Weekly Health Policy Briefing 02/19/2026

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Puts & takes

If you’re a US policymaker, one way you might approach reducing healthcare spending is by perusing the McKinsey profit pool model, and then figuring out clever regulatory and legislative ways to shrink some of those profit pools. And if you’re going down this route, pharma and biotech seem like an appetizing place to start as the single largest pool of profits in the industry:

Why is pharma & biotech throwing off so much profit? There are a lot of stories you could tell depending on how generous or ungenerous you’re feeling. But the classic business school explanation has to do with two intro-to-finance type principles: (1) the time-value of money and (2) risk premiums.

Suppose I’m coming to you asking for an investment. If you’re going to give me money, you’re making a bit of a sacrifice in that you can’t use that money to buy stuff you want today. A dollar today is worth more to you than a dollar in the future because you’re sacrificing the ability to buy stuff today; that’s the time value of money.

But also, if you’re going to give me money, you’re evaluating the potential risk of getting the returns I’m talking about. If I come to you asking for money in a nice suit with a clear business plan and a good story about how this particular neighborhood has a very specific need for a coffee shop, and I’ve done lots of market research and it’s just obviously a slam-dunk because the neighborhood residents are predominantly from the Boston suburbs and practically begging for a local Dunkin’ franchise, you might say, “that doesn’t seem too risky, it’s likely you’ll be successful,” and the risk premium will be relatively low.

But what if I’m a rumpled-looking graduate student who thinks they’ve discovered a way to regulate blood sugar and appetite because of some peptide I found in the spit of a venomous lizard? You might be a little more wary and want a higher risk premium in exchange for your hard-earned money.

Pharma and biotech investments are expensive across both the time-value of money and risk premium dimensions, so the profits you need to return to investors need to be vertiginously high, or at least that’s the business school explanation.

When you’re calculating the risk premium for the Dunkin’ franchise or the wiry, Gila monster spit guy, one thing included in your calculations is the regulatory risk. Maybe the zoning authorities in the target neighborhood for the coffee shop are notoriously anti-Dunkin’ and pro-Starbucks. You’ll add a few basis points to your cost of capital because it might take longer to get approval, and that approval is a bit less certain.

Last week, FDA biologics director Vinay Prasad overruled career staff on reviewing a new flu shot from Moderna, which prompted a sharp response from the pharma and biotech industry, along with the Wall Street Journal editorial board. The decision was reversed, but it comes amidst a “Napster moment” for the industry and an uneasy relationship with the White House on price controls.

So if you’re doing the math on the risk premium you’re going to charge the grad student for his idea to cure obesity using reptile saliva, you might be pricing in some additional regulatory risk. I can’t really comment on the merits of the Moderna vaccine, the enforcement of patent laws for big pharma companies, or most-favored-nation pricing—it is way outside my area of expertise. But whether you buy the business school explanation for the industry’s high profits or not, you might be feeling a bit more sympathy for it than before.

Top of mind in health care policy & financing

The CMS Innovation Center made two major announcements for the ACCESS model last week:

A voluntary agreement with private payers who cover over 165 million lives across MA, Medicaid, and Commercial to adopt “an outcomes-based payment structure aligned to the Medicare-focused ACCESS (Advancing Chronic Care with Effective, Scalable Solutions) Model.”
The annual payment allowed amounts for the Original Medicare ACCESS tracks

I did a little back-of-the-envelope, Claude-assisted math on the unit economics for some publicly traded, digital health companies, including Omada Health (eCKM, CKM, and MSK), Hinge Health (MSK and potentially BH soon), and Talkspace (BH), and with the exception of maybe Omada, you can see why the initial reactions ranged from muted to pessimistic.

The voluntary agreement with the private payers, and a conversation Kevin had with Jacob Shiff from CMMI yesterday, help tell a different story, which is that the market opportunity is larger than just the Original Medicare population at these Original Medicare rates and, importantly, that CMMI is expecting technology to fundamentally change the unit economics of healthcare delivery and chronic care management.

Two stray thoughts: first, there’s an old economist joke about how you could see the computer age everywhere but the productivity statistics, and I think you could propose an analogue for the AI age about impacts to cost structure. Given the thoughtful design of the Outcome Aligned Payments, this really does call the question of whether we’ll start to see the downward pressure from AI in service-intensive industries’ unit costs. Second, I appreciate that CMMI is taking a big swing and trying to be a good steward of taxpayer dollars, but man, if a technology is driving results in any of these four tracks, I think our willingness to pay should be a lot higher.

One part of the HHS Notice of Benefit and Payment Parameters for 2027 Proposed Rule was the option for states to outsource their ACA exchange to a web-broker, called the State Exchange Enhanced Direct Enrollment Option:

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CMS proposes to establish a new optional Exchange model known as the State Exchange Enhanced Direct Enrollment option. If adopted, this proposal would permit an SBE to adopt a private sector-based approach for consumers seeking coverage through an SBE, whereby an SBE may rely exclusively on web-brokers to operate the consumer-facing websites that facilitate the applicant eligibility and enrollment process. This proposed approach would be an alternative to the SBE operating a centralized, consumer-facing eligibility application and enrollment website on its own SBE website. Accordingly, CMS also proposes to remove the requirement that SBEs must operate a centralized consumer-facing eligibility and enrollment website on their SBE websites, allowing the SBEs to elect to implement this proposed State Exchange Enhanced Direct Enrollment option model.

If this provision is adopted in the final rule, Oklahoma seems like it’s going to be first in line to experiment with a decentralized exchange. On first principles, a web-broker might be more suited to operating an insurance exchange than a state government office, so I’m tracking the rationale from that perspective. But given how much of the recent discourse about the ACA has focused on brokers' bad behavior, I do worry a bit about the potential for perverse incentives.

Also filed under the states as laboratories for health care policy, Connecticut Governor Ned Lamont is exploring a Connecticut Option in his latest budget. Connecticut is following the lead of Nevada, Colorado, and Washington State, which are all dipping their toes in the water of a state-run or public-private partnership insurance plan with rate reduction benchmarks.

The core challenge of these programs is that there are significant returns to scale for a health care payer, and it’s hard to get that sort of scale with just a sub-segment of a sub-segment of a state population. Without a lot of members, the hospitals and providers just aren’t that motivated to get in-network for less generous rates.

There are ways to help accelerate the arduous process of building a public option: Washington state requires hospitals to contract with at least one state public option plan, and Colorado requires payers in the state to offer a public option plan.

If you set aside the political and ideological challenges, which are, in fact, non-trivial, the most direct route would be offering employers the option to buy into these plans. You get better risk and more scale. You might even start with the state employee health insurance plan.

But because of those non-trivial political and ideological challenges, Ned Lamont is hedging his bets and also proposing a state-financed tax credit for employers to adopt ICHRAs.

The Hickpuff Review

H.R.1 requires cost-sharing for Medicaid expansion beneficiaries in some cases, and Betsy Q. Cliff and Richard Hirth had an interesting read in Health Affairs Forefront on some practical considerations, like the collectability challenges, as well as the value of judicious use of co-payments for low-value, non-emergent use of emergency rooms comes to mind.
Modern Healthcare published an article about the Rural Health Transformation Program dollars and the Program of All-Inclusive Care for the Elderly (PACE), which was nicely timed with an announcement that PACE operator Habitat Health raised growth financing from Hercules Capital. I’m a big fan of the PACE model, and it does seem like a nice use of RHTP funds to help facilitate the capital-intensive build-out their model requires, which may look like a tailwind to Habitat Health and Innovage.
Paragon Health Institute’s Chris Medrano and Brian Blase published an issue brief on the four areas with the highest waste, fraud, and abuse potential in Medicaid: Home and Community Based Services, Non-emergency Medical Transport, Applied Behavioral Therapy, and Substance Use Disorder Treatment. While I disagree with the authors’ conclusions that capping federal funds is the answer, I do think it’s worth thinking about where technology-driven solutions can help make transactions more legible and easier to monitor like in the case of Lyft and their NEMT program or Cityblock talking about leveraging AI and the “technology” of capitated payments in Long-Term Services and Supports.
Politico featured a ticktock titled Why Congress failed to reach an Obamacare deal which won’t cause you to update your priors on the ACA or Congress, but does serve as a useful reminder of the tension between a predictable, stable, and accommodating policy environment for businesses and citizens and the political reality of representative democracy.
If you had been kept awake over these last few weeks trying to reconcile the differing estimates of coding intensity in Medicare Advantage between what Chris Klomp et al. published in Health Affairs Scholar and MedPAC’s latest report, MedPAC board member Michael Chernew et al. shared this Forefront article, which explains the difference: