Americans pay some of the world’s highest rates for health care coverage and drug therapies. Although those costs hurt consumers, drug companies point out that the U.S. system allows them to bring new therapies to market faster and sometimes exclusively for domestic patients. Still, tabs like $84,000 for a curative hepatitis C treatment price most people out, even those with the best insurance.
Andrew Lo, a finance professor at the MIT Sloan School of Management and director of its Laboratory for Financial Engineering, has proposed a fix of sorts. He and fellow researcher David Weinstock, a physician at the Boston-based Dana-Farber Cancer Institute, recently published a paper in the journal Science Translational Medicine that shows how capital markets could finance these costly treatments in the same way that consumers bankroll other large purchases, like mortgages.
Lo’s and Weinstock’s solution: health care loans, or HCLs, which could be underwritten and securitized to amortize the cost of treatment over several years. “I have a number of family and friends dealing with cancer, and as we know, those treatments are very expensive,” Lo tells Institutional Investor. “So I wanted to get better acquainted with the costs of drug development to understand what is driving this market. Once I got into that research, HCLs seemed to me to be a way to provide a bridge for covering the costs of these drugs.”
Although Lo concedes that $84,000 for a single treatment regimen seems high at first glance, when people take into account that they could come away with a lifetime of good health, such pricing “seems like a bargain,” he says. The idea of taking out a mortgage to cover lifesaving treatment on top of already exorbitant health insurance premiums may be off-putting for many consumers, though. “Of course it’s distasteful,” Lo admits. “But we have no prevailing policy in place to deal with the cost. What we are proposing is a stopgap in the absence of that discussion.”
Here’s how HCLs would work in practice: Individuals would assume all or part of the cost of a treatment, but to pay for it they would borrow from a special purpose entity (SPE) that provides the financing amortized over a repayment period of several years. In Lo’s and Weinstock’s model, the hypothetical loan carries a 9.1 percent interest rate, higher than a mortgage and roughly similar to what someone with good credit could expect from a credit card. The SPE gets the cash to offer these loans by securitizing them on the back end, allowing investors to buy baskets of the loans and shares of the SPE.
Lo and Weinstock don’t speculate on potential returns, but they say that HCLs would probably mimic other parts of the asset-backed securities market and might appeal to institutional investors such as pension funds.
Basing lifesaving treatments on the kind of creditworthiness needed to obtain consumer loans raises ethical concerns, but Lo says an HCL is better than having no access to treatment. One expert isn’t so sure. “You can create a market for anything, but that doesn’t solve the problem of health care costs,” says Gerald Kominski, a professor of health policy and management at the UCLA Fielding School of Public Health. Financing of this sort would exacerbate inequality within health care, contends Kominski, who is director of the UCLA Center for Health Policy Research.
Lo and Weinstock do propose some measures to forestall the possibility of loose financing or the kind of predatory subprime lending that fueled the 2007–’09 mortgage crisis. Legally requiring risk retention at the SPE level would force lenders to put some skin in the game, they maintain.
But what about a scenario like the one that patients saw when hedge fund manager and former Turing Pharmaceuticals CEO Martin Shkreli bought an effective generic drug and raised its price by 5,000 percent? As the market for HCLs grows, lenders and borrowers would have more leverage to negotiate lower drug prices too, Lo and Weinstock say. Their model also includes an idea for a so-called lemon provision that would give borrowers the right to stop payment if a treatment fails or has adverse side effects.
Kominski is skeptical, though. Predicting that such negotiations would be unlikely, he advocates for a policy-driven approach. “There are plenty of drug companies that operate in countries that put limits on how much development costs can be passed on to the consumer,” Kominski says. “They are still for-profit entities, and they still make a profit. Anytime you allow monopolistic behavior like we saw with Turing Pharmaceuticals, prices are going to be elevated. The government has the right to regulate monopolies.”
You would be forgiven for thinking that HCLs highlight all that is wrong with the current financial system, and in many ways Lo agrees. He and Weinstock offer a second model, in which insurers take on the amortization of treatment, but that would require changes to allow the cost of treatments to travel with patients.
“Right now insurance companies are reluctant to pay for these expensive treatments, because once they treat you, if you move or switch insurers, they’ve taken a huge hit to their capital reserves without enough years to make it back from your subsequent insurance premium payments,” Lo explains.
He argues for a switch that would allow the insurer to take out a loan for the treatment, but if the patient moves or switches providers, the loan would travel them to the new insurer. Moving treatment loans with people would become the financial equivalent of covering preexisting conditions, which the Affordable Care Act now mandates. The problem of patients’ moving around could also be solved by allowing for interstate insurance.
For UCLA’s Kominski, the argument for greater insurance portability sounds good in theory, but he worries that a stateless insurance policy might undermine consumer safeguards found in states like California. “We have strong consumer protections here in California,” he notes. “If you move to an interstate system, you could see insurers set up companies in states that are less regulated, which could open up new levels of risk.”
Lo recently presented the HCL concept at an MIT conference at which insurance companies were present, and he says the feedback was positive: “I think everyone is trying to find a way to get treatments to people, but right now we have limited ways of dealing with who is responsible for the total cost.”
