It was during the financial crisis that Andrew Lo had his epiphany: The way to save health care from ever-rising costs is by bringing in the banks. Specifically, by packaging drug development costs into securities to be bought and sold by Wall Street—the very, um, mortgage-bundling technique that blew up the economy in 2007. “The reason the financial crisis happened is not because securitization didn’t work. It happened because it worked way too well,” says Lo, a professor of financial engineering at MIT. Securitization injected a huge pool of money into mortgages—what if you could inject that pool of money into a worthwhile cause and, ahem, do it responsibly?
So Lo, who has seen his mother and several friends die from cancer, wants to use the techniques of Wall Street to fix healthcare. In a new paper in Science Translational Medicine, he and his coauthors propose creating loans for patients whose insurance policies don’t cover ultra-expensive treatments like the cure for hepatitis C—loans that would be financed by bundling them and selling to Wall Street investors.
I know. I know. But hear him out. Even Lo admits that this proposed solution, only a short-term one, sounds distasteful. But behind the proposal is a bigger, more provocative point. As much as “financial innovation” has become a dirty phrase since Wall Street brought down the economy, its fingerprints are everywhere. Health insurance, after all, is a type of financial innovation that spreads the cost of health care over a large pool of people. Maybe the way to fix health care costs is smarter financial engineering.
Consider the dilemma. Sovaldi, the hepatitis C cure, costs $84,000 for a course of treatment, and who gets covered varies insurer by insurer or state by state when it comes to Medicaid. What this means practically is that many hepatitis C patients can’t get Sovaldi. As more expensive cures come on the market—like gene therapy, which may cost $1 million or more—the problem of paying for these very expensive treatments is only going to get worse. Either premiums shoot up for everyone or … ?
“Andrew Lo’s paper is really the first systematic attempt of showing the way forward,” says Amitabh Chandra, a health policy researcher at Harvard. “My eyes lit up when I saw it.” Chandra doesn’t agree with Lo’s first proposal, that patients should shoulder the debt for their treatment. But he like the looks of a longer-term solution that Lo and his coauthors outline: Insurance companies or the government should take on the loans for these cures. That will take longer to implement, because it requires new laws, either to allow states with balanced budget requirements to take on debt or for insurance companies to shift the debt associated with a patient’s treatment onto the next insurance company should they switch.
This all sounds ridiculously baroque, doesn’t it? Why not just force drug companies to lower their prices? If you can hold your nose for a second, think about it from a drug company’s point of view. Making a drug that alleviates the symptoms of diabetes gets you decades of revenue from a single patient; making a drug that cures diabetes gives you only one payout. Unless that payout is huge, the profit-driven drug company has no financial incentive to cure diabetes, which is the better ultimate outcome.
That’s the argument, though no one is sure exactly how much price haggling would change things. “If you negotiate the drug price down, will it reduce innovation? The question is how much, and I don’t think that’s a number we know,” says Benjamin Handel, a health economist at the University of California, Berkeley. What Lo’s proposal does do is theoretically make cures available to more patients, incentivizing the drug industry to make those instead of mitigators. He’s also previously proposed using securitization to create a megafund for cancer drug discoveries.
Here’s the fundamental tension: Developing drugs is expensive, but most people can agree that everyone should have access to those drugs. Insurance spreads out those costs among everyone who buys insurance. Loans spread out the cost over time. “We do need more creativity in how we pay for healthcare, says Soeren Mattke, a senior scientist at the RAND Corporation. The innovations that health care needs might be not just scientific but also financial. As long as those financial innovations don’t careen out of control—because you already know how that story ends.