Digital-health startups are booming. Their customers are overwhelmed.

Corporate-benefits executives, the main customers for these startups, say they are excited about technology that can lower costs and improve employees’ health. But the explosion of activity has spawned a glut of startups pitching redundant or overpriced services, they say.

Benefits executives are pushing digital health companies to add services, merge with complementary companies and cut deals on pricing, pressure that the companies are responding to in order to stand out in the crowded sector.

Numerous health apps promise to promote well-being, manage diabetes, improve sleep, monitor heart health, encourage weight loss and track whether patients are sticking to physical-therapy regimens, among others. Mental health, a growing area due in part to pandemic burnout, has spawned more than 100 startups, according to research from 7Wire Ventures, a venture firm. There are also apps to help employees navigate their company’s other digital-health apps.

“We are inundated,” says Meredith Touchstone, director of benefits at CarMax Inc. “We already have these very big portfolios of vendors. And with all this new stuff coming into the market, there’s no way to assess, literally thousands” of digital-health services now available.

A record $7 billion of venture capital poured into healthcare services in the first quarter, according to research firm PitchBook, the highest quarterly total in at least a decade.

Total venture-capital investment hit its own record in the first quarter, continuing a multiyear boom driven by surging growth and investor interest in technology companies as well as a trend of startups waiting longer to raise capital in public markets.

Even by that yardstick, investment in healthcare-service startups is hot, rising to 10% of total venture investment, according to PitchBook, also a record and double the median of the previous 10 years.

In the age of smartphones and low-cost sensors, digital-health startups promise that they can deliver cheaper, more effective and more convenient healthcare. Patients can reach clinicians or health coaches quickly via text or video and during off hours. Doctors can monitor patients remotely.

Most large employers in the U.S. self-insure, meaning they work with insurance companies to administer their health plans and provide a network of doctors, but ultimately the employers pay the cost of care themselves. Digital-health apps claim they can contain employers’ healthcare costs by specializing in specific areas and using digital tools to track results.

Demand for digital-health services accelerated during the pandemic as patients sought remote care. State regulators waived rules preventing doctors from practicing medicine across state lines. Medicare expanded benefits for telehealth visits. And more money came into the sector when Teladoc Health Inc. announced a merger with diabetes-monitoring startup Livongo in October, valuing the latter at $13.9 billion when the deal closed.

“Everybody’s excited because there’s so much damn money floating around. After Livongo got sold, everyone said, ‘Where’s my piece?’ ” says Stuart Piltch, chief executive of Cambridge Advisory Group, a healthcare consulting and data firm. “I get that Wall Street loves these things, but do they work? It’s not clear yet.”

Measuring results for digital-health services is tricky, say benefits executives, in part because many services struggle to prove they can lower costs or improve care.

Erik Sossa, who recently retired as head of benefits at PepsiCo Inc., says digital-health services work best when connected to a company’s existing health plan, so doctors can see patients’ health histories. That was one reason Pepsi stopped using Teladoc for telemedicine services, Mr. Sossa says.

“Telemedicine is a fantastic medium, but if it’s just late-night urgent care, it’s kind of a commodity,” Mr. Sossa says. Pepsi now uses LiveHealth Online, a telemedicine service connected to the company’s health plan.

Teladoc declined to comment on its relationship with Pepsi. Pepsi didn’t respond to a request for comment.

Employers are asking digital-health providers to integrate with their insurers and expand the conditions their products address. Employers are also pushing the services to stop charging a monthly fee for all eligible employees and instead charge when employees use the service, since many of these apps go unused, benefits executives say.

Startup Omada Health Inc. began with a digital service to manage prediabetes, sending patients an internet-connected scale and giving them access to health coaches via their smartphone. At customers’ request, it has since added services to treat hypertension, full-blown diabetes, mental health and digital physical therapy, says Sean Duffy, Omada’s chief executive.

“Many employers prefer working with one party across critical disease areas,” he says.

Competition is intensifying as digital-health companies broaden their offerings, especially in diabetes care. Livongo also started as a company helping people manage diabetes, later adding hypertension, mental health and prediabetes care, putting Omada and Livongo in frequent competition.

The need for companies to distinguish themselves in a crowded market is driving deals, analysts say.

Teladoc has bought multiple companies to broaden its services, while its telemedicine rivals like MDLive, Doctor on Demand and PlushCare Inc. have themselves merged or been acquired.

Care navigation—apps that coordinate other health apps—is another area of growth and deals. Grand Rounds, which started out as a provider of second medical opinions, has jumped into the area and added telemedicine, merging with Doctor on Demand. A competitor, care-navigation firm Accolade Inc., last month bought 2nd.md Inc., a service for second medical opinions. Accolade also said last month it would buy PlushCare.

Meanwhile, the former chairman of Livongo, Glen Tullman, has already launched his own care-navigation company, Transcarent Inc., which hopes to provide a collection of its own digital-health services.

Mr. Sossa, now a consultant after leaving Pepsi, expects more consolidation. “If you’re a one-trick pony, it’s easy to replace you,” he says.

This story has been published from a wire agency feed without modifications to the text.