The largest Q4 digital health funding deals went to startups taking on the industry's most established players

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Investors showed a continued appetite for digital health startups that are taking on healthcare's oldest and most concentrated markets in Q4 2018, according to MobiHealthNews.

Two health insurance startups raked in the largest funding rounds in Q4 2018: Devoted ($300 millionraised) and Bright ($200 million raised) secured significantly more funding than their peers, with the next largest funding round nabbing just $50 million. And while digital health funding in Q4 was lower than any other quarter in 2018, funding grew 113% year-over-year from the $550 million secured in Q4 2017.

The large funding deals committed to startups taking on healthcare's most established players suggests there's demand for disruptive business models across the pharma and provider sectors:

• Pharmacy startups' continued success indicates strong demand for alternatives to brick-and-mortar pharmacies. Same-day delivery digital pharmacy Alto raised $50 million, despite taking on a pharma space dominated by large players: For example, four pharmacies dispensed more than half of all prescriptions in 2017, perDrug Channels. And Amazon's $1 billion acquisition of PillPack also suggests that startups pose a legitimate threat to traditional retail pharmacies.
• And primary care disruptors are gaining traction as younger consumers' demand for convenient care parallels with a decline in loyalty to traditional primary care providers (PCPs). For example, text-based primary care entrant 98point6 raked in $50 million in Q4 and tech-enabled, concierge-style PCP One Medical closed a $350 million funding round earlier in 2018. Investors likely anticipate these on-demand care, digital-focused startups can woo millennials, who are more likely to conducthealthcare functions digitally and tend to favor more convenient care channels like telemedicine. Nearly half of millennials don't have a PCP, suggesting there's ample addressable market for startups that can better tailor their services to younger demographics.

Healthcare startups continued threat of encroaching on incumbents' businesses lines will likely reshape the digital health acquisition market in 2019. Through Q3, other digital health companies were the most active acquirers of digital health companies in 2018 - which makes sense, as young digital health companies likely view horizontal integration as a way to diversify their products and services and carve out a greater share of the highly competitive healthcare market.

But we expect the large funding rounds garnered by the aforementioned players - alongside the expanding geographic footprints and capitalization of health insurtechs Oscar Health and Clover Health - will force established players to confront the threat of these startups.

This will likely take the form of acquisitions - either of these growing competitors or of more specialized players that allow incumbents to better match the tech-focused, customer-centric business models digital health startups tend to tout.

As such, we expect incumbents - particularly in the payer and pharma space - to initiate a larger proportion of digital health M&A deals moving forward.