Health data management tools raise $3.7B in the first half of 2021

Software companies that assist healthcare providers with managing health data have raised $3.7 billion in investment funding so far this year, up from $2 billion in the same period last year, according to a second-quarter report from market research firm Mercom Capital Group.

In 2021's second quarter, such health information management companies amassed $1.7 billion in funding from investors, down from $2.1 billion in the first quarter but up 136.5% from $709 raised during the same period last year, according to the report. Health information management companies are just a portion of a broader digital health subsector that comprises tools for healthcare providers and practices.

Most investor funding goes toward digital health companies that focus on consumers.

"There's a lot of attention, both from VCs and from media, on patient-facing technologies," said Jeff Becker, a principal analyst at CB Insights, a firm that analyzes data on venture capital and startups. "There's certainly very cool things happening in that space. But there's also innovation at the bedside."

In the second quarter, companies focused on providers and practices raised $2.4 billion, accounting for 31.2% of the quarter's total $7.7 billion in funding.

That total marks a new quarterly funding record for the full digital health sector.

Analytics companies raised $565 million during the quarter, one-third of all funding raised by health information management companies and nearly one-quarter of investments that went to provider- and practice-focused companies. Benefits ($513 million), practice management tools ($480 million) and clinical decision-support ($434 million) companies also raised significant funds.

Practice management tools experienced sizable growth—raising $753 million in the first half of 2021 compared to $233 million during the same period last year.

Other top growth categories included clinical decision-support and analytics, according to Mercom's report.

Many health systems are turning to digital tools to address persistent challenges like clinical documentation, which has been linked with provider burnout, said Nathan Ray, a director in consultancy West Monroe's healthcare and life sciences practice. Internal and family medicine clinicians, in particular, spend substantial time working in the electronic health record system, according to a recent study.

For these uses, innovative digital technology is working "behind-the-scenes" as part of a doctor's workflow, according to Ray. More providers are turning to software tools that help capture data from a patient visit and document it into the patient's record, as well as to draw out insights that can be used to identify at-risk patients and suggest next steps.

Providers are also looking at involves workforce management, such as software tools that credential and schedule clinical staff, for "back-office digital innovation," he said.

Alayacare, a company that sells practice management software for home healthcare providers, raised roughly $183 million in a Series D funding round.

There were 20 mergers or acquisitions of practice management tools during the first half of the year; telehealth was the only digital health category with more M&A transactions at 25.

In total, 136 M&A transactions took place during the first half of the year, 73 of which took place in 2021's second quarter. Provider- and practice-focused companies "dominated" M&A activity for the quarter, comprising 43 of the 73 transactions, according to Mercom's report. Thirty of those transactions involved health information management companies.

Health information management companies were involved in 59 M&A transactions in the first half of 2021, compared to 34 in the first half of 2020.

Microsoft Corp.'s $19.7 billion purchase of Nuance Communications—a company that sells artificial-intelligence clinical documentation tools—represents the priciest acquisition so far this year, followed by Optum's $13 billion purchase of Change Healthcare—a company that sells revenue cycle management tools—which is being reviewed by the Justice Department.