Can securitized debt instruments, those same products that helped inflate the housing-market bubble and played a major role in the 2008 financial crisis, be used to finance the cost of catastrophic health care expenses?
A small group of big thinkers believes they can.
Andrew Lo, MIT professor and director of the MIT Laboratory for Financial Engineering, and David Weinstock, associate professor at Harvard Medical School and the Dana-Farber Cancer Institute, co-authored a recent op-ed piece in
InvestmentNews promoting securitized health care loans as a workable solution for accessing high-cost medical treatments.
CONSUMER ACCESS
In theory, securitizing health care loans would create a market for certain health-care-related debt, encouraging lenders to make such loans, thereby creating more consumer access to expensive drug therapies and medical treatments.
Of course, lenders will only be interested in making such loans if they know there's a secondary market ready to purchase them for inclusion in investment pools. That's where hedge funds come to the rescue. Mr. Lo believes there are hedge fund managers champing at the bit for access to such loans.
It's not a completely terrible idea. If nothing else, it addresses a real need facing some consumers. Along the way, it creates an opportunity that could get some investors excited, while at the same time making financial advisers really nervous.
Though this might sound like something that is a long way off, proponents believe we're less than a year away from seeing the first securitized health care loans.
This is where financial advisers should be paying attention, because the loans will be neatly packaged, offer decent yields and sound logical enough.
Mr. Lo anticipates the safest senior-level tranches will yield between 5% and 7%, while riskier junior tranches will produce yields in the 6% to 9% range. There could be an even riskier equity-level tranche, representing whatever's left over after all the bondholders get paid.
Securitized health care loans have a good chance of becoming a reality because of some huge gaps in insurance coverage for certain medical treatments, such as the $84,000 list price for a curative therapy for the hepatitis C virus.
The treatment has proven 90% effective in curing hepatitis C. Since the insurance industry would likely deem it too cost-prohibitive to provide the treatment to all 2.7 million Americans with chronic hepatitis C infection at a cost of $227 billion, Mr. Lo believes loans are the answer.
According to his model for this particular treatment, insurers would shoulder $44,000, and the patient would borrow the remaining $40,000 at a 9.1% rate, with nine annual payments of $6,700.
For potential investors, the temptation is to harken back to 2008 and recall what happens if loan payments aren't made. In this case, we're talking about unsecured debt whose default could be triggered by any number of things, including the death of the borrower.
Mr. Lo says such variables are being factored into the risk-return profile of the pools. Among the considerations is linking payment duration to continued health, and precluding these types of healthcare securitization loans for therapies with marginal benefit.
TUGGING AT HEARTSTRINGS
Mr. Lo supports his securitization argument by tugging at the heartstrings with references to the inhumanity of forcing someone to pay the full cost upfront or, worse, making them go without treatment. A valid point, for sure, which raises broader questions about health coverage and the role of government.
But as an investment, this is an idea that adopts the same general form as the mortgage-backed securities that were loaded down with subprime loans 10 years ago.
To that, Mr. Lo contends the “financial crisis occurred not because these techniques didn't work; it occurred because they worked too well.”
Assuming a best-case-scenario that regulators are smarter now and the financial engineering infrastructure is sound this time around, securitized health care debt should still be approached with extreme caution.
