Hope and Headaches for Digital Health

Health care represents about 18 percent of the U.S. economy, and Malay Gandhi is trying to change it one $100,000 check at a time.

Mr. Gandhi is the San Francisco managing director for Rock Health, a nonprofit incubator and seed funding provider that has invested in 50 digital health companies, including Doctor on Demand and Lift Labs, which was bought by Google in September.

It’s hoping to be the Y Combinator of health apps, amid growing competition. Y Combinator has been funding more digital health startups of its own, and other seed funds such as the New York Digital Health Accelerator are entering the space.

Rock Health raised a $3.3 million fund from Kleiner Perkins, the Mayo Clinic and others. The firm, which invests $100,000 at a time, is planning to close a new fund soon.

Rock Health estimates that more than $3 billion has been invested in digital health companies so far in 2014, more than triple the full-year total for 2011. 

Despite the influx of cash and well-known players like FitBit, digital health is in its early stages. App developers are still trying to figure out how to establish security protocols to satisfy federal regulations and encourage consumers to trust them with new streams of data coming from devices such as FitBit’s wristband and the forthcoming Apple Watch.

The Information chatted with Mr. Gandhi about where digital health is headed and the challenges startups face in an industry where distribution and payment channels are still controlled by incumbents. Edited excerpts below.