Why the Digital Behavioral Health Industry Needs Consolidation

A new PitchBook report predicts that the digital health sector should expect — and even needs — greater consolidation to succeed.

And behavioral health will see a significant role in that movement as it continues to drive the continued use of digital health in the U.S. However, behavioral health providers will need to consider doing much more in the future than the one-off point solutions that have proliferated over the last several years.

“To be successful, digital health companies must provide comprehensive health services with combined telehealth and care coordination, have a clear strategy to reach large populations of members and/or deliver care for currently unmet medical needs,” the report states. 


Venture capital flooded digital health following the onset of COVID and resultant mitigation efforts. It forced millions into digital care and created a massive business and regulatory experiment. Telehealth utilization boomed as a result.

However, the use of behavioral health via telehealth has endured at higher rates than any other care segment. In December, behavioral health-related claims comprised about 40% of all telehealth-related health insurance claims tracked by the nonprofit research group Fair Health. Mental health conditions accounted for about 62% of all telehealth-related claims during the same month. 

The year 2022 saw the venture capital funding flood recede significantly. Venture capital funds invested about $7 billion in digital health companies last year, 55% lower than 2021’s $15.6 billion, the report states.


“While there are many key areas of opportunity for startups in digital health, risks for companies in the sector include competition and market fragmentation — particularly in primary telehealth and wellness—the necessity of scaling up to achieve profits, and the need to overcome point solution fatigue of payers and employers,” the report states.

Despite the pullback on investment dollars and the perceived need for consolidation, “exit activity was almost nonexistent” in 2022. PitchBook tracked $200 million in exit value activity last year and about $11 billion in the year prior.

Companies faced a “frozen IPO market,” economic headwinds leading to widespread cutbacks among startups and a lack of clear or large incumbents for strategic acquisition partners over the last year, according to the report.

Behavioral health startups and other digital companies have faced challenges breaking through the direct-to-consumer (D2C) and business-to-business (B2B) models. For the former, D2C companies face competition from “the hundreds of thousands of health apps,” which can be an expensive marketing proposition. For the latter, B2B clients are shifting expectations to focus on outcomes and impact.

“In the employer market, there is an ongoing shift from PMPM to per-appointment due to low utilization and employers increasingly looking for telehealth providers to prove return on investment (ROI),” the report states.

Despite the shift, the employer market has become more attuned to the need for behavioral health services and the potential upside of providing digital support for conditions such as substance use disorder (SUD).

The report points to SUD support, including for alcohol use disorder (AUD) and opioid use disorder (OUD), as having the potential to be one of the fastest growing segments of the wellness category because of “clear cost-benefits of reducing substance dependencies.”

“The COVID-19 pandemic led to a rise in substance use and a growing recognition of mental health’s impact on substance use, and startups for alcohol and cessation proliferated over the past few years,” the report states. “Online alcohol cessation programs are likely to see greater demand from the younger generation, and given that people become more sensitive to alcohol as they age, an aging population is another tailwind for this category.”

Beyond telehealth, other digital solutions, especially the most high-tech and leading interventions, face tougher scrutiny.

Digital therapeutics — services that seek to treat conditions and be treated like medicines — require specific and scientific proof to succeed. Unlike other apps that focus on wellness or self-guided content, these interventions face questions such as “will it work?” This is driven by the opaque relationship between digital solutions and outcomes, the report notes.

“Growing clinical evidence and recognition by providers that digital treatments can be effective treatment options are drivers of future growth in the space, and while there are a multitude of health coaching and wellness apps available in app stores, only a select few have clinically validated outcomes, an aspect that startups in this space can emphasize to differentiate themselves,” the report states.

Virtual reality continues to strongly feature behavioral health interventions or behavior-influence conditions such as metabolic diseases.

In a separate report, PitchBook highlights firms such as OxfordVR and BehaVR for their virtual reality services offering exposure therapy and calming programs geared toward improving behavioral health outcomes. Other services include improving behavioral health to reduce chronic pain or improve physical therapy outcomes. 

PitchBook is “bullish” on virtual reality but acknowledges it is “another nascent category in digital health with high growth potential.”

“Healthcare has been slow to adopt digital formats—even as the world becomes increasingly digital—although the COVID-19 pandemic accelerated virtual health trends,” the report states. “The next wave of innovation will be led by technologies that bring healthcare closer to the patient, whether through at-home testing platforms, digital therapeutics, or new ways of delivering health guidance based on data collected from wearables, genetic testing, and biomarker analysis.”

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