Financing Arms Races, Health Edition
posted by Frank Pasquale
As the subprime mortgage meltdown continues, we’re seeing the ugly side of credit expansion. Consider how Countrywide approached its customers:
[T]he company’s commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan’s value in a commission. While mortgage brokers’ commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.
Though many celebrated ever-rising home prices, more discerning commentators (like Schiller, Frank, and Warren) saw the run-up in paper wealth in a darker light. Buyers may be getting a bit more house for their money, but they were also fiercely competing in an auction for space and position. The gap between housing haves and have-nots widened, giving the latter ever more worry about their chance of owning a piece of the American dream.
Now we might be seeing a similar dynamic in cosmetic health interventions. As patients turn to no-interest loans for health care, we can expect ever more demand for “$3,500 laser eye surgery, $6,000 ceramic tooth implants or other procedures not typically covered by insurance.” Just as the leverage behind a 30-year mortgage accelerates a bidding war for houses, this new frontier of financing will increase the social pressure to conform–to ditch those glasses, get rid of even minor dental imperfections, etc. As the article notes, “consumer debt experts warn that as more people try to bridge widening gaps in their health insurance, paying for medical care on credit could plunge the unwary into a financial crisis.” But as more begin to do so, the phenomenon becomes self-reinforcing: physical imperfection starts to signal financial distress and thus becomes ever more stigmatic.
Though the loans described in the article are small, I have a sense they are part of a larger trend in the marketization of health care. Presently, US health expenditures are much higher than other countries’ due to (inter alia) extraordinary administrative costs, doctors’ political power to limit their supply, and a third-party payment system that obscures costs for patients. If “consumer-directed” health care manages to shift those costs directly to patients, health providers may well turn to financing options to “spread the pain” of a big bill over five, ten, or even thirty years.
Moreover, libertarians who want to get rid of Medicare might see the financing plans as an ideal way of moving responsibility for health care finance from the state to individual families. As parents enter retirement, they could set up a reverse mortgage on their house to pay for health care. If those assets run out, I assume libertarians would want to see the parents turn to their children for help–say, asking each to take out a $300,000 health care mortgage for their parents’ care. Perhaps big finance can perfect the libertarian dream of complete personal/familial responsibility for health care.