Managing long-term risks of investments within the health care sector : - Supporting decision making processes using financial theory

Abstract: ATMP (Advanced Therapy Medicinal Products) is a new type of treatment with the potential to cure otherwise severe and even deadly diseases, for which there are only inhibitive medicine available. This means that the healthcare sector now have access to treatments that greatly increases the number of QALY:s received. However, the problem with the implementation of ATMP lies within the disparity between its large upfront costs and the return, which is spread over a long time-period. There is also the problem with lack of information, causing further risks when investing in ATMP. Seeing as the treatment is a “one-off” where the results are uncertain, and the costs are high and lumped together at the beginning. By constructing a laboratory setting we analyze the health evaluating outcome when changing endogenous variables and modelling scenarios from real world estimates, forming a hypothetical base case which represents the difficulty decision makers face when evaluating treatments with ATMP- characteristics. Furthermore, we find that there is a prominent cost difference between the two alternatives as well as an enhanced sensitivity to the methodologically execution. To mitigate the risk of these types of long-term investments we present different types of strategies, which are built upon financial theory by the utilization of options and swaps. We also suggest using these payment schemes based upon our results, this can open opportunities to elude the decision uncertainty present for these types of long-term investments within the public healthcare sector. Making use of real options and venture capitalist structures we present a variety of solutions that might be suitable for different types of scenarios and ATMP:s. These different types of payment solutions and risk mitigating strategies could potentially also be used in combination with each other depending on the availability of a counterparty and the duration of the contract. In conclusion, we find that financial theory can mediate decisionmakers in situations that suffer from ATMP characteristics. We find financial solutions that can price long-term uncertainty and alleviate irreversibility from decisionmakers. Relying on already preferred solutions in the health sector i.e., negotiated contracts and outcome-based payment structures, financial theory has the possibility to use public funds more effectively with mitigated uncertainty.