Survival Strategies in Digital Health: The New M&A Landscape Beyond AI Hype

The Consolidation Imperative in Digital Health

While artificial intelligence dominates healthcare investment headlines, a quieter but equally significant transformation is unfolding across the digital health sector. Companies that flourished during the 2021 funding boom now face a stark reality: merge with competitors or face extinction. This consolidation wave represents a fundamental market correction that’s reshaping the entire healthcare technology ecosystem.

According to investment bankers and private equity executives speaking at the recent HLTH conference, healthcare M&A activity has been slower than anticipated in 2025 but is now accelerating as companies “recalibrate expectations.” The shift marks a dramatic change in mindset for digital health startups that have historically been reluctant to combine forces.

The Investor Landscape: AI’s Dominant Shadow

As AI captures investor attention and capital, non-AI healthcare startups face unprecedented fundraising challenges. The phenomenon has created a two-tier market where AI-focused companies command premium valuations while traditional digital health players struggle to secure funding. This divergence is forcing many founders to consider previously unthinkable partnerships with direct competitors.

Nick Richitt, global cohead of healthcare services investment banking at JPMorgan, observes that both early-stage VC-backed startups and their investors are showing increased willingness to discuss mergers, particularly in virtual care sectors. “Why are we pursuing parallel roadmaps when we could pool our resources?” he questioned during the panel discussion, highlighting the shifting mentality among industry players.

Valuation Realities and Market Corrections

The current M&A environment features significant valuation adjustments that reflect market maturity. Several high-profile transactions demonstrate this trend, including telehealth company RemedyMeds’ acquisition of consumer health provider Thirty Madison. The $500 million deal represented a substantial markdown from Thirty Madison’s previous $1 billion valuation during its 2021 Series C round.

Similarly, public mobile health provider DocGo recently announced its acquisition of virtual care startup SteadyMD in a deal worth up to $25 million—notably less than the $40 million SteadyMD had raised from investors, including a $25 million round led by Lux Capital in 2021., according to expert analysis

Robb Vorhoff, managing director and global head of healthcare at General Atlantic, describes this valuation correction as “healthy for the industry—even when they hurt.” He notes that many companies that maximized valuations during the funding boom now face the challenge of growing into those valuations amid higher IPO standards., as covered previously

Two Types of Struggling Healthcare Companies

Industry experts identify two distinct categories of companies facing consolidation pressure:

• Late-stage companies with inflated valuations: These startups raised substantial capital at peak valuations in 2021 and now struggle to demonstrate corresponding growth metrics required for public market entry.
• Early-stage companies in the “doom loop”: These younger startups face funding shortages that force them to rely on venture debt and cash flow management, ultimately slowing growth and depressing valuations.

Richitt explains the second category’s challenge: “You get stuck trying to outrun the debt while your valuation comes down, creating a cycle that’s difficult to escape without strategic combination.”

The Complex Reality of “Mergers of Equals”

While consolidation may offer a lifeline, executing successful mergers presents significant challenges. Sasha Kelemen, director in Baird’s healthcare investment banking group, notes that even when founders identify complementary businesses interested in merging, they often struggle to agree on relative valuations and leadership structures for the combined entity.

“It’s a painful process,” Kelemen acknowledges, describing the current environment as a “‘come to Jesus’ moment where companies realize survival requires coming together in different ways.”

Healthcare AI’s Contrasting Trajectory

While traditional digital health companies face consolidation pressure, healthcare AI ventures experience dramatically different market conditions. According to KPMG data, healthcare M&A deal value increased 56% in the first half of 2025 compared to the previous six months, driven largely by higher-priced AI transactions.

Hospital revenue management has emerged as particularly attractive, with multiple billion-dollar deals demonstrating investor appetite. R1 RCM’s acquisition of General Catalyst-backed Phare Health and Waystar’s $1.25 billion purchase of Iodine Software illustrate the premium valuations AI-enabled healthcare companies command.

Kelemen observes that “large incumbents are actively considering whether to buy or build AI capabilities,” creating robust M&A activity in specific healthcare AI segments.

The Path Forward: Strategic Adaptation

As the market continues to differentiate between AI and non-AI healthcare companies, traditional digital health providers must navigate an increasingly complex landscape. Vorhoff suggests that current valuation corrections, while challenging, ultimately strengthen the industry by forcing discipline and strategic clarity.

Richitt highlights the ongoing market evolution: “The M&A market is going to adjudicate some of this, figure out the answers, and the IPO market will do the rest.” This natural selection process, though difficult for individual companies, promises to create a more sustainable and mature digital health ecosystem.

For healthcare startups outside the AI spotlight, strategic combinations—however challenging—may represent not just survival tactics but opportunities to build more resilient, comprehensive platforms capable of delivering lasting value in an increasingly competitive market.

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