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