Basics:

A government financial guarantee legally binds a unit of government to take on an obligation should a clearly specified uncertain event materialize. Government financial guarantees are typically designed to improve (“enhance”) the credit quality of borrowers in order to facilitate their access  to debt markets that would otherwise be completely closed to them or to improve the terms of credit otherwise available to the borrowers.  Thus, with a government loan guarantee, the government commits to making loan repayments if the guaranteed borrower defaults, and will attempt to recover such payments from the borrower. Governments provide a wide range of loan guarantees (e.g., for farmers, importers and exporters, small business owners, home buyers, and post-secondary students). Governments also provide other financial guarantees, including exchange rate guarantees, income, profit and rate of return guarantees, and minimum pension guarantees. Government financial guarantees are a common feature of PPP contracts and other purchase arrangements between the government and the private sector.

Government financial guarantees are accounted for as  explicit contingent liabilities in government accounting parlance. Similar contingent liabilities result from such other government financial obligations as governmentally sponsored insurance schemes covering deposits, pension obligations, war-risk, crop and flood damage. It should be noted that pension and social security obligations of the government (as distinct from guaranteed minimum pensions under private pension schemes or government insurance of pension savings) are not contingent liabilities, because they can be measured with some precision with probabilistic tools such as actuarial tables.

 An implicit contingent liability arises when there is an expectation that the government will take on an obligation despite the absence of a contractual or policy commitment to do so. Such an expectation is usually based on past or common government practices, like providing relief in the event of uninsured natural disasters and bailing out public enterprises, public financial institutions, sub-national governments, or strategically important private firms that get into financial difficulties. The government may also be expected to cover some costs that are extraordinary (e.g., those related to war reparations, and national reconciliation and reunification).¹

 

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¹ International Monetary Fund.  Government Guarantees and Fiscal Risk. April 1, 2005. http://www.internationalmonetaryfund.org/external/np/pp/eng/2005/040105c.pdf

FHA began as a Depression era government guarantee program enhancing the credit quality of home mortgages and permitting the creation of the low cost, fixed rate, long term fixed rate secured debt market in the US. FannieMae and FreddieMac were developed as government-chartered financial institutions to purchase FHA-insured mortgages from the banks and thrift institution which had originated the loans, creating the flourishing secondary market of mortgages which is the cornerstone of modern housing finance. Government or other third party guarantees of medical borrowing similarly would permit access to lower cost and/or longer term capital by lenders, who can be expected to pass along those terms to borrowers.

Beginning as a response to the Sputnik launch, the US Federal Government’s assistance to individuals seeking access to low cost, long term, fixed rate unsecured debt for post secondary education has including a varying mix of interest rate subsidies and loan guarantees which continue today. The launch of Sallie Mae in 1972 provided the same kind of secondary market liquidity for student loans as that created for mortgages by the Fannie Mae and Freddie Mac. And this has set the stage for the bundling and sale into the capital markets as asset-backed securities which provides much of the capital for student lending today.

Business model: Possible use of Federal Government’s Sovereign AAA rating to help individuals access low cost, fixed rate, long tenor unsecured debt to pay for uncovered, non-elective medical expenses

Assumptions:  Government credit enhancement is a proven mechanism which has driven down the cost of secured financing for housing and the cost of unsecured financing for basic human capital investments such as post-secondary education. There is a public interest in making health care as affordable a form of human capital investment as possible.

The UK private finance initiative (PFI) provides a way of funding major capital investments, without immediate recourse to the public purse. Private consortia, usually involving large construction firms, are contracted to design, build, and in some cases manage new projects. Contracts typically last for 30 years, during which time the building is leased by a public authority. Periodic payments are made to operators contingent upon achievement of a wide range of construction and operating quality measures. There are incentives for exceeding performance bench-marks and penalties for failing to meet them. Concessionaires are typically able to raise long-term, fixed rate capital markets debt to finance facility construction and major maintenance, when it is secured by mortgages on the facilities and a senior lien on the stream of concession payments from the government.

The UK government and concessionaires argue that substantial life cycle savings are produced by such advantages of the concession system as the private sector’s ability to use advanced procurement techniques free of burden-some government red tape, attract better management than can typically be found for public and non-profit sector enterprises, etc. Skeptics point out that the higher costs of commercial financing, including particularly costly equity layers compared with direct government, may fully offset savings achieved with these private sector advantages. However, one clear advantage of this system of capital financing for providers is the steady predictable flow of concession contract payments which can be counted on to pay the debt service and fixed operating cost portions of the typical provider’s annual budget. This element of predictability is entirely lacking for most non-profit and for-profit healthcare providers in the US. If third party payors agreed to long-term “capacity” contracts with providers in the US, an analogous element of badly needed predictability could be provided to US. Such a change would require third party payors to think in a fundamentally different way about providers’ and their financial needs, essentially splitting the debt service and fixed operating cost elements from the variable operating cost elements.

Business model:  Healthcare providers face demand risk and minimum revenue guarantees, variable concession tenor extensions and related devices can be helpful in mitigating these risks, reducing the costs of long-term capital for providers and ultimately the cost of medical procedures for consumers.

• Anticipation of Out of Pocket Revenue and Expenses for Providers and Consumers
• Smoothing the vicissitudes of  individual financial context in the face of the cost of healthcare events
• Visible gaps between what insurance covers and the hard costs of healthcare
• Balance of sharing risk at micro level while managing risk at macro level
• Integrity in the calculation of risk
• New Alliances
• Intermediation and disintermediation
• Transparency across pricing
• Realignment in risk of collections