The Picks and Shovels of Digital Health: Infrastructure Bets That Will Define the Next Decade
Abstract
Digital health investment hit roughly $29B globally in 2023 after the correction from the 2021 peak of $57B. Most of the capital that got torched in the downturn chased applications -- the shiny clinical tools, the consumer apps, the point solutions. What survived and what will win the next cycle is infrastructure. This essay makes the case that the durable alpha in digital health sits one layer below the applications most investors are looking at, in the unglamorous but defensible plumbing that every health tech builder will need. Key themes:
- Data interoperability and the persistence of fragmentation as a forcing function for middleware
- Identity and patient matching as an underappreciated category with moat characteristics
- Clinical AI infrastructure vs. AI applications -- why the former is the better bet
- Provider revenue cycle as infrastructure, not software
- Compliance and regulatory infrastructure as a structural tailwind
- Market sizing: the infrastructure TAM that nobody talks about is north of $80B by 2030
Table of Contents
1. The Application Graveyard and What It Teaches Us
2. Data Infrastructure: The Fragmentation Dividend
3. Identity Is Infrastructure
4. The AI Stack Problem in Healthcare
5. Revenue Cycle as Structural Infrastructure
6. Compliance Infrastructure Is Having Its Moment
7. Where the Money Should Go
The Application Graveyard and What It Teaches Us
There is a reason that the 2020-2021 digital health bubble produced so many companies with impressive press releases and mediocre outcomes. The investment thesis for most of that capital was essentially: healthcare is broken, technology fixes broken things, therefore health tech. That logic is not wrong exactly, but it skips the part where healthcare is not just broken, it is structurally different from every other industry that has been disrupted by software. The regulatory environment is uniquely hostile, the sales cycles are brutal, the procurement committees are designed to move slowly, and the data that any application needs to work is scattered across thousands of siloed systems in formats that were standardized in 1987. You can build a beautiful chronic care management product and spend three years failing to get EHR integration before you run out of runway. The graveyard is full of companies that solved the clinical problem and could not solve the plumbing problem.
What this tells the sophisticated investor is something that should feel obvious in retrospect: the constraint in health tech is almost never the application layer. There are plenty of smart clinician-founders who understand the workflow problem. The constraint is everything underneath. The data access problem. The identity problem. The compliance problem. The billing and remittance problem. The AI model evaluation problem. These are unsexy, technically hard, and -- crucially -- shared across every application that anyone is trying to build. That combination of characteristics is exactly what makes them good businesses. Picks and shovels during a gold rush tend to be better investments than individual miners, and healthcare is in the early innings of a multi-decade software transformation that is going to require a lot of shovels.
The market correction that ran from late 2021 through 2023 was healthy. It rationalized valuations, it killed zombie point solutions that were never going to achieve the unit economics required for standalone success, and it concentrated capital toward companies that had real infrastructure value. What has emerged from that correction is a cleaner view of where durable value lives. The companies that held their valuations through the downturn were disproportionately infrastructure plays. The companies that got torched were disproportionately application-layer point solutions dependent on grant funding, employer pilots, or consumer acquisition economics that never penciled.
The forward thesis, then, is not complicated: the next cohort of successful digital health applications is going to be built on a layer of infrastructure that mostly does not exist yet in mature form. The entrepreneurs building that infrastructure are going to have better unit economics, stronger moats, and cleaner exit paths than the application builders they serve. The investors who figure this out early are going to make a lot of money. The ones who keep chasing the clinical application story are going to keep getting frustrated by the same structural problems that killed the last cycle's darlings.
Data Infrastructure: The Fragmentation Dividend
