Securitizing Your Health With ACOs
While the economy has been the major focus of the Presidential election, healthcare is not far behind. Republicans and democrats may argue over the best solution to providing medical care, but both can agree that soaring costs are creating a nightmare scenario. A major problem with government-funded medical plans is that there are perverse incentives to increase costs rather than contain them. Medicare, the government-funded healthcare program for those over 65, makes separate payments to healthcare providers for healthcare services. This leads to healthcare providers being paid for the volume, rather than the quality, of services. Providers have fewer reasons to contain costs or find efficiencies, which is part of the reason why healthcare spending the United States makes up such a large proportion of GDP: more than 15%, or over $2 trillion, in 2008.

Solutions to Rising Costs
To address the ballooning cost of care, the government has been experimenting with novel payment methods, such as bundled payments or capitation. Bundled payments link the payments that medical providers may receive for helping a patient over the course of treatment (called an episode of care), reducing the occurrence of multiple claims being made (and thus multiple payments). Capitation, on the other hand, provides medical teams a fixed payment per patient, regardless of the number of procedures undertaken - hence, the "cap."

Innovative new ways of managing care are also being developed. Accountable Care Organizations (ACOs) are groups of healthcare providers and medical professionals who come together voluntarily to coordinate patient care. By working together, ACO participants help reduce the number of duplicate procedures and services that patients receive, reducing the overall cost of medical care. ACOs are a fairly new concept, having popped into the healthcare scene in the 2000s, but have received more attention since being included in the Patient Protection and Affordable Care Act. While they are a step toward a pay-for-performance system, they have not entirely shed the yoke of the fee-for-service model that is currently employed by government-funded health programs.

While there are several proposed bundled payment types, including retrospective and prospective types, the onus of financial responsibility is shifting to the ACO. What does the shift mean for profitability? It means that healthcare providers will have to rethink the way they provide services, which doesn't mean that they won't be profitable. If doctors and hospitals know how much they will be paid for taking care of a particular patient type, and if they know that increased efficiencies and better coordination can reduce costs, then setting a cap on the amount of money a provider can receive for an episode of care (in the case of bundled payments) or per patient (in capitation), gives providers a baseline from which to judge profit. Additionally, by knowing the profitability associated with different types of care, ACOs could go a step further: they could securitize.

Securitizing ACOs
Securitization involves pooling assets or rights to cash flows, bundling together those assets with similar characteristics, and creating a financial instrument that can be traded (often through a special purpose vehicle, or SPV). This creates an asset-backed security, or ABS, which can then be traded like any other security. This allows the original holder of the asset, or originator, to sell assets that it previously could not, while also moving risk off its books. Those buying the new financial instrument gain access to cash flows. ACOs have the components required to securitize.

For example, an ACO could bundle a certain episode of care (EOC), such as the services required to manage a patient receiving a heart transplant, and then create a financial instrument based on profits associated with providing that particular set of care. Each EOC bundle could be tranched according to the risk associated with the type of ailment. An ACO would want to securitize the EOC because it can exchange future cash flows for money now, possibly using that money to modernize systems and management techniques in order to increase profits from other EOCs. It would also be transferring the risk associated with patient care to investors.

Advantages and Disadvantages
Would investors be interested in this sort of EOC-ABS? Well, not all members of an ACO are publicly traded companies, making it hard for investors looking to take advantage of improvements in healthcare technology, processes and coordination. Investors may also be interested in this EOC-ABS because spending on healthcare is already in the trillions of dollars and expected to grow. Investment banks may find this new investment vehicle lucrative, since the complexity associated with structuring SPVs and transactions often leads organizations to hire outside help.

There are downsides to this model, especially for the public. By creating a financial incentive to increase the gap between cost of care and payments, ACOs may be accused of rationing care, even if payments are tied to quality of care, rather than quantity. This is partially the reason why Americans feared Health Maintenance Organizations (HMOs), and why mentioning "death panels" still riles up opponents of the Patient Protection and Affordable Care Act.

The Bottom Line
Could providing investors with exposure to profits from patient care rev up innovation? Investors may push for efficiency, either directly by pushing ACO managers to provide more cost-effective care, or indirectly, by passing on the purchase of EOC-ABSs if the originating ACO has a history of high costs relative to profits. Ultimately, the legality of AOCs securitizing the care they provide patients falls to the Securities Act of 1933 and the Securities and Exchange Act of 1934, the two primary laws governing securitization. However, because this is such a novel approach to mitigating the risk associated with medical care and with profiting from making care more efficient, other regulatory bodies are bound to step in.




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