, noted that he has expected increased M&A activity in the digital health space for some time, a trend that is positive given the long-standing lack of liquidity in the space.
He noted that the industry is starting to see a separation of “winners” from other companies. More successful deals are where companies that already have significant scale buy smaller assets. He gave the example of sword trading.
A less successful deal, however, was the merger of two smaller companies, but Greeley declined to give an example.
“These deals are really hard to get done,” he said. “By 2021, we will have about 900 companies set up. The number of new companies that are more normalized in the industry should be 300 to 400. So, it is completely expected that you will see consolidation, but merging two distressed companies does not mean that you will have a company that is thriving. You may just have a company that is slightly larger but still struggling. When I say distressed, it is growing at a slower rate and they still need to raise a lot of capital.”
He added that as payers face greater financial pressure, especially following the recent announcement that Medicare Advantage plans will achieve essentially flat payment rates through 2027, digital health companies that want to partner with them will need to be in a stronger position.
“Payers are going to have to repurpose many of their benefit designs, which means they may have to cut back, drop some of the features that digital health companies bring to market, or pay less,” Greeley said, adding that consolidation will create stronger companies with more leverage in negotiations with partners.
Another driver of M&A activity, Greeley claimed, is the “hyperdynamic” pace of change in technology. Companies that launched three to five years ago with what was once considered state-of-the-art technology, such as the traditional SaaS model, may now struggle to compete with the latest AI capabilities. Like others, Greeley anticipates more mergers to create comprehensive solutions that can be brought to market.
What to pay attention to
So which industries are likely to see more consolidation?
Primary care, post-acute care, ancillary services and the technology that supports these areas are the markets that will benefit the most, said Define Ventures' Shah. Figlioli also pointed to revenue cycle management, imaging/radiology, robotics and consumer health as areas to watch.
At the same time, activity in the IPO market, which showed signs of vitality last year, is likely to decline. Greeley expects more companies to exit this year through mergers and acquisitions rather than through the public markets.
“I think that's not so much a reflection of the category as it is a reflection of the geopolitical turmoil that we're all experiencing,” he said.
Katie Edge, senior vice president at Abundant Venture Partners, expects the IPO to be “Targeted and well-validated exits” in the absence of headline-grabbing IPOs.
But whether it's an IPO or an M&A, the basic principles are the same.
“Companies with strong execution, clinical impact and economic transparency remain the best candidates for an IPO window or strategic sale,” she said.
Photo: designer491, Getty Images
