Health care inflation through securitization.

Securitization was behind the financial problems that erupted during the Great Recession.  And securitization proceeded based on legislative changes approved by Congress.  According to Bethany McLean and Joe Nocera in what may be the best book to explain the 2008 Subprime Mortgage Crisis and subsequent Great Recession, All the Devils Are Here: The Hidden History of the Financial Crisis, securitization was invented during the 1970’s as mortgage-backed securities for FHA and VA loans (1).

Securitization of a mortgage turns it into an asset that can be traded by investors.  Then the mortgage risk of default gets transferred to a third-party—the investor–who is neither the borrower nor the lender.  This destroys the negative consequences of a bad loan that would normally discipline the lender.  That means that a lender can make bad loans without suffering harm.  Meanwhile, if investors suffer a default especially a large market-wide default, the entire market can suffer harm that gets transferred to retirement funds, for example.  It was mortgage-backed securities that inspired the development of other financial innovations like credit default swaps.  These innovations can remove culpability for harms from the people who make bad loans.  Risk, then default and then harms dispersed to people who never benefitted from the loans as either borrowers or lenders.  Society then suffers widespread and terrible wealth destruction.

The American real estate market has not yet recovered from the Great Recession.  Prices for real estate have been volatile and American cities are full of overpriced empty houses that are being devoured by time into distressed properties that no one would want even if they were affordable.  Other homes have been turned into rentals.  Home ownership hasn’t been this low since 1965 (2).  And financial wizards now suggest that the same securitization that undid the housing market should be applied to health care.  What hubris!

The argument being made is that care over time for a chronic health disorder is a lucrative profit center but some curative procedures are either too costly to afford or not incentivized for development because long-term treatment is so much more lucrative than a cure.  Some have suggested that $80,000 hepatitis C treatments are too expensive even when insurance companies can sometimes get a $40,000 reduction in cost.  The treatment is curative but people can’t afford it and many insurance companies refuse to pay the exorbitant cost.  The suggestion being made in the article listed below (3) is to securitize the treatment cost in a mortgage like payment process. Then instead of lowering the price (to what individuals in the market can afford), a payment vehicle (where the risk would fall against investors and perhaps against larger society in the case of a default) would make it possible to maintain the high price.  The argument is that this would incentivize more lifesaving curative treatments that would otherwise eliminate a profit center being maintained by longer term chronic treatments.

When I read about securitizing healthcare, I feel angry.  It makes me understand that securitization has been a mistake for all of us in the grassroots.  It also shows that government intervention into real estate or healthcare has caused an avalanche of price increases.  These increases aren’t affordable except with more legislation that facilitates a new payment vehicle that diffuses consequences over all of society.  But those consequences still hurt as can be seen by the consequences of the subprime mortgage crisis.  And overcharging for treatments that are unaffordable in the real healthcare marketplace where real health problems are found is a bad policy.  Prices are supposed to be bounded by what the market can support–inside an affordable price structure.

For a while, securitization seemed to increase home ownership but only until a huge number of bad loans were defaulted on.  Then everyone lost property value (30%-40% in the short-term).  And many people lost their real estate investment capital in foreclosure and that shrunk the market for home ownership.  After foreclosure, there were a lot of empty properties.  Eight years later, the recovery in home prices is mostly due to investors passing properties between themselves.  Investors don’t want to live in the house.  In some cities there are enough renters to rent the house.  So houses that were treated like capital investments are trapped in limbo as investment properties that are either rented or empty.

Securitization for healthcare could artificially expand the market for overpriced treatments in the short-term.  But how would a healthcare cure be foreclosed upon and who would pay for that when the buyer couldn’t make their payment?  I imagine that we would all pay just as has happened in real estate.  Obamacare could facilitate securitization of healthcare treatments at inflated prices just as Fannie Mae and Freddie Mac facilitated a real estate boom at inflated prices by supplying unqualified buyers that temporarily sustained real estate demand.  Remember that the real estate bubble led to real estate malinvestments and a subsequent collapse of a buyer’s bubble in real estate.  And now we have an oversupply of houses at inflated prices and the lowest rate of home ownership in fifty years.  In these securitization processes we should all beware of the long-term consequences.  You can’t stop harms by spreading them out to more people.  In fact, the state of our economy stuck in the doldrums shows the opposite. Malinvestments waste economic resources and cause economic harms.

Here are references for your follow-up:

(1) Bethany McClean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis, (Portfolio, Penguin, New York, 2010, 2011), 5-7.

(2) “The Rise and Fall of the American Homeowner: Current Homeownership Rate Is Back to Where it Was 50 Years Ago”, http://www.doctorhousingbubble.com/rise-and-fall-homeownership-rate-housing-real-estate-ownership-over-time/, accessed 6 April 2016.

(3) Vahid Montazerhodjat, David M. Weinstock and Adrew W. Lo, “Buying Cures Versus Renting Health: Financing Health Care with Consumer Loans, Science Translational Medicine”, stm.sciencemag.org/content/8/327/327ps6.full, accessed 5 April 2016.

(4) Lambert Strether, Corrente, “A Modest Proposal: Securitizing Loans for Large Health Care Expenses, http://www.nakedcapitalism.com/2016/04/a-modest-proposal-securitizing-loans-for-large-health-care-expenses.html, accessed 5 April 2016.

If you are trying to put the pieces together of how we got to our political and economic here and now, I encourage you to purchase a copy of Political Catsup with Economy Fries at Amazon.com.

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