Weekly Health Tech Reads 2/1/26

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I’m sure everyone here has already heard that CMS released its 2027 Advance Notice for Medicare Advantage on Monday evening, with a 0.09% effective average change for payors, a major negative surprise for the industry.

Analysts and other industry observers appeared to expect an overall change in the mid single digits, with one analyst on Humana’s Q3 earnings call back in November speculating that we could see an effective growth rate of 9+% based on cost trend increases. The effective growth rate came in at 4.97%.

The roughly 5% swings in rates highlight the unpredictability of the market at the moment, which seems like a huge problem in a market that has 1. played a major role in supporting startup innovation in healthcare over the last decade and 2. been perceived by many as returning to stability in 2027 as it moves into a post-v28 world. Regardless of where the final notice comes in a few months, the Advance Notice took a sledgehammer to the concept of stability and predictability in this market, which seems to run counter to its general strategy towards working with industry.

The stock market reacted swiftly to the news, with the public MA stocks all dropping 10%+ on the announcement. The WSJ did the math, reporting that this drop erased ~$100 billion in market cap overnight for the large four players alone (UNH, HUM, CVS, ELV). Aside from Alignment, no MA plan saw a bounceback later in the week (Elevance reported earnings on Wednesday, which drove its uptick midweek). Humana’s stock actually continued to drop on Tuesday, ultimately ending the week down 26%.

It wasn’t just a drag on the public insurers, either. The Advance Notice also prompted the Alliance of Community Health Plans — a group of provider-sponsored health plans in various regional markets — to issue a statement calling the Advance Notice “disappointing and wholly unrealistic,” noting that it expects more carriers will exit the market if these rates are finalized. It’s worth noting in this statement that ACHP also said it supports CMS’s efforts to modernize risk adjustment, which seems like an important point here — the blowback isn’t about risk adjustment, it’s about the overall math.

Regional health plans have already been under financial strain, with a HealthScape Advisors report noting a few months ago suggesting that over half of regional plans don’t have the capital reserves to make it through 2027. And that was prior to this news. So if the intent was to level the playing field in the MA market, this seems problematic.

Klomp’s Commentary on Tuesday

Given the magnitude of the reaction to the news and the confusing strategic implications, it was particularly interesting to listen to Chris Klomp on a webinar with Paragon Institute’s Demetrios Kouzoukas on Tuesday, just after the news was released. 44 minutes into an hour-long conversation, they finally got to the topic of Advance Notice, and here’s what Klomp had to say:

This is where my head really starts to hurt. On its face, it seems incongruent to be vociferously supporting the Medicare Advantage market on the same day that you’ve wiped out $100 billion in market cap from public insurers, while regional insurers issue statements saying this move threatens their very existence. By all accounts, Klomp and other CMS leaders are both extremely sharp and excellent communicators, particularly in playing out their negotiations with the private markets — MFN seems like a good example here. That seems to be a hallmark of this administration. So what exactly is CMS signaling that it supports here, given the seeming incongruency?

As Politico noted this week, Klomp himself said at JPM only a few weeks ago that Medicare Advantage has been destabilized, that stability and predictability are needed in the market, and that CMS will pay consistently. I suppose that, in some sense, this could be interpreted quite literally as CMS paying consistently, since it is not changing what it pays plans between 2026 and 2027. But nerdy jokes aside, this doesn’t add up to me. This move was anything but stable and predictable, as indicated by the various reactions.

There are two potential narratives in my head that I can come up with to resolve the incongruency in my mind in terms of what happened on Monday:

Both of those explanations would make sense to me, although I have no idea which of those two narratives is more likely at this point. It is also entirely possible that I am missing another explanation; this is just what my brain has been able to work through this week. Back to the underlying point about stability and predictability — the divergence in underlying explanations here seems like a huge challenge for the industry.

It seems that when Final Notice comes out in a few months, we’ll get a better indication of what is actually happening here. As many commentators have noted this week, Final Notice has historically been ~1% higher than the Advance Notice. Here’s the data from the past decade of Advance Notice and Final Notice:

If the Final Notice comes in relatively flat, it would seem to be a clear indication that this is indeed a hard reset for the market. If the Final Notice comes in at the high end of historical increases, it may signal that CMS may not have intended to cut so deeply here and risks throwing out the baby with the bathwater. Given the trend in MA insurer stock prices this week, Wall Street appears to have tipped its hand on the expected outcome.

The ripple effect for startups and investors

Irrespective of the Final Notice outcome, it seems hard to overstate the ripple effects from this sort of market dislocation in Medicare Advantage. If you go back and look at large exits in healthcare services over the last decade, so many of them have been on the backs of the MA market — i.e. Oak Street, Signify, VillageMD, Landmark, and CareBridge, just to name a few of the unicorns that were built primarily off the success of the MA program. If you’re an investor in these sorts of businesses, I think you need to ask yourself whether the government is signaling it no longer wants to fund these outcomes with taxpayer dollars. If that’s the case, with an IPO market that is still frozen and the only group of strategic acquirers crippled, what exit potential is there for companies working on government programs moving forward? This seems like a huge potential issue for the private markets on top of an already challenging environment.

If you work at a venture-backed startup that has been innovating for a complex and/or senior population over the last decade, there’s a good chance that your startup exists, either directly or indirectly, as a result of the success of the MA program over the past decade. Sometimes people ask me about why I talk about insurance markets so much in this newsletter. It’s because of this dynamic — the insurance markets, and specifically Medicare Advantage, are the key engine behind a lot of the startup activity in the market. This sort of dislocation in the MA market will inevitably cause ripple effects felt well beyond the MA plans themselves. The first wave will hit VBC providers, as it did with v28, and subsequent waves will hit the various solutions selling into those markets. Needless to say, it will be interesting to see how CMS addresses these challenges, as it also indicates that it wants to broadly fund innovation and risk-taking generally moving forward.

It feels like we are at a tipping point, potentially moving very quickly towards a two-tier healthcare system in this country — a cash pay/commercial insurance market for individuals and companies who can afford it, and a large government-funded risk pool for the rest of the country. How specifically those risk pools emerge over time will be interesting to watch, but if one thing is clear at the present moment, it’s that the federal government is trying to be a better steward of taxpayer resources.

The juxtaposition of headlines across those two tiers this week seems to tell the story about the state of innovation in various markets quite well — while ACA, Medicaid, and Medicare markets are getting hammered, Ro and Hims are both sharing details of their forthcoming Super Bowl ads, with Ro breaking down how it is paying north of $15 million dollars all-in for an ad. It all seems like a telling example of American healthcare, for better and worse.

Question of the Week

Given all of the various dynamics at play above, I thought it’d be interesting to poll the community here. How much would you expect the Final Notice to increase the Expected Average Change number?

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