Digital Impact: The Future of Healthcare

The healthcare sector is one of the largest and fastest-growing in the world. Healthcare is the second largest sector in the global equity markets (MSCI World) behind information technology, representing 13% of the global market capitalization.    Within the MSCI World Healthcare index, there are 10 industry sub-groups representing 153 companies. For the five years leading into the pandemic, the  S&P 1500 healthcare sector profits experienced compound annual growth 3.5 times greater than the full S&P 1500.

Demographics are among the key factors responsible for this growth. For instance, the over-65 population in the U.S. has grown 62% since 2000 and is expected to grow another 30% over the next decade, according to a U.S. Census Bureau projection. Additionally, as of 2021, U.S. birthrates have fallen by 4%. An aging population in the U.S. and globally is likely to demand more and spend more on healthcare, which argues for a continuation of the trends underway.

The broad healthcare sector offers opportunities to invest in companies producing lifesaving drugs, innovative treatments, medical devices, and healthcare services.  Further, innovative solutions from the healthcare IT and digital space may offer ways to reach a broader population at lower costs. Such investments offer the potential to improve quality of life and raise productivity for millions of people.

However, the cost of healthcare in the U.S. keeps rising dramatically while the access to quality healthcare services for those most in need seems tenuous. Growth in U.S. health expenditure as a share of GDP outpaced comparable nations in the Organization for Economic Cooperation and Development (OECD), at 16.2% vs 17.8% between 2010 and 2021. In 2021, the U.S. spent approximately $12,914 per person on healthcare, the highest per capita cost across the OECD, which spent less than $5,050 per person on average in 2021. Yet there is a substantial portion of the U.S. population that lacks adequate access to healthcare, as we discuss in the section “Framing the Challenge.”

Clearly, there is an enormous market of people who need access to healthcare services, especially those either underserved or not served by the U.S. healthcare system. This includes 85 million people on Medicaid as of December 2022, over 65 million people using Medicare in 2022, and 27.5 million nonelderly individuals who lacked health insurance in 2021.

Further, those with chronic conditions account for a larger proportion of the national healthcare spend. By one estimate, 90% of the nation’s $3.5 trillion in annual healthcare expenditures are for people with chronic and mental health conditions. More than half of Medicaid spending is attributable to the highest-cost 5% of enrollees, primarily the elderly and individuals with disabilities, many of whom have chronic conditions. Better access to healthcare services, which could lead to earlier intervention to control these chronic and mental health conditions, may reduce their toll on this segment of the population while reducing their cost to nation’s healthcare system.

What types of investments can help provide better care for all, including underserved and medically vulnerable populations? How can costs be controlled while expanding the reach of healthcare to those in need?

Investing in Health & Health Equity

Healthcare consumers typically interact with the health system only when they are sick or injured. But the future of health may be focused more on well-being and prevention rather than just treatment. Prevention and early diagnoses can reduce healthcare costs and improve health outcomes. Cost, quality, and access to care are key to the healthcare system. In the future, health is likely to revolve around sustaining well-being rather than just responding to illness.

Some major themes that capture this trend toward investing to sustain health include telehealth, personalized (also called precision) medicine, remote monitoring, robotics, genomics, and wearable technology. Innovative technology and improved processes may provide the solution to making healthcare more widely available at a reasonable cost.

With advances in lower-cost preventive, diagnostic, and disease management technologies comes an opportunity to address the significant inequities in access to health care. McKinsey stated that “Better healthcare is an absolute good” in a recent report in which they outlined a framework for how pharmaceutical and life sciences companies can think about health equity.

So while we think about the technologies being developed, we also need to consider the populations being addressed.  As with every sector of the economy, the analysis changes as we think through an equity lens. We must consider limited access to food, care, or medication; needs left unmet when innovation is misaligned with disease burdens; and communities that do not receive care commensurate with their needs. Addressing the issues has obvious benefits for patients, the pharmaceutical and life sciences companies that serve them, and investors who contribute capital toward these solutions.

The Role of Government

Addressing the massive challenge to society in delivering health care requires a multidisciplinary approach. As illustrated in this report, contributions from various scientific fields, combined with insights from social science and advocacy, are coming together to redefine the future of health care.

Government investment also has a tremendous role to play. The recent creation of the Advanced Research Projects Agency for Health (ARPA-H) to support and fund research is modeled on the long-lived and highly productive DARPA – the Defense Advanced Research Projects Agency. We discuss DARPA and the promise of ARPA-H in this report.

The Challenge of Data Governance

Overhanging  the potential for digital technologies to revolutionize health care delivery is the very real issue of data governance.  In the U.S., for example, federal health information privacy laws do not explicitly cover digital health records or applications (although some states do).   Personal health data can become vulnerable to cyberattack or unauthorized use.  As we highlight in our section “Using Digital Tech to Close the Gender Equity Gap in Health,” concerns about privacy could pose a significant risk to investments in reproduction-focused apps.

Another challenge is the growing need for public health professionals to understand how to leverage the power of artificial intelligence to analyze massive amounts of data in a way that is both scientifically sound and anonymized. While these are critical concerns, they are beyond the scope of our report.

About This Report

With the context of a severely stressed healthcare system and the urgent need for technology and digital transformation to address the daunting issues we face, Pathstone is offering this report as a reflection of how investors can deploy their capital to that end.  We have chosen to examine one portion of this enormous subject:  Digital Health. The National Institutes of Health defines “digital health” as the use of information and communication technologies in medicine, such as mobile health (mHealth), to manage illness and to promote wellness. At the same time, we have tried to weave in discussions of Health Equity and Women’s Health.  As outlined in our next section, the Digital Health Investment Landscape, there are numerous investable solutions that hold promise to reshape healthcare in a meaningful way. We also highlight some of the innovative achievements of DARPA as a way to highlight to key role of public/private partnerships in developing solutions.

Please see PDF for important disclosures.


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