Weekly Health Policy Briefing 01/08/26

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For structural and demographic reasons, rural hospitals and providers are more reliant on Medicaid dollars and have thinner to negative margins than their urban and suburban peers. So, a big concern during the One Big Beautiful Bill Act debate was that the changes to Medicaid enrollment and financing would be cataclysmic for rural health in America.

KFF estimates the OBBBA will reduce federal healthcare spending in rural areas by about $137 billion. Importantly, this estimate doesn’t include state spending, and for complicated, back-door-ish reasons, the combined federal and state impact will be higher.

So the $50 billion Rural Health Transformation Program was conceived not so much as a plug for this $137 billion hole as a transformative, experimental investment to fundamentally change the structural and demographic challenges of providing healthcare in rural America.

And now, the experiment is starting. On December 29th, CMS announced the establishment of the Office of Rural Health Transformation and initial awards to all 50 states.

Read more about how the grants are being distributed here from KFF, and peruse some of the state applications here:

When we spoke with the rural health startup Hopscotch Primary Care about the Rural Health Transformation Program, they cited alternative payment models and incentives to bring doctors to rural areas as two investments that could be transformative, rather than a budget-hole-plugging exercise.

It seems the states agreed. In the applications I’ve skimmed through and webinars I’ve watched, provider incentives and alternative payment models were a major theme.

It’s a bit en vogue to question the merits of value-based care-style alternative payment models (APM) at the moment. But a key point Tim and Aditi made during our chat is that fee-for-service exacerbates the demographic and structural challenges of rural health, and APMs make the difference between negative operating margins and an attractive, sustainable business.

Setting aside the question of whether APMs lead to better outcomes or create value for the healthcare system at a macro level through investments in preventative care and bending the cost curve, it seems to me that APMs are particularly suited to the unique challenges of rural health, and the provider groups who can navigate these models will look back at the RHTP as a real tailwind.

Where we left off in December was that the expiration of the subsidies was a fait accompli, but there was still hope for a fix in the new year. Prediction market Kalshi is skeptical:

The House is poised to pass a 3-year extension today, and the Senate is cooking up its 2-year counteroffer at the time of writing. But the skepticism in the prediction market is largely rooted in the fact that there doesn’t appear to be enough Republican support to clear the 60-vote threshold.

On the enrollment front, we’re still waiting for the next National Snapshot from CMS, which was last released on December 5th. In the interim, a quick whip around from state-based exchanges courtesy of Charles Gaba at acasignups.net

California enrollment is up 1.1% YoY with new enrollments down 31% YoY, active renewals up 19.7%, and passive renewals up 1% YoY. Gaba flags that 1.25 million of the 1.92 million fall into the passive renewal category, which has the highest potential for sticker shock.

New Mexico enrollment is up 20% YoY, largely driven by the state's unusual and expensive decision to backfill 100% of the federal credits for all enrollees. New enrollments are up 27% YoY, while active renewals are down 10%, but less sticker shock concern here due to the state’s extraordinary financial commitment.

Maine is at about 90% of last year’s total enrollment, with 7 days remaining until the open enrollment deadline, and about half of current enrollees are passively enrolled.

New Jersey is up 7% YoY with a pretty significant auto-enrollment population that may contribute to attrition.

One fact about pregnancy in the United States is that Medicaid finances 41% of all births, and nearly half of births in nonmetro areas. If you’re in the maternity care business, patients on Medicaid are going to make up a non-trivial part of your population.

Another fact about pregnancies in the United States is that they’re expensive. According to the Peterson-KFF Health Systems Tracker, the average health costs “associated with pregnancy, childbirth, and postpartum care” were $18,865 in the 2018-2020 dataset. And hiding in the averages are a lot of outliers, which, if you’ve spent time looking at Sunlife’s high cost claims analysis, you’ll know a complicated pregnancy can get really expensive really quickly:

So you can see where investor interest might come from in a company like Pomelo Care, which has expanded its scope recently, but has historically been focused on maternity care for payers and employers. This morning, they announced a $92 million Series C fundraising round and a valuation of $1.7 billion and shared some impressive statistics:

I’m always looking for data points that Medicaid is an investable business, and a recurring theme in discussions with VCs is that pure-play Medicaid care delivery is difficult to fund, although recent financing rounds from Nest Health and Bluebird Kids Health run counter to this narrative.

What I find interesting about Pomelo and other companies focused on maternal care (see also HTN’s interview with Sina Haeri from Ouma Health) is that, in a line of business like maternal health, a blended payer mix strategy seems like a compelling investment thesis.

Any growth story is going to be contingent on taking Medicaid, and if your tech-enabled services have lower marginal costs than traditional services, you’ve got yourself a business, despite Medicaid reimbursement rates for that are sometimes half as much as commercial insurance for a birth.

Kevin and I are both fond of this illustration from Tinder’s former CPO Ravi Mehta:

If you think of Medicaid as having a lower willingness to pay than commercial insurance and employers having a higher willingness to pay, you can begin to sketch out care models, disease states, or populations where this may also be true. All of this is premised on your unit economics holding, but it’s interesting to think about where a Medicaid business could be part of a compelling growth story for investors.

You might be tempted to call this cross-subsidization, but I don’t think that’s quite right. We don’t say that people paying the full ticket price at a movie theater are cross-subsidizing students and seniors; the business is just discriminating on price based on willingness to pay. It is contingent on the service having lower marginal cost features; however, I’m not suggesting this is likely or possible across all healthcare service businesses, though one hopes it’s true among the ones the investors are writing checks for.