Financing Healthcare: A Matter of Life or Death

Sixty-two percent of all personal bankruptcies in 2007 were related to medical expenses.

A perspective recently published in Science Transitional Medicine offered a detailed proposal for how healthcare loans (HCLs) could become a short-term reality. For the first time, their plan uses portfolio theory and financial engineering methods to simulate and explain how HCLs could be financed and repaid.

Authors offered their proposal as a solution to the burgeoning cost of new, transformative therapies for cancer, hepatitis C, and rare diseases.

Creators of the new HCL idea alluded to direct-acting antivirals, gene therapy, new cancer drugs, and adoptive cellular therapies as examples of novel curative treatments that are very effective, yet very expensive, requiring large upfront payments. Even though the potential to universally treat ailments like hepatitis C virus (HCV) infection exists, the authors pointed out, its cost is prohibitive within current economic realities.

In order to make curative options accessible to a broader patient population, researchers argued, a healthcare loan, akin to a home mortgage, could fill the gaps in today’s financing landscape. This potential solution could solve the problems of collateral and high interest rates plaguing patients’ limited options to finance their healthcare costs.

How Would a Healthcare Loan Work?

This specific HCL plan uses common techniques in the consumer loan market—diversification and securitization—to reduce risk and increase efficiency. What this means, authors said, is that risk reduction strategies would lower borrowing costs and financial burden for patients and attract more investment capital.

An interesting feature of their HCL proposal is that it links the loan repayment to ongoing value. The performance of HCL bonds would directly correlate with the continued efficacy of the borrower’s therapy because payments would end upon death or other predefined end point. Authors explained that this would help to align the interests of patients, payers, and the pharmaceutical industry.

In a simulation of how their HCL would work, authors used the example of 12,500 patients receiving HCV therapy. Assuming that insurance payers covered $44,000 per person, the researchers illustrated that a typical $40,000 upfront patient copay could be paid off in 9 years with monthly payments under $600 ($6,700 per year, per patient) at an average interest rate of 9.1%. In practice, each borrower’s interest rate would be determined individually, however. The financial burden would be equivalent to that of private student loans.

Authors calculated that in today’s economic environment, their HCL metrics would make a very attractive risk-reward profile for most investors. Also, they noted that securitization would be viable for a wide range of economic conditions and cost parameters.

Long-term Solutions to High Costs

The creators of this HCL proposal declared that, ultimately, large copays are antithetical to the very purpose of health insurance.

They stressed that their patient financing plan is intended to give patients immediate financial relief and therapeutic access. In the long run, however, authors stated that it would be preferable and more sustainable for health insurance carriers to reduce or eliminate patient copays for curative therapies.

They suggested that payers could achieve this by covering initial costs themselves (financed via securitization) and spreading the amortized costs across their policyholders via recalculated premiums. Authors argued that this solution would go much farther to reduce total costs because under this structure insurers would have the leverage to negotiate lower prices and borrow at lower interest rates.

A key problem that has faced insurers is how to recoup large one-time outlays. After a large expense, insurers cannot count on reimbursement through monthly premiums if a beneficiary changes plans. Authors proposed solving this problem legislatively by expanding “preexisting conditions” to include “financial conditions.”

Next Steps for Healthcare Financing

Authors want to convene “a meeting of stakeholders—biopharma executives, payers, patient advocates, regulators, financial engineers, and investors—to identify the most promising methods for financing expensive therapies.”

Stakeholders will be invited to come together for this conversation at a 2016 conference, cosponsored by the MIT Laboratory for Financial Engineering and the Dana-Farber Cancer Institute (Harvard Medical School).

Information about this conference should be announced at http://lfe.mit.edu and http://www.dana-farber.org.