Managing increasingly prevalent chronic diseases will require close continuous monitoring of patients. Cell-based biosensors may be used for implantable diagnostic systems to monitor health status. Cells are indeed natural sensors in the body. Functional cellular systems can be maintained in the body for long-term implantation using cell encapsulation technology. By taking advantage of recent progress in miniaturized optoelectronic systems, the genetic engineering of optically responsive cells may be combined with cell encapsulation to generate smart implantable cell-based sensing systems. In biomedical research, cell-based biosensors may be used to study cell signaling, therapeutic effects, and dosing of bioactive molecules in preclinical models. Today, a wide variety of genetically encoded fluorescent sensors have been developed for real-time imaging of living cells. Here, recent developments in genetically encoded sensors, cell encapsulation, and ultrasmall optical systems are highlighted. The integration of these components in a new generation of biosensors is creating innovative smart in vivo cell-based systems, bringing novel perspectives for biomedical research and ultimately allowing unique health monitoring applications.