Creating an HHS Loan Program Office to Fill Critical Gaps in Life Science and Health Financing
We propose the establishment of a Department of Health and Human Services Loan Programs Office (HHS LPO) to fill critical and systematic gaps in financing that prevent innovative life-saving medicines and other critical health technologies from reaching patients, improving health outcomes, and bolstering our public health. To be effective, the HHS LPO requires an authority to issue or guarantee loans, up to $5 billion in total. Federally financed debt can help fill critical funding gaps and complement ongoing federal grants, contracts, reimbursement, and regulatory policies and catalyze private-sector investment in innovation.
Challenge and Opportunity
Despite recent advances in the biological understanding of human diseases and a rapidly advancing technological toolbox, commercialization of innovative life-saving medicines and critical health technologies face enormous headwinds. This is due in part to the difficulty in accessing sustained financing across the entire development lifecycle. Further, macroeconomic trends such as non-zero interest rates have substantially reduced deployed capital from venture capital and private equity, especially with longer investment horizons.
The average new medicine requires 15 years and over $2 billion to go from the earliest stages of discovery to widespread clinical deployment. Over the last 20 years, the earliest and riskiest portions of the drug discovery process have shifted from the province of large pharmaceutical companies to a patchwork of researchers, entrepreneurs, venture capitalists, and supporting organizations. While this trend has enabled new entrants into the biotechnology landscape, it has also required startup companies to navigate labyrinthine processes of technical regulatory guidelines, obtaining long-term and risk-friendly financing, and predicting payor and provider willingness to ultimately adopt the product.
Additionally, there are major gaps in healthcare infrastructure such as lack of adequate drug manufacturing capacity, healthcare worker shortages, and declining rural hospitals. Limited investment is available for critical infrastructure to support telehealth, rural healthcare settings, biomanufacturing, and decentralized clinical trials, among others.
The challenges in health share some similarities to other highly regulated, capital-intensive industries, such as energy. The Department of Energy (DOE) Loan Program Office (LPO) was created in 2005 to offer loans and loan guarantees to support businesses in deploying innovative clean energy, advanced transportation, and tribal energy projects in the United States. LPO has closed more than $40 billion in deals to date. While agencies across HHS rely primarily on grants and contracts to deploy research and development (R&D) funding, capital-intensive projects are best deployed as loans, not only to appropriately balance risk between the government and lendees but also to provide better stewardship over taxpayer resources via mechanisms that create liquidity with lower budget impact. Moreover, private-sector financing rates are subject to market-based interest rates, which can have enormous impacts on available capital for R&D.
Plan of Action
There are many federal credit programs across multiple departments and agencies that provide a strong blueprint for the HHS LPO to follow. Examples include the aforementioned DOE Loan Programs Office, which provides capital to scale large-scale energy infrastructure projects using new technologies, and the Small Business Administration’s credit programs, which provide credit financing to small businesses via several loan and loan matching programs.
Proposed Actions
We propose the following three actions:
- Pass legislation authorizing the HHS LPO to make or guarantee loans supporting the development of critical medicines that serve unmet or underserved public health needs.
- Establish the LPO as a staffing division within HHS.
- Appropriate a budget to support the staffing and operations of the newly created HHS LPO.
Scope
Similar to how DOE LPO services the priorities of the DOE, the HHS LPO would develop strategy priorities based on market gaps and public health gaps. It would also develop a rigorous diligence process to prioritize, solicit, assess, and manage potential deals, in alignment with the Federal Credit Reform Act and the associated policies set forth by the Office of Management and Budget and followed by all federal credit programs. It would also seek companion equity investors and creditors from the private sector to create leverage and would provide portfolio support via demand-alignment and -generation mechanisms (e.g., advance manufacturing commitments and advanced market commitments from insurers).
We envision several possible areas of focus for the HHS LPO:
- Providing loans or loan guarantees to amplify investment funds that use venture capital or other private investment tools, such as early-stage drug development or biomanufacturing capacity. While these funds may already exist, they are typically underpowered.
- Providing large-scale financing in partnership with private investors to fund major healthcare infrastructure gaps, such as rural hospitals, decentralized clinical trial capacity, telehealth services, and advanced biomanufacturing capacity.
- Providing financing to test new innovative finance models, e.g. portfolio-based R&D bonds, designed to attract additional capital into under-funded R&D and lower financial risks.
Conclusion
To address the challenges in bringing innovative life-saving medicines and critical health technologies to market, we need an HHS Loan Programs Office that would not only create liquidity by providing or guaranteeing critical financing for capital-intensive projects but address critical gaps in the innovation pipeline, including treatments for rare diseases, underserved communities, biomanufacturing, and healthcare infrastructure. Finally, it would be uniquely positioned to pilot innovative financing mechanisms in partnership with the private sector to better align private capital towards public health goals.
This action-ready policy memo is part of Day One 2025 — our effort to bring forward bold policy ideas, grounded in science and evidence, that can tackle the country’s biggest challenges and bring us closer to the prosperous, equitable and safe future that we all hope for whoever takes office in 2025 and beyond.
The DOE LPO, enabled via the Energy Policy Act of 2005, enables the Secretary of Energy to provide loan guarantees toward publicly or privately financed projects involving new and innovative energy technologies.
The DOE LPO provides a bridge to private financing and bankability for large-scale, high-impact clean energy and supply chain projects involving new and innovative technologies. It also expands manufacturing capacity and energy access within the United States. The DOE LPO has enabled companies involving energy and energy manufacturing technologies to achieve infrastructure-scale growth, including Tesla, an electric car manufacturer; Lithium Americas Corp., a company supplying lithium for batteries; and the Agua Caliente Solar Project, a solar power station sponsored by NRG Solar that was the largest in the world at its time of construction.
The HHS LPO would similarly augment, guarantee, or bridge to private financing for projects involving the development and deployment of new and innovative technologies in life sciences and healthcare. It would draw upon the structure and authority of the DOE LPO as its basis.
The HHS LPO could look to the DOE LPO for examples as to how to structure potential funds or use cases. The DOE LPO’s Title 17 Clean Energy Financing Program provides four eligible project categories: (1) projects deploying new or significantly improved technology; (2) projects manufacturing products representing new or significantly improved technologies; (3) projects receiving credit or financing from counterpart state-level institutions; and (4) projects involving existing infrastructure that also share benefits to customers or associated communities.
Drawing on these examples, the HHS LPO could support project categories such as (1) emerging health and life science technologies; (2) the commercialization and scaling access of novel technologies; and (3) expanding biomanufacturing capacity in the United States, particularly for novel platforms (e.g., cell and gene therapies).
The budget could be estimated via its authority to make or guarantee loans. Presently, the DOE LPO has over $400 billion in loan authority and is actively managing a portfolio of just over $30 billion. Given this benchmark and the size of the private market for early-stage healthcare venture capital valued at approximately $20 billion, we encourage the creation of an HHS LPO with $5 billion in loan-making authority. Using proportional volume to the $180 million sought by DOE LPO in FY2023, we estimate that an HHS LPO with $5 billion in loan-making authority would require a budget appropriation of $30 million.
The HHS LPO would be subject to oversight by the HHS Inspector General, OMB, as well as the respective legislative bodies, the House of Representatives Energy and Commerce Committee and the Senate Health, Education, Labor and Pension Committee.
Like the DOE LPO, the HHS LPO would publish an Annual Portfolio Status Report detailing its new investments, existing portfolio, and other key financial and operational metrics.
It is also possible for Congress to authorize existing funding agencies, such as BARDA, the Advanced Research Projects Agency for Health (ARPA-H), or the National Institutes for Health (NIH), with loan authority. However, due the highly specialized talent needed to effectively operate a complex loan financing operation, the program is significantly more likely to succeed if housed into a dedicated HHS LPO that would then work closely with the other health-focused funding agencies within HHS.
The other alternative is to expand the authority for other LPOs and financing agencies, such as the DOE LPO or the U.S. Development Finance Corporation, to focus on domestic health. However, that is likely to create conflicts of priority given their already large and diverse portfolios.
The project requires legislation similar to the Department of Energy’s Title 17 Clean Energy Financing Program, created via the Energy Policy Act of 2005 and subsequently expanded via the Infrastructure Investment and Jobs Act in 2021 and the Inflation Reduction Act in 2022.
This legislation would direct the HHS to establish an office, presumably a Loan Programs Office, to make loan guarantees to support new and innovative technologies in life sciences and healthcare. While the LPO could reside within an existing HHS division, the LPO would most ideally be established in a manner that enables it to serve projects across the full Department, including those from the National Institutes of Health, Food and Drug Administration, Biomedical Advanced Research and Development Authority, and the Centers for Medicare and Medicaid Services. As such, it would preferably not reside within any single one of these organizations. Like the DOE LPO, the HHS LPO would be led by a director, who would be directed to hire the necessary finance, technical, and operational experts for the function of the office.
Drawing on the Energy Policy Act of 2005 that created the DOE LPO, enabling legislation for the HHS Loan Programs office would direct the Secretary of HHS to make loan guarantees in consultation with the Secretary of Treasury toward projects involving new and innovative technologies in healthcare and life sciences. The enabling legislation would include several provisions:
- Necessary included terms and conditions for loan guarantees created via the HHS LPO, including loan length, interest rates, and default provisions;
- Allowance of fees to be captured via the HHS LPO to provide funding support for the program; and
- A list of eligible project types for loan guarantees.
Supporters are likely to include companies developing and deploying life sciences and healthcare technologies, including early-stage biotechnology research companies, biomanufacturing companies, and healthcare technology companies. Similarly, patient advocates would be similarly supportive because of the LPO’s potential to bring new technologies to market and reduce the overall Weighted Average Cost of Capital (WACC) for biotechnology companies, potentially supporting expanded access.
Existing financiers of research in biomedical sciences technology may be neutral or ambivalent toward this policy. On one hand, it would provide expanded access to syndicated financing or loan guarantees that would compound the impact of each dollar invested. On the other hand, most financiers currently use equity financing, which enables the demand for a high rate of return via subsequent investment and operation. An LPO could provide financing that requires a lower rate of return, thereby diluting the impact of current financiers in the market.
Skeptics are likely to include groups opposing expansions of government spending, particularly involving higher-risk mechanisms like loan guarantees. The DOE LPO has drawn the attention of several such skeptics, oftentimes leading to increased levels of oversight from legislative stakeholders. The HHS LPO could expect similar opposition. Other skeptics may include companies with existing medicines and healthcare technologies, who may be worried about competitors introducing products with prices and access provisions that have been enabled via financing with lower WACC.
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