Healthcare AI investment is on the rise: 5 things to know

Venture capital funding of artificial intelligence solutions for healthcare is off to a strong start and could top $11 billion this year, according to a report.

If investment hits that level, it would mean that 26% of the venture capital dollars put into healthcare this year went to companies leveraging AI, compared with 21% in 2023, according to the report from Silicon Valley Bank. Its report focused on the use of AI in patient care and providers' operations.

During the first quarter, $2.8 billion was invested, the research found. The report also noted at least 30 U.S. healthcare AI companies have hit valuations of $1 billion since 2019.

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Here are five things to know from the report about where VC interest in healthcare AI is headed. 

1. AI is winning over other tech investments 

VC-based healthcare AI deal activity growth rates are outpacing overall technology AI deals, and the AI deals have been picking up speed since the middle of last year. Tech AI deals, meanwhile, has seen nearly stagnant growth rates since the start of last year. 

2. Clinical uses for AI is a hot area for investment

Since 2021, venture capital investment in AI for clinical use has totaled $12.5 billion. That includes its use in areas such as patient diagnostics — testing, imaging and imaging analysis and remote-patient monitoring. During the same time frame, $6.6 billion was invested in AI tools for administrative uses such as virtual assistants and billing and coding functions.

Edging out clinical AI was therapeutic AI, which has received $12.9 billion in venture capital funding since 2021.

Venture capital funding deals involving administrative AI uses accounted for 42% of dealmaking and 27% of healthcare AI investment in the first quarter, in part because those functions aren't as prone to regulatory hurdles as a clinical AI use.

3. Challenges lie with regulations and payer approval

Healthcare AI used for diagnostics requires regulatory approval due to its proximity to patients, which can affect the speed at which new diagnostic products are adopted by providers, if at all. Diagnostic AI accounts for more than half the total AI investment in clinical solutions, since it is hard to develop, Silicon Valley Bank said. 

Patient diagnostic AI companies also are encountering obstacles with payers. If payers are not convinced the platforms will save them money by improving patient health, they may end reimbursement.

"Convincing payers is difficult considering the speed that patients tend to switch employment and therefore payers,"  said Raysa Bousleiman, co-author of the report and vice president of life science and healthcare venture capital relationships at Silicon Valley Bank. "If a monetary benefit, in the form of healthy patients that require less expensive care, is not realized within two to three years, it is tough for payers to reap the rewards of an AI-powered test and therefore value it higher than an ordinary test."

4. Adoption of AI programs and platforms is critical

Development costs, industry consolidation and too few resources to train healthcare providers on how to use AI have slowed widespread adoption of some AI programs and technologies, the report said. Companies that partner with providers with access to patient data, or with larger technology companies, are expected to be more successful in getting their technologies adopted as well as avoiding development and industry issues.

5. Fewer funds will close, but the sum raised will grow

Silicon Valley Bank predicted 66 global venture capital funds focused on healthcare AI will close this year, compared with 68 funds in 2023 and 101 funds in 2022. However, the company also predicted that by year's end, venture capital-backed healthcare AI will see $16.9 billion in funds raised, an increase from $9.7 billion in 2023.