Conference on the Economics and Finance of Healthcare and Medicine

Professor Lo's current research spans five areas: evolutionary models of investor behavior and adaptive markets, systemic risk and financial regulation, quantitative models of financial markets, financial applications of machine-learning techniques and secure multi-party computation, and healthcare finance.  Recent projects include: deriving risk aversion, loss aversion, probability matching, and other behaviors as emergent properties of evolution in stochastic environments; quantifying the financial consequences of ESG and other forms of impact investing on investment performance; proposing new funding models for fusion energy; and developing new statistical tools for predicting clinical trial outcomes, incorporating patient preferences into the drug approval process, and accelerating biomedical innovation via novel financing and business structures.  He is currently an advisor to the Journal of Investment Management and the Journal of Portfolio Management.

Vauling Pharmaceutical Innovation

Gaurab Aryal, Federico Ciliberto, Leland E. Farmer, Ekaterina Khmelnitskaya

We propose a methodology to estimate the market value of pharmaceutical drugs. Our approach combines an event study with a model of discounted cash flows and uses stock market responses to drug development announcements to infer the values. We estimate that, on average, a successful drug is valued at $1.62 billion, and its value at the discovery stage is $64.3 million, with substantial heterogeneity across major diseases. Leveraging these estimates, we also determine the average drug development costs at various stages. Furthermore, we explore applying our estimates to design policies that support drug development through drug buyouts and cost-sharing agreements.

Hidden Medical Debt and Consumer Access to Credit

Elena Loutskina, Joonsung Won

Credit bureaus face significant frictions in collecting consumer medical debt liabilities data, which spurred an intense ongoing policy debate. Leveraging novel healthcare costs proxies based on Medicare spending data, we evaluate the impact of hidden medical liabilities on consumer credit scoring and access to credit. We document that the traditional creditworthiness measures underestimate the ex-post default for consumers residing in higher healthcare costs markets. Consumers in high-healthcare-cost CBSAs are 37.6% more likely to default than those in low-healthcare-cost CBSAs. These effects are more pronounced among higher risk consumers, those with low credit scores and high DTIs. Lenders internalize these biases and impose higher mortgage rejection rates in high-healthcare-cost CBSAs, particularly for riskier applicants. These effects intensify following a policy shift that partially removed medical liabilities from credit reports without affecting consumer balance sheets. Our findings suggest that limiting the flow of medical liabilities data undermines the predictive accuracy of standard credit metrics, impairs the information value of credit bureau outputs, and leads to less efficient credit allocation.

Firm Investment in the Face of Tail Risk: Evidence From Hospitals

Meghan Esson and Jingshu Luo

We examine how organizations navigate investment decisions when confronted with tail risk -- the small possibility of extreme financial loss. We focus on hospital investments in trauma centers faced with medical malpractice risk. We focus on hospitals for three reasons: first, medical malpractice insurance inherently leaves hospitals exposed to substantial tail risk; second, the consequential financial stakes of medical liability for hospitals are quite large; and third, while trauma centers are financially beneficial, they are also exceptionally susceptible to tail risk given the critical nature of their services. For identification, we exploit the staggered adoption of caps on non-economic damages across states from 1991 to 2011, treating this as a quasi-random modulation of tail risk. These caps impose a ceiling on potential awards in malpractice lawsuits, thereby attenuating the tail risk. Employing a staggered synthetic control methodology, we find a 25% increase in the likelihood that a hospital has a trauma center following the reduction of tail risk. This effect is predominantly driven by non-profit hospitals and new investments (i.e., trauma center openings) rather than disinvestment (i.e., decrease in trauma center closures), indicating a one-sided response to decreased tail risk. We demonstrate that this increased presence of trauma centers is associated with a 3% reduction in traffic fatalities, with more pronounced effects in areas prone to mass casualty incidents. The timing of health improvements aligns closely with the increase in trauma centers, suggesting a direct link between hospital investment decisions and improved public health outcomes.

How Do Debt Collection Restrictions Affect Hospitals and Patients?

Christine Zhuowei Huang, Amit Kumar, Lynn Linghuan Wang

Tighter regulations on consumer debt collectors, although intended to curb predatory practices, may disrupt industries to which such debts are owed. Using a paired-county stacked difference-in-differences design, we show that these regulations adversely affect hospitals. While hospital patient volume remains unchanged, their accounts receivable, liabilities, and profitability deteriorate, with stronger effects for ex-ante higher financial liability and debt collector density. Consequently, hospitals reduce capacity, employment, and care quality, and steer patients to high-cost procedures. Additionally, non-profit hospitals reduce charity care for uninsured patients. Overall, ignoring spillovers of consumer financial protection laws on non-financial sectors may overstate their benefits.

Driving a Bargain: Negotiation Skill and Price Dispersion

Kristine Hankins, Tong Liu, Denis Sosyura

We show that individual negotiation skills affect equilibrium prices in societally important contracting. We develop a novel measure of managers’ negotiation skills from private vehicle transactions and link it to proprietary data on negotiated hospital prices. Higher-skilled managers negotiate better prices, suggesting negotiation skill is a portable asset. Management turnovers and shocks to insurer bargaining positions support this interpretation. We estimate a model to quantify the role of individual skill and find heterogeneity in negotiation skills explains 37% of the price dispersion attributed to differences in hospitals’ bargaining power. Overall, human capital is an important determinant of market-wide price dispersion.

Tunneling and Hidden Profits in Health Care

Ashvin Gandhi, Andrew Olenski

This study examines whether healthcare providers tunnel profits and assets to commonlyowned related parties by making inflated payments for their goods and services. Such practices allow providers to understate their profitability—which may encourage regulators to increase reimbursements and relax quality standards—and shield assets from malpractice liability. Using uniquely detailed nursing home financial data, we find evidence of widespread tunneling to related-party real estate and management companies. Our estimates suggest that 68% of nursing home profits are tunneled to related parties and that accounting for tunneled profits and assets raises the implied typical investment IRR from 4.83% to 13.11%.
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The (going) public option: Equity market financing in the hospital industry

Cyrus Aghamolla, Jash Jain, Richard T. Thakor

We examine the role of public equity financing in the hospital sector. We find that the transition to public equity markets by hospital systems leads to dramatic and persistent increases in profitability, net income, and net patient revenues for the system’s individual hospitals following the initial public offering. This increase in revenues is accompanied by expansions in both capacity and equipment, allowing hospitals to accommodate
more patients and increase service offerings. The results additionally show that recently public systems use the raised capital to accelerate acquisitions of hospitals located in close geographic proximity to hospitals already owned by the system. The expanded network of the system can help to explain the large observed increase in profits after going public—greater regional market power enhances the system’s bargaining posture with insurers, allowing them to demand higher reimbursement rates, thereby driving up prices for hospital services. These results improve our understanding of how access to public equity markets influences the healthcare landscape.

Financing Charity: Evidence from U.S. Hospitals

Katharina Lewellen, Giorgo Sertsios, Jiadi Xu

U.S. hospitals are expected to provide charity care—services delivered at below-cost prices—though the strength of this commitment and their funding sources vary across organizational forms. We study how the different forms respond to persistent increases in local demand for uncompensated care induced by immigration flows. Using historical immigrant enclaves to instrument for local immigration, we find that a 1% increase in immigration (relative to a county’s initial population) leads to a 2.17% decline in hospital bed capacity over ten years, driven primarily by nonprofit exits through closures or mergers. Surviving nonprofits experience declining profit margins and rising uncompensated care; they respond by reducing capital investments rather than raising external funds. Government hospitals absorb comparable operating losses yet avoid exit and expand market shares while for-profit hospitals remain largely unaffected. Our findings suggest that nonprofit hospitals face tight financing and operating constraints that limit their ability to absorb profitability shocks and sustain mission-driven commitments. More broadly, the results highlight how sustained increases in demand for charitable services reshape capital allocation and ownership structure in the healthcare sector.