Curing the Ails of Health Insurance

In recent months, medical research has made tremendous strides towards creating treatments that cure major diseases. For example, in July, researchers indicated that they had found an effective way to use stem cells to cure sickle cell disease. Similarly, scientists are hopeful that advancements in gene therapy may lead to cures for diseases ranging from dementia to HIV. These types of treatments undoubtedly have a tremendous social upside; however, the enormous costs associated with these medical breakthroughs can cause insurance companies to feel sick.

Unfortunately, cures that utilize cutting-edge technologies, such as stem cell therapy or gene therapy, generally have huge upfront costs compared to older, less effective chronic treatments. These high costs in the U.S. can stem from various factors. Primarily, big pharmaceutical companies predictably try to make immense profits on effective drugs. While it may seem that drug companies use these large profits only to reward themselves and their stockholders, large percentages of the profits from successful drugs are used to offset losses on unsuccessful drugs and to incentivize R&D. Drug research is often considered a high-risk venture since 95 percent of experimental drugs that are studied in human trials fail to meet FDA standards. In fact, large pharmaceutical companies that work on multiple drug projects at once invest an average of $5 billion per new medicine. Additionally, large profits on expensive drugs in America tend to subsidize medications in developing countries, where the costs of cures would otherwise be too expensive for the general population.

While it may appear that insurers face a fundamental price issue due to the high upfront costs of potential cures, it is relevant to note that the primary problem is usually a volume issue. In essence, insurers worry that high upfront costs, combined with large disease-ridden populations, will threaten their bottom line.

As more drugs that cure diseases are produced, insurance companies will need to adjust their systems to pay for large costs that are temporally frontloaded, but whose benefits are spread out over the rest of the patient’s lifetime. According to Dr. Scott Gottlieb of the American Enterprise Institute, as curative therapies become more common, insurance companies will need to develop payment models and credit vehicles that will distribute high upfront costs over time.

One way to distribute such costs is to model the payment schedule after loans for durable goods, such as houses. A significant amount, like a down payment, can be paid at the time of the treatment, and then the rest of the cost can be divided over a pre-determined length of time. Thomas Philipson, an economist at the University of Chicago, writes that the problem with this model currently is that, at the payer-level, federal programs such as Medicaid operate on a full expenditure of annual appropriations, without the option of carrying over funds to subsequent years. Consequently, public payers cannot borrow money effectively since they cannot predict their ability to service debt over time. If this system could be changed, however, debt financing could help to eradicate various diseases such as sickle cell.

On a patient level, Philipson observes that those obtaining treatments may be subjected to high co-pays, which could be financed via various vehicles like credit cards. Patients undergoing high-risk procedures would have to pay higher interest rates than those undergoing low-risk treatments. Regardless of interest rates, however, patient-level debt financing would undoubtedly help reduce the number of people suffering from curable, yet expensive diseases.

At both the payer-level and the patient-level, credit mechanisms would be societally beneficial because they would allow large-scale public health efforts that would not only decrease the disease among existing populations, but also prevent future incidences from occurring. Therefore, debt-financed disease eradication should be recognized as a viable way to combat diseases, and implementation of this method should begin now.

One thought on “Curing the Ails of Health Insurance

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