Financing health care with consumer loans

If you were to write a dystopian comedy about healthcare with this plan, people would shout “No Way!” but here it is in real life: Long-term loans, like mortgages, to pay for treatment for diseases like cancer, and hepatitis C that are outrageously expensive because the drug companies can charge whatever they want.  The authors comment “By estimating the post-treatment mortality rates of the patients and using statistical models to gauge the default characteristics of these loans, we demonstrate viability under current practical conditions,” (i.e. adjusting interest rates to reflect the proportion of patients who die before paying off the loan.)  Never underestimate the ingenuity of capitalism in healthcare.

From: Don McCanne
Date: Tue, 3/29/2016 12:09 PM
To: Quote-of-the-Day;
Subject:qotd: Financing health care with consumer loans

Kaiser Health News
March 29, 2016
Mortgages For Expensive Health Care? Some Experts Think It Can Work.
By Michelle Andrews

A Massachusetts Institute of Technology economist and Harvard oncologist have a proposal to get highly effective but prohibitively expensive drugs into consumers’ hands: health care installment loans.

Writing last month in the journal Science Translational Medicine, the authors liken drug loans to mortgages, noting that both can enable consumers to buy big-ticket items requiring a hefty up-front payment that they could not otherwise afford.

Some consumer advocates and health insurance experts see it differently.

“Isn’t this why we have health insurance?” asked Mark Rukavina, a Boston-based health care consultant whose work has focused on affordability and medical debt. “Insurance used to protect people from financial ruin for these unpredictable, costly occurrences. Now, with large deductibles, we’ve got coverage for preventive care but not for treatment.”

Andrew Lo, a financial economist at MIT’s Sloan School of Management, and Dr. David Weinstock, an oncologist at the Harvard-affiliated Dana-Farber Cancer Institute, agree that insurance would be a better option. But for many consumers that isn’t enough protection these days.

“This is a private sector stopgap way to deal with something right now,” said Lo.

Their proposal calls for the loans to be financed by a pool of investors who would buy bonds and equities issued by an organization that makes the loans to consumers.

While it’s “distasteful” to talk about patients mortgaging their lives for treatment, Lo said, they hope the proposal will spur change.

http://khn.org/news/mortgages-for-expensive-health-care-some-experts-think-it-can-work/

***

Science Translational Medicine
February 24, 2016
Buying cures versus renting health: Financing health care with consumer loans
By Vahid Montazerhodjat, David M. Weinstock, and Andrew W. Lo

Abstract

A crisis is building over the prices of new transformative therapies for cancer, hepatitis C virus infection, and rare diseases.. The clinical imperative is to offer these therapies as broadly and rapidly as possible. We propose a practical way to increase drug affordability through health care loans (HCLs) — the equivalent of mortgages for large health care expenses. HCLs allow patients in both multipayer and single-payer markets to access a broader set of therapeutics, including expensive short-duration treatments that are curative. HCLs also link payment to clinical benefit and should help lower per-patient cost while incentivizing the development of transformative therapies rather than those that offer small incremental advances. Moreover, we propose the use of securitization — a well-known financial engineering method — to finance a large diversified pool of HCLs through both debt and equity. Numerical simulations suggest that securitization is viable for a wide range of economic environments and cost parameters, allowing a much broader patient population to access transformative therapies while also aligning the interests of patients, payers, and the pharmaceutical industry.

The Role of Health Insurance

Large copays are antithetical to the very purpose of health insurance. Hence, our proposal for patients to cover these costs with HCLs is only a short-run bridging solution. A more sustainable and economically more efficient approach to address the high cost of transformative therapies is for insurance companies to cover these costs, spread the amortized costs across their policyholders, finance the upfront payments using securitization, and set premiums at the appropriate levels to cover these costs. In return for larger drug purchases, insurance companies would wield substantial leverage to negotiate lower prices. Also, insurers would presumably borrow at lower interest rates than would individual patients, further reducing the overall financing cost of these therapies.

Conclusion

The burden of upfront payment for curative therapies makes it challenging for public and private payers to afford universal access to potentially life-saving therapies. To address this issue, we considered a new financing paradigm in which portfolio theory and securitization techniques are used to finance HCLs whose repayment is linked to ongoing value. By estimating the post-treatment mortality rates of the patients and using statistical models to gauge the default characteristics of these loans, we demonstrate viability under current practical conditions. Securitization brings new participants (for example, pension funds, mutual funds, and life insurance companies) into the financing pool and helps transform a set of disjointed and sometimes competing interests into a more cooperative system focused on improving care.. HCLs, not unlike student loans, auto loans, and home mortgages, can improve access to the best health care for the less affluent.

Considering the extremely large burden of certain diseases, such as HCV, for which cures already exist, and the many transformative therapies on the horizon, developing more efficient financing methods is now a matter of life and death. Taking action is no longer a choice but has become a necessity.

http://stm.sciencemag.org/content/8/327/327ps6.full

***

Comment by Don McCanne

So the answer to outrageously priced drugs is to pay for them through health care loans (HCLs) – the equivalent of mortgages – and then use securitization “to finance a large diversified pool of HCLs through both debt and equity.” Did we not learn anything from the subprime mortgage crisis? Just as securitization of subprime loans became a “necessity,” securitization of HCLs is now not only supposedly necessary to prevent personal insolvency, it is, according to Andrew Lo, et al, “a matter of life and death.”

In Lo’s words, “While it’s ‘distasteful’ to talk about patients mortgaging their lives for treatment, they hope the proposal will spur change.”

Oh my.

An improved Medicare for all with first dollar coverage would eliminate any need to consider such an inhumane concept.

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