Digital health's 'come to Jesus moment': Merge or die

The digital health landscape is witnessing a significant shift as startups confront a critical juncture: merge with competitors or face potential closure. During a recent panel at the HLTH conference in Las Vegas, industry experts highlighted that mergers and acquisitions (M&A) in healthcare have been slower than anticipated in 2025, but signs of increased activity are emerging. Sasha Kelemen, a director in Baird's healthcare investment banking division, noted a pivotal transformation among digital health companies. Historically hesitant to merge, many are now recognizing the necessity of collaboration to ensure survival. "We're experiencing a 'come to Jesus' moment where companies realize that unity may be their best path forward," Kelemen remarked, acknowledging the difficulties inherent in such decisions. As AI innovations capture the attention of investors, non-AI startups that thrived during the venture capital boom in 2021 are now struggling to secure funding. Merging with competitors has become a last-ditch effort for many in this challenging environment. Nick Richitt, cohead of healthcare services investment banking at JPMorgan, observed a growing willingness among early-stage, VC-backed startups to explore mergers, particularly in the realm of virtual care, a shift not seen in previous quarters. Recent merges in virtual care highlight this trend, including the acquisition of consumer health provider Thirty Madison by telehealth startup RemedyMeds, valued at $500 million, and DocGo's planned acquisition of SteadyMD for up to $25 million. Despite a slight decline in overall VC investment in healthcare, funding for health tech has surged, largely driven by AI advancements. KPMG reports a 56% increase in the total value of healthcare M&A deals in the first half of the year, even as deal volume experienced a slight dip. However, the growing appetite for healthcare AI leaves many traditional healthcare service providers struggling. Richitt identified two categories of vulnerable companies: late-stage startups that raised substantial funds at high valuations in 2021, now grappling with longer growth timelines, and early-stage startups caught in a 'doom loop' where dwindling funding options restrict growth and lead to declining valuations. The complexities of merging comparable businesses pose additional challenges. Founders may struggle to agree on valuations or leadership roles within the new entity. Meanwhile, the pressure on investors to deliver returns to their limited partners is mounting, with many viewing the current valuation corrections as a necessary, albeit painful, adjustment for the industry. The stark divide in the healthcare VC landscape is evident as struggling startups coexist with AI-driven firms that are thriving amid rising investor interest. Although there are fewer strategic buyers for virtual care initiatives, demand for healthcare AI deals is on the rise, particularly among companies offering AI solutions to hospitals. Notable transactions include R1 RCM's acquisition of Phare Health for enhanced medical coding and Waystar's $1.25 billion purchase of Iodine Software. Amidst this dynamic environment, venture-backed startups are also eyeing acquisitions to capitalize on emerging opportunities. Richitt emphasized that the valuation of AI companies remains uncertain, leaving investors and bankers to navigate the complexities of structuring deals. As the M&A landscape continues to evolve, the industry awaits clarity on how these shifts will inform future valuations and growth strategies.