I had previously been annoyed by the hover element on my small MacBook screen and disabled it. Re-enabling the hover feature resolved the issue. I'll report the bug to VS Code since disabling the hover shouldn't affect the escape key/window focus.

To enable hover:

1. Go to settings (CMD+, or Code->Settings...->Settings)
2. Search for "hover: enabled"
3. Ensure the option Editor > Hover: Enabled is selected