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Could Lifesaving Health Care Be Financed Like a Home Purchase?

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As many financial advisors know, the rising cost of health care is one of the biggest challenges their clients face, especially in retirement. Now two professors – one from MIT and the other from Harvard Medical School – are proposing a new type of securitized asset that can help finance expensive medical treatments while delivering relatively high returns to investors.

Under the strategy developed by professors Andrew Lo of MIT and David Weinstock of Harvard Medical School and MIT research associate Vahid Montazerhodjat, individual health care loans, or HCLs, would be pooled, then securitized and sold as bonds or stocks to investors.

“The basic concept is to convert a large upfront medical expense into a series of more affordable payments, akin to getting a mortgage when buying a house,” the professors wrote in a recent column in The Boston Globe.

The loans would help patients pay for expensive therapies that can cure, rather than just treat, diseases, which they otherwise could not afford.  That could increase the sales of such “curative” therapies, providing funds for biopharmaceutical companies to develop other new therapies.

Investors, meanwhile, could profit from substantial returns — a large diversified fund of HCLs generated hypothetical annual returns of 12%, according to the professors – from an asset that is “not likely to be highly correlated with the stock market,” said Lo in a press release.

“Our solution is far from perfect,” the professors wrote in The Boston Globe. “The very idea of mortgaging health care is distasteful … A law that mandates full coverage for curative therapies and allows for price negotiation would likely be economically more efficient than our approach. Unfortunately such a saw has yet to be enacted. Rather than charge at windmills like Don Quixote, we propose a market-based solution to get patients the medications they desperately need right now.”

One such medication is a curative therapy for hepatitis C virus (HCV) infection, which costs about $84,000 for six to eight weeks of treatment. The treatment appears to cure more than 90% of infected individuals, according to the professors, and 2.7 million Americans have chronic HCV.

Another curative drug is Glybera, which treats patients deficient in lipoprotein lipase, a protein needed to break down fat molecules. It costs about $1 million. This medication’s benefit may last a lifetime but the cost must be paid upfront, according to another article the two professors and Montazerhodjat wrote in Science Translational Medicine. “The stark reality is that many patients do not have access to transformative therapies solely because of affordability,” the authors wrote.

HCLs would function as a long-term loan for patients to afford their co-payments for these therapies. Under the HCL strategy, patients could borrow from a Special Purpose Entity (SPE) which would issue bonds and stocks to investors, with different risk-return characteristics in order to appeal to a wide range of investors.  Whenever the treatment stops working, the patient’s payments would stop.

The professors propose to reduce that investment risk by offering bondholders guarantees of all or a faction of their principal invested, which could be provided by third parties such as philanthropists, pension funds, government agencies, insurance companies or even drug companies. As result, HCLs would not only provide an incentive to develop curative therapies but also act as a disincentive to market therapies that fail.

“Developing more efficient financing methods is now a matter of life and death,“ the authors wrote in Science Translational Medicine. “Taking action is no longer a choice but has become a necessity.” It could also help investors as well.

— Check out Health Care Worries Grow as Investors Approach Retirement on ThinkAdvisor.