By Lambert Strether of Corrente.

I saw this headline in Kaiser Health News — “Mortgages For Expensive Health Care? Some Experts Think It Can Work” — so I said, “Nah,” and ignored it for a couple days, but then I clicked through to the academic paper Kaiser linked to — if “academic” has any meaning, the times being what they are — and I couldn’t find any tells that it was a parody or some kind of sick joke, so yeah. It’s for real! The paper is called “Buying cures versus renting health: Financing health care with consumer loans,” by Vahid Montazerhodjat, David M. Weinstock, and Andrew W. Lo, and it was published in Science Translational Medicine (STM), February 24, 2016. First, I’ll present the author’s scheme, and after briefly showing how it conforms to the simple rules of neoliberalism, I’ll look at potential scope creep if the proposal is implemented, debt-cropping, and the possibility of predatory servicing. I’ll conclude with a 30,000-foot view of the scheme’s implications. (I’m afraid I’m thinking of this post in terms of somebody who’s take out one of these loans — a consumer patient — rather from the finance perspective that Yves would offer. That said, readers with more nuts-and-bolts knowledge of securization than I have — like most of you — please feel free to chime in; that’s why I’m describing the scheme first.)

The Scheme

First, let’s talk about the scheme. STM summarizes it in one line:

Health care loans [HCLs]—the equivalent of mortgages for large health care expenses—are a practical way to increase patient access to costly transformative therapies

(I’ll discuss “costly transformative therapies” under Scope Creep.) Here is the long-form version from the authors themselves:

We propose two frameworks that would each grant additional access to transformative drugs, but under very different constraints. The first is a short-term approach that is immediately implementable: establishment of a special purpose entity (SPE) to fund expensive drug purchases. In this setting, the patient borrows from the SPE to make their co-payment, and the loan is amortized over a repayment period as with other consumer loans such as mortgages, credit card debt, and auto and student loans. … The SPE would be financed by a pool of investors who purchase various securities—bonds and stock—issued by the SPE. These securities have different risk-return characteristics that appeal to a wide spectrum of investors, and the value of each security is derived from the underlying collection of consumer loans that generate cash flows during the periods when the loans are outstanding (fig. S1). This structure is known collectively as securitization and is actively used in all consumer finance products. The second framework is a longer-run solution in which private payers and government agencies assume the debt. Such an approach will likely require new regulation or legislation to address disincentives for insurers to cover transformative therapies as well as potential unintended consequences on lower-income patients (Table 1); however, policy-makers have dealt with similar issues in other contexts [Like ObamaCare! Oh, wait….].

When the authors say “immediately implementable,” they’re not kidding; in fact, they’re holding a conference on the topic this winter. Kaiser again:

[Author] Lo said the MIT Laboratory for Financial Engineering and the Dana-Farber Cancer Institute will host a conference this winter to bring together drug manufacturers, insurers, patient advocates, financial engineers and others to discuss strategies to make expensive drug therapies more affordable. Health care loans will be on the agenda, he said.

I’d be mighty interested to see who the “patient advocates” might be; somehow I doubt that PNHP, let alone ACT-UP, will be invited.

Neoliberalism

Readers will remember Rule #1 of neoliberalism: “Because markets.” (That’s a complete sentence, and is in itself sufficient justification for any market-based program, like HCLs.) The authors, as one might expect, conform to the rule:

A natural method for expanding access to curative therapies is to offer “health care loans” (HCLs) that spread or amortize the cost of cures over many years and thereby overcome the limitation in financial liquidity that currently reduces the affordability of curative therapies.

“Natural.” Really? What’s natural about it? As Roger Albin, Professor of Neurology at the University of Michigan, remarks in the only letter (so far) responding to the article:

An alternative would be for Congress to appropriate a substantial sum – many billions of dollars seems appropriate – and purchase the rights of these drugs. The intellectual property would be assigned to a non-profit entity that would manufacture and distribute these drugs at cost. This concept is no more utopian than the authors’ proposal, which would require constant and costly regulation to ensure efficacy.

At this point, some institutional notes: The authors are affiliated with the MIT Laboratory for Financial Engineering, the MIT Department of Electrical Engineering and Computer Science, the Department of Medical Oncology, the Dana-Farber Cancer Institute and Harvard Medical School, the Broad Institute of Harvard and MIT, the MIT Computer Science and Artificial Intelligence Laboratory, and AlphaSimplex Group LLC. They exemplify, in other words, “Boston, Massachusetts, the spiritual homeland of the professional class,” which is described very well by Thomas Frank in Salon:

To think about it slightly more critically, Boston is the headquarters for two industries that are steadily bankrupting middle America: big learning and big medicine, both of them imposing costs that everyone else is basically required to pay and which increase at a far more rapid pace than wages or inflation. A thousand dollars a pill, 30 grand a semester: the debts that are gradually choking the life out of people where you live are what has made this city so very rich.

Does that sound relevant to the topic of this article? And:

Perhaps it makes sense, then, that another category in which Massachusetts ranks highly is inequality. Once the visitor leaves the brainy bustle of Boston, he discovers that this state is filled with wreckage — with former manufacturing towns in which workers watch their way of life draining away, and with cities that are little more than warehouses for people on Medicare.

Which proposal would help the people of those wrecked towns more? HCLs? Or drugs at cost? At this point, we might remember Context #1 of neoliberalism, where Rule #1 does not apply: “The world of the neo-liberal practitioners themselves; the academic guilds, media outlets[1], and think tanks”, like Harvard, MIT, Dana Farber, In other words, and sadly, Montazerhodjat, Weinstock, and Lo — and their conference attendees, except just possibly some of the patient advocates — are far less likely ever to need to go out on the market for an HCL then the workers in wrecked towns like Fall River, and far more likely to be able to get an HCL at a good rate and pay it back, if they ever do.

Scope Creep

Now let’s talk about the HCL and scope creep. KHN said the scheme was limited to “prohibitively expensive drugs,” and:

The health care installment loans [HCLs] that Lo, Weinstock and [Montazerhodjat] propose would be aimed at helping people afford “transformative” therapies that cure potentially lethal conditions such as cancer or hepatitis C. They’re not designed to pay for maintenance drugs that help people deal with chronic illness. It’s easier for insurers to cover maintenance drugs because they’re purchased over an extended period of time, they said.

But what’s “expensive”? “Prohibitively” for whom? And why only drugs? And the authors define the scope of their scheme this way:

Our more modest goal is to explore the feasibility of a private-sector approach to making expensive and highly efficacious [including curative] therapies more affordable right now.

But is there any real reason to think that limiting scope to either expensive drugs, or drugs at all, is realistic? The authors continually reference existing consumer loan schemes to show the effiicacy of their scheme. But all such schemes prove that scope creep is inevitable, and that the HCL financial infrastructure, once in place, will be available to any FIRE sector operator, including the bottom feeders. We have auto loans. And we also have loans for hubcaps. We have personal loans at banks. And we also have payday lenders. Is there a reason to think that HCLs won’t start with expensive drugs, and quickly morph into, say, high-interest loans for expensive surgeries? (The high deductibles under ObamaCare would seem tailor made to create such “market opportunities.”) Perhaps issues like these are why the Roger Albin writes, in his letter:

The authors’ proposal exhibits a considerable degree of naiveté. Their proposed approach is precisely the type of well-intentioned expedient that tends to become a permanent and ultimately unsatisfactory permanent solution.

Well, “unsatisfactory” for whom?

Debtcropping

There’s a name for the sort of financial dystopia — “Surely you don’t plan to take the kidney back?” — I just described: “Debtcropping.” Matt Stoller in 2010:

Debt is not just a credit instrument, it is an instrument of political and economic control. It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien placed on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers. They were in hock to the man, and eventually became slaves to him. This structure, of sharecropping and usury, held together by political violence, continued into the 1960s in some areas of the South. As late as the 1960s, Kennedy would see rural poverty in Arkansas and pronounce it ‘shocking’. These were the fruits of usury, a society built on unsustainable debt peonage. Today, we are in the midst of creating a second sharecropper society.

If you want to see how debtcropping will play out with HCLs, take a look at how the authors discuss default (in the context of problems their “second” framework would have to solve:

Limitations on default. Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, consumers with student loans are prevented from defaulting by excluding them from bankruptcy proceedings except in cases of “undue hardship.” This feature of the student loan market has received mixed reviews from various stakeholders. Some argue that it is essential protection for consumers who are unable to afford the legal expense of bankruptcy proceedings. Others counter that it is tantamount to indentured servitude and subsidizes lenders by reducing default risk at the expense of borrowers and taxpayers. Almost by definition, many patients face “undue hardship”; hence, preventing those with HCLs from declaring bankruptcy is unlikely to be either practical or socially acceptable.

And:

In alignment with the move toward value-based reimbursement (11), we propose that payment of the HCL continues until the debt is repaid, the patient or payer defaults, or the benefit from the drug ends, whichever occurs first.

Well, it’s definitely good that HCLs, unlike student loans, would be dischargeable in bankruptcy. That said, the incentives seem a little weird. If the HCL is for a “curative” drug, isn’t the incentive for the consumer patient to get cured and default? (And, if so, surely that’s a fundamental problem with a market-based solution.) Or are we saying that a consumer patient only enters the (health care) program after a credit check? And what will the terms of the HCL be? For example, as NC readers know, your Medicaid payments get clawed back from your estate if you’re over 55. Would HCLs permit terms like that? Suppose the collateral for your life the HCL is your house, and you get in trouble on the payments. In a sane world, you’d go to your HCL servicer for a workout. However, as we know from the mortgage crisis, servicers were incentivized against workouts — they’re bespoke — and so (or because) it was simpler just to seize people’s homes. Will HCL servicers be any better? Dubious, since existing servicers will probably move into this new market. Finally, as far as “the benefit from the drug ends,” who decides in case of conflict? And will side effects be included as net “benefit”? Suppose (say) the drug cures my heart condition, but I go blind as a result and can’t work. Must I then default?

To be fair, the authors are aware of the fallout from the mortage crisis. They write:

Last, it is appropriate to raise concerns about any application of financial engineering techniques to health care, especially because securitization was chief among the techniques involved in the most recent financial crisis. Although this powerful tool is actively used in many markets today and plays a critical role in financing mortgages, student loans, consumer credit, and other major business expenditures, securitization can still be abused if the proper protections are not present. Thus, regulatory oversight—including risk-retention requirements for HCL securitization issuers and risk transparency for HCL investors—is essential for the creation of robust and sustainable HCL funding markets. To argue that securitization is simply too risky without a feasible alternative is to relegate patients who could otherwise benefit from HCLs right now to the status quo.

I think the authors need to get out more. Mortages and student loans are debtcropping, pure and simple. We don’t need more of that. Well, “Boston” might, but Fall River doesn’t. (And as far as “no feasible alternative,” I bet if the authors would put their personal networks at the disposal of single payer, we’d have a real solution tout suite. Further, one might also add that financial burderns are stressors in themselves, and so the medical benefits accruing to individual consumers patients don’t net out to the degree the authors believe they do. Finally, our system of profit-based health care is lethal, but the author’s putatively short term plan reinforces it, and might indeed, via scope creep, become permanent. If the authors want to talk about “relegating patients,” they need to consider all patients, not simply those who would benefit from the treatments they consider.)

Securitization

Finally, here’s what the authors have to say about securitization. They ran simulations for their therapy of choice:

We simulated the performance of a hypothetical HCL fund for financing HCV therapy co-payments in a context that assumes payment by the insurance company of $44,000 for each of 12,500 patients toward the cost for HCV therapy; the remaining $40,000 is borne by the patient as a co-payment.

I’ve gotta say, they lost me at the $40,000 co-pay (!!). If course, if I were cynical and paranoid, I’d imagine that my friendly HCL loan officer would offer me a second loan, at more onerous terms, for the co-pay. To resume:

On the basis of anecdotal evidence, it is likely that the actual charge for curative therapy is substantially lower than $84,000. However, we intend to show that even if patients were required to pay such high co-pays, the therapy could still be affordable under the appropriate financing structure. In addition, a $40,000 co-pay is much lower than the current alternative for patients with early-stage HCV; for such patients, coverage is typically denied, so the cost is the full list price. Patients would obtain HCLs from funds raised by the SPE [Special Purpose Entity] through various tiers of bonds and equity that total $500 million (Fig. 1A). Default rates were calibrated to typical values for consumer loans by borrower-income levels. We considered three scenarios—pessimistic, baseline, and optimistic—that cover a range of probabilities for HCL default based on the borrower’s income (Fig. 2, A and B, and fig. S2). These default models were derived by using student loan data (Supplementary materials, table S1 and figs. S3 and S4). Studies on interferon and ribavirin treatment for chronic HCV infection have reported that all-cause mortality rates for patients with a sustained virological response—which equates to cure in nearly all cases—are not statistically different from those of an age-matched general population (12–14). Therefore, we used general-population mortality rates as a proxy for patients who receive new HCV-directed therapies (15, 16). More than 75% of the HCV-infected population in the United States are baby-boomers (that is, born between 1945 and 1965), so we used U.S. Census Bureau projections for the baby-boomer cohort (fig. S5) (17). The estimated survival curve and annual death probabilities are depicted in Fig. 2, C and D. Our estimated 10-year survival rate (89.3%) is close to the rates reported elsewhere (12, 16, 18). We used 10 million Monte Carlo simulation paths per each scenario of HCL default probability to evaluate the performance of the HCL fund, assuming that individual HCLs have 9-year terms with a 9.1% annual interest rate.

If I wasn’t lost at the $40,000 co-pay, I’m certainly lost at the 9.1% interest rate.

The term and interest rate of the HCLs were selected to be close to those of private student loans and to avoid too high a payment burden on borrowers—based on the patient population income distribution—without jeopardizing investment performance. In practice, the interest rate on HCLs could be determined specifically for each borrower. However, for simplicity and transparency, we used a single interest rate across the HCLs in the portfolio to represent an average over the population. The SPE is financed by senior and junior debt yielding current market rates (2.1 and 2.5%, respectively) and by equity that receives any remaining cash flows after the senior and junior debt payments are made (Fig. 1B) (details of the simulation parameters and risk-return computations are provided in the supplementary materials). Overall, the risk-reward profiles across all three scenarios are within an acceptable range to attract investors.

Two questions: 1) Readers who are also investors, would you invest in this? Why or why not? 2) What happens when HCLs are repackaged and resold as Collateralized Debt Obligations? Suppose the pharma company making the HCV drug takes a tranche in the funds raised by the SPE. Are their interests really aligned with the patient’s?

Conclusion

Again, I’m taking the viewpoint of the poor schlub who has to put up his house to save his life. Or the poor schlub who — after scope creep — takes out an HCL at the Walmart Clinic to fix his back pain, and then finds out when the treatment is done that he still can’t lift, or work. Of course, the authors say you don’t have to pay if there’s no benefit, but the authors didn’t reckon on the arbitration clause in the HCL, or that the arbitration process is rigged in favor of Walmart. And so on.

The scheme is so well-worked out on an academic level that it practically glitters, and I’m sure the authors would have a talking point in response to each point I make here. Nevertheless, I feel that the authors, as very proper Bostonians, are at the very best naive at what will happen when their plan collides with real patients, real originators, real serviceres, real investors, and real traders. Readers?