Private equity (PE) and other private capital investors are continuing to explore digital health technologies as a key area of investment. Investors seeking to capture the best opportunities should have a playbook to help them deftly navigate this high-growth, scalable market. This article reviews key aspects of the U.S. digital health marketplace that are relevant to investors and provides a playbook for assessing associated due diligence, operational, and exit considerations, including guidelines to help:

  • understand the breadth of digital health;
  • identify market opportunities and regulatory burdens;
  • stay nimble and informed in a fast-moving regulated environment; and
  • utilize digital health as a path to environmental, social, and governance (ESG) and diversity, equity, and inclusion (DEI) objectives for strategic investors, sponsors, and sponsor-backed companies.

Understanding the Breadth of Digital Health

The breadth of digital health itself is daunting. Understanding the various market segments can help accelerate investment focus and reveal creative ways to identify complementary investments and areas of strategic focus. The following three categories of digital health are among the most relevant for PE and other private capital investors today.

  • Telemedicine and other telehealth providers that offer either direct-to-consumer or physician referral-based healthcare services such as concierge medicine, laboratory test orders, online pharmacies, behavioral health counseling, remote patient monitoring (RPM), and remote therapeutic monitoring (RTM), among many others.
  • Drug development, clinical trial, and related life science services companies that assist life science companies with a spectrum of activities from initial drug development to clinical trial implementation. Examples include artificial intelligence and machine learning companies that cut the time and other efficiencies associated with traditional drug discovery and development for biotechs; digitizing and enabling efficient participation or administration of decentralized clinical trials, such as mobile technology that allows the patient to record their various vitals in lieu of an in-person visit to the site of care; and software algorithms that can be used to identify research sites that are more likely to have a local concentration of patients that qualify for the trial.
  • Food and Drug Administration (FDA)–approved/cleared products and medical devices such as digital pills, software as a medical device, artificial intelligence–driven medical devices, EHR wearable devices, and innovative augmented reality and virtual reality medical devices. Many of these FDA-approved or cleared digital products are accompanied by supporting hardware and use machine learning models to diagnose patients, track and manage chronic diseases, or deliver a therapeutic intervention.
  • Direct-to-consumer mobile apps that focus on consumer health tracking, patient/provider communication tools, adherence reminders and other tools, or healthcare community building, among others.

Naturally there can be some overlap among these categories (such as direct-to-consumer apps used in clinical trials). In all events, obtaining a clear understanding of the breadth of digital health can significantly assist -the analysis by healthcare investors in assessing potential targets and unlocking niche areas that are diamonds in the rough.

Identifying Market Opportunity and Regulatory Burdens

Like any other healthcare investment, digital health investments require PE and other capital investors to assess the balance of the market opportunity with the associated regulatory burdens.


Telehealth provider operations raise regulatory issues with which healthcare PE and other private capital investors are already expert: licensure, corporate practice of medicine, and friendly professional corporation models. But they also raise new potential issues, such as licensure rules for out-of-state remote or even out-of-country services as well as reimbursement challenges that do not arise in traditional face-to-face patient care settings.

  • For example, new billing codes have been created to cover RPM and RTM services. As with many new covered services, healthcare providers and investors operating in the RPM and RTM space have been required to interpret how to apply the requirements of these codes and adapt as the government and payors continue to tweak such requirements. Examples of issues RPM and RTM providers continue to face include the level of supervision required of their personnel and the manner in which a “medical device” as defined by the FDA must be incorporated in the service. Payors remain skeptical about the use of RPM and RTM codes for new digital health technologies, but the reimbursement landscape continues to evolve and could improve.
  • Government scrutiny is increasing in digital health. Last month, a healthcare company that provides remote cardiac monitoring through its wireless device paid close to $45 million to settle False Claims Act allegations by the Department of Justice (DOJ). The government’s allegations included that the company submitted claims for federal healthcare program (FHCP) reimbursement for services furnished outside of the United States and by unqualified personnel. Because services furnished outside of the United States and/or by unqualified personnel are ineligible for FHCP reimbursement, the government considered the claims submitted for such services to be false.
  • Yet another unique challenge is consumer protection related to the increase in concierge medicine services. Concierge medicine, also known as retainer-based medicine or direct primary care, allows patients to have guaranteed access to their doctor and more personalized, comprehensive care for a monthly membership fee. To facilitate accessibility and differentiate from traditional brick-and-mortar medical practices, concierge practices are frequent adopters of digital health technology, especially given that these practices are less likely to accept insurance. Although the model is based on a desire to limit wait times and other administrative burdens that create barriers to care, the model is subject to criticism that it could exacerbate existing gaps in access to primary care as more doctors choose this type of medical practice instead of traditional medical care. Practice models that, by design, exclude certain categories of patients because of cost-prohibitive fees may be viewed as discriminatory against underserved populations. Another downside to this model is that some concierge practices accept fewer insurance carriers than a traditional medical practice. Finally, there can also be issues related to the extent to which the membership fee includes services that are routinely covered by insurance, including Medicare, such as physical exams, routine medical office visits, and routine diagnostic tests.

Pharma and Life Sciences Services

There are regulatory requirements but also opportunities associated with digital health products used in research and development and clinical trials. For example, the digital health technology may need to be included in an investigational new drug application (IND) and/or an investigational device exemption (IDE). Increasingly, life science companies are using digital health tools in clinical trials to address diversity and equity issues and enable decentralization of clinical trials, which is also important in light of FDA’s draft guidance issued in April 2022 regarding diversity plans.

  • One regulatory hurdle is that technology used in clinical trials should be appropriately verified and validated and fit for purpose. Digital health technologies may qualify as a Drug Development Tool or Medical Device Development Tool. This voluntary qualification program allows a digital health technology to potentially be used in multiple clinical trials for a specific use.
  • There are not just regulatory considerations but compliance and enforcement issues as well. DOJ enforcement regarding clinical trial conduct continues. For example, in 2022, two study coordinators were sentenced to approximately 24 months and 40 months in prison and ordered to pay more than $2 million in restitution for defrauding clients paying for clinical trial work as well as for falsifying data to make it appear as though subjects were participating in clinical trials when they were not. To date, enforcement has targeted clinical sites, but parties in the clinical trial ecosystem (including sponsors, clinical investigators, and contract research organizations) are subject to enforcement. A DOJ official confirmed at a conference in 2022 that DOJ is interested in potential cases against sponsors because fabricated clinical trial data can have harmful consequences if relied upon by the FDA, drug researchers, and medical providers when making decisions about the safety, efficacy, and clinical use of drug products. Therefore, oversight over clinical trial operations remains important even if remote tools are used.

FDA-Cleared and -Approved Products and Devices

First and foremost, investors must assess whether the technology will be regulated as a medical device that falls within FDA’s jurisdiction and, if so, whether FDA is exercising enforcement discretion such that the product can be marketed without approval, clearance, or authorization and, if that is the case, understand whether and when that enforcement policy may change. The intended use of the product as well as the potential risks are the drivers of this determination. FDA regulations and policy in the digital health space are evolving, and investors both familiar with and new to healthcare and life sciences should be aware of the latest guidance developments and how they affect FDA’s approach to various types of digital health technologies. Some additional issues to be aware of:

  • FDA continues to monitor and review marketing materials to determine whether claims made require the product to attain FDA approval, clearance, or authorization. If statements are made that the product is intended to diagnose, cure, mitigate, treat, or prevent a disease or condition, that may kick the product out of the regulatory safe harbors. In 2021, FDA issued a warning letter based on its review of a product website and its view that a product was being marketed in violation of the Federal Food, Drug, and Cosmetic Act because it did not have clearance or approval and did not meet the requirements in the general wellness guidance. In another, earlier warning letter, FDA alleged that a website and YouTube video demonstrated that a software product was marketed without appropriate clearance or approval.
  • One of the focus areas for FDA’s Center for Devices and Radiological Health (CDRH) in 2023 is cybersecurity. For example, CDRH is planning to finalize its guidance on Cybersecurity in Medical Devices: Quality System Considerations and Content of Premarket Submissions. Therefore, understanding what the cybersecurity requirements are, whether they apply, and how the target company plans to meet any applicable requirements will be important.

Staying Nimble and Informed in a Fast-Moving Regulated Environment

More than traditional lines of healthcare and life sciences services companies, the vast array of digital health businesses raise novel potential regulatory issues. A few examples of key issues to consider in valuation and diligence:


  1. Are there developments in licensure or accreditation rules affecting remote services that could affect the business?
  2. What potential reimbursement changes are on the horizon that could affect the value of the business?
  3. Are there any new enforcement developments that affect coding or billing practices or suggest compliance program improvements?

Pharma and Life Sciences Services

  1. What FDA regulations or priorities are coming that could affect the use of any digital health software or hardware used in clinical study services?
  2. Does the use of the digital health product require inclusion in an Institutional Review Board review, IND, and/or IDE?

FDA-Approved/-Cleared Products and Devices

  1. What FDA regulations or priorities are coming that could affect the use of any digital health software or hardware used in the delivery of care?
  2. Has the investment target engaged with FDA regarding the technology?
  3. What recent enforcement actions has FDA taken that show current enforcement priorities?

Digital Health as a Path to ESG and DEI

Many strategic investors, sponsors, and sponsored-backed companies are focused on digital health transformation are quite attuned to how their acquisitions might serve the greater good. And why not? Digital health products frequently lend themselves to promoting access to care, to community, and to technology. These characteristics of digital health transformations can be cultivated strategically by strategic investors, sponsors, and sponsored-backed companies to complement their ESG initiatives as well as their commitments to DEI in clinical trial research and access to medicines and other treatments, to the extent those considerations apply as well. These synergies thus make certain digital health portfolio companies attractive targets for many, and a selling point when it comes time to exit for sponsors. Indeed, investors who find effective — and measurable — ways to help their digital health investments remain focused on these societal imperatives will likely find themselves in an enviable position when it is time to exit.