Healthcare consumes one-sixth of the U.S. economy, costing citizens an estimated $2.7 trillion annually, with twenty to thirty percent of wasted. The U.S. must address the soaring cost of healthcare. Universal access to healthcare is not sustainable – everyone knows this fact. Today no viable solutions to this problem exist. Can financial sector innovations shoulder the burden and solve healthcare sustainability for America?
In a recent paper published February 24, 2016 in Science Translation Medicine titled, “Buying cures versus renting health: Financing health care with consumer loans” Vahid Montazerhodjat, David Weinstock, and Andrew Low suggest that healthcare loans (HCLs) and securitization are two of many financial innovations that could fund universal healthcare. Andrew Lo, an MIT engineering professor, presents his argument – a mortgage approach to backing excessive healthcare – that expesive treatments such as hepatitis C virus (HCV) infection has an average cost of $84,000 for 6-8 weeks of treatment are unaffordable. The cost to treat all Americans with chronic HCV would cost $227 billion, covering 180 million infected persons. The article suggests that all treatment falls into two categories cures and mitigators (noncurative drugs). Cures solve the root problem, and mitigators extend life through continued care without an immediate cure. The challenge comes when most treatments require full payment up front; this logically removes many patients who can't afford excessive costs ranging from $100,000 to $1,000,0000 for the cure. Concerns over affordability brings us back to the highly efficacious but financially restricted therapies. How do we solve this massive financial gap between the needs to improve patient care and the practical means by which patients can pay for treatment?
Several financial institutions do offer loans to pay for healthcare. Who’s able to apply and receive these loans? Surely not the population in the greatest financial distress. Merely making healthcare more affordable doesn't rid the world of these acute infectious diseases. The gap still exists between patient need and financial ability to pay, supported by the 62% of bankruptcies in 2007 directly resulted from excessive healthcare costs. The unfortunate news is that 75% of the people who filed for bankruptcy had healthcare coverage. As citizens, we must reset the U.S. healthcare system.
“Create a new law mandating full coverage for curative therapies” - Andrew Lo.
Short-term framework 1: Special Purpose Entity (SPE)
Consumers assume the debt. This approach starts with a special purpose entity (SPE), to fund expensive drug purchases. A patient would borrow from the SPE for costs such as copayment and out of pocket costs. The loan from the SPE acts similar to a mortgage with amortization and a long-term repayment period e.g. auto loans or student loans. Investors would purchase securities and bonds issued by the SPE. Securitization is not new and widely used in most financial products making this an immediate solution.
Long-term framework 2: Healthcare Loans (HCLs) Funds
Private payers and the government assume the debt. New regulations would need to be established to address financial reimbursement model as well mitigating consequences for low-income patients. Economic theories imply that as demand for therapies increase, the cost per treatment will also increase. Although this sounds consistent, trends for heart disease and high cholesterol does not support this theory. The long-term approach aligns well with value-based reimbursement and would also require additional regulations and legislature to hold private payers and insurers accountable.
The paper illustrated one example of an HCL fund cash. In this example the SPE would comprise of senior bonds ($400M), junior bonds ($50M) and equity ($50M) to $40,000/drug cost. These funds would flow from the SPE to the drug company to cover a sample of 12,500 patients. This model illustrates that the cost for each patient repayment period would be $6,600 annually at an annual interest rate of 9.1%. This investment would result in bond growth consistent with the market: senior bonds (C=2.1%, current market rate yields), junior bonds (C=2.5%, current market rate yields), and equity (no coupons). If financial losses did occur, they would flow from equity, junior bonds, and then lastly drawn from senior bonds.
It's not all rosy. Throughout the paper, there are eight unresolved issues, and perceived complications identified in the analysis.
1. Low median income and limited credit of some patients
2. Economic externalities of infections such as HCV
3. Differences between U.S. and foreign pricing
4. Impact of price increase owing to a larger market resulting from HCLs
5. Limitations of consumer credit risk model
6. Misaligned incentives
7. Limitations on default
8. Tracking value over the amortization period
One primary challenge is patient switching policyholders and the financial impact of shifting debt from insurer A to insurer B. In the example above the drug costs is $42,000 and spread over a 9-year proposed term. If the patient was treated while under the care of insurer A, insurer A would pay for the cost of the patient treatment. If the patient changed from insurer A to insurer B, at the end of the third-year, insurer B would needs to absorb the remaining six years of payments. Insurer debt controls must be established to prevent insurer B from unfairly assuming benefits that insurer A had covered.
What's the alternative if these frameworks do not work? We can look to the UK's national healthcare system (NHS) that recently removed 20 major cancer drugs as too expensive. The NHS is a good example of what happens to a nation when they are unable to solve the growing costs of healthcare – patient treatment is all-or-nothing. Securitization and healthcare loans provide patients more options.
Maybe healthcare funding falls into the category of the quintessential problem space example. A solution exists but the population is too biased to see it.
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