Last fall, a Florida investment consortium bet $80,000 that Paul, a 33-year-old HIV-positive District man with an inexorably dropping T-cell count, wouldn’t grow old.
It seemed like a good investment at the time.
“The major problems for me were just starting,” Paul recalls. “I was tired all the time. I’d peter out for the day at 3 o’clock.” By wintertime, “I was throwing up every day and experiencing other problemsdiarrhea, things of that nature.”
Within the precise, almost clinical tone in which Paul describes his ordeal, you can hear echoes of the marble-floored foyers of the corporate world he inhabited in his working life. Until last winter. “I never threw up in front of anyone at work, but it got to the point where I was afraid of that happening,” he says. “Rather than contribute to an embarrassing situation, I left. After that, there was a month or so when I couldn’t leave the house.”
Paul was able to quit his job because he received a lump sum payout on his life insurance policy. In industry parlance, the Florida investors viaticated Paul’s policy, which is just a technical way of saying they bought his insurancepaid him a percentage of the policy’s face value up front and agreed to take over the premium payments for the rest of his life. They would cash in when Paul died, which seemed like a good bet given how sick he was last fall. In terms of investor optimism, this was the high-water mark. From that point on, the deal soured.
In February, Paul started a treatment program based on one of the new triple-drug combinations that have come to be known as “the AIDS cocktail.” Seven months later, he’s sitting on a Dupont Circle park bench on a recent Saturday evening watching the nightlife surge and flow around him. His eyes are alive and bright. His skin is clear. He’s sharply dressed, in black jeans and a white T. He fills them well.
“I feel 100 percent better,” he says. “I’ve been doing volunteer work, and I’m thinking of starting my own business.”
He might as well. He’s got the moneymoney that used to belong to the Florida investment consortium. Now it’s his.
Paul’s life insurance could have been a fantastically lucrative investment. The face value of the policythe money the investors will receive upon Paul’s deathis $150,000. If Paul had died last winter, the investors would have almost doubled their money. But every month Paul stays alive the return shrinks like paper on fire. If he dies in five years, the investors’ annual return will be around 11 percent. Ten years, and it’s down to 3 percent. If he ends up living to a ripe old age, they might as well have parked their 80 grand in a checking account.
Ten years ago this sort of transaction was all but unknown. But over the past decade, viatical companies have climbed the spindly back of the AIDS epidemic to form the basis of a nationwide industry that takes in hundreds of millions of dollars a year.
And now the industry is choking on the AIDS cocktail. With protease inhibitors, scientists are optimistic that AIDS is finally being transformed into a manageable chronic disease, more like diabetes than a death sentence. Paul and thousands of others like hima growing multitude of HIV-positive men and women who slowly but surely have been regaining their healthare on the verge of bringing down an industry that only a year ago was climbing to cruising altitude.
Paul has a hard time feeling bad for the people who bet he was not long for this world. “For me, it’s like the icing on the cake,” says Paul. “I’m like, ‘Thank you. Thank you very much.’”
The word “viatical” springs from the Latin viaticum, “provisions for a journey.” In medieval days, a viaticum was sort of a care package for monks who spent their lives traveling from one monastery to the next. So the story goes, at least.
Whatever. In its current usage, as applied to this practice and this industry, the word is without question the brainchild of someone with a born genius for euphemism. It’s a sweet word, a soft word, a safe and cuddly word, a word that utterly fails to convey the vampirism inherent in a transaction whose take depends on an AIDS patient’s sticking to the script and exiting, stage left, on cue.
Here’s how the viatical industry works. Say you’re HIV-positive and you’re sitting on a life insurance policy with a $150,000 face value, which is average for policies viaticated in the D.C. area. You decide to cash in. Maybe you figure the money you’re spending on premiums would be better spent on medicine or food. Or maybe you just want to move to Florida and live large in the time you’ve got left.
First you have to check whether you’re sick enough to sell investors on your policy. If you can’t prove that you’re at least within striking distance of the deathbed, they won’t be interested. They’re the ones who’ll be paying your premiums for the rest of your life, after all.
The No. 1 indicator of your condition is your T-cell count, a measure of the white blood cells in your immune system. The lower your T-cell count, the sicker you are. (A normal T-cell count is about 1,100.)
But the lower your T-cell count, the richer you can become: Sensing your imminent passing, viatical companies will bid competitively for your policy. “If you’ve got a T-cell count of 1,000 or more, we can’t do business,” says Bert Jaeger, president and owner of Viatical Benefits Foundation Inc., which, despite the name, is rigorously for-profit.
But that’s just to get in the door. A T-cell count just shy of 1,000 might attract a bid, but it would probably be down around 10 percent of the face value, or even less. You wouldn’t want to trade a $150,000 policy for $15,000 in cashunless you were desperate. To get a seat at the big-money tablewhere the bids range from 50 to 90 percent of face valueyou’ve got to be really sick, with a T-cell count of 300 or below.
To provide some perspective, the Centers for Disease Control in Atlanta consider a T-cell count of 200 or less one of the signs that an HIV-positive person has developed full-blown AIDS. This is generally the point where you drop weight and feel the full physical impact of the disease. (At his worst moments, Paul’s T-cell count hovered right at the 200 mark. It’s now 464 and climbing.)
So let’s say you know you’ve definitely got a salable policy. What next? Well, you have a couple of options. You could call a few of the major companies yourself and see if they’re interested. Or you could go to a viatical broker with experience in peddling death. For a cut, he will help you gather the required medical information, tweak it so that you seem as close to death’s door as possible, and then shop your policy around to viatical companies.
Either way, you’ll be filling in a lot of blanks. Because before these companies place their wager on your life, they want to know everything that could keep your heart beating. Have you had opportunistic infections such as pneumonia, tuberculosis, or shingles? AIDS-related cancers such as Kaposi’s sarcoma? What about neuropathy (extreme pain) in your fingers or toes? Skin lesions? Anemia? Any blood transfusions? How many? What treatments are you taking? Chemotherapy? Have you been hospitalized? When, where, and why?
The typical medical profile is 14 pages long, and the typical viatical company has a crack team of top AIDS specialists straining at the leash to pore over every page of it. Their job is to take your profile and reduce it to a single datum of overwhelming import both to you and to them: life expectancy.
Up until a few years ago, the viatical business spread by word of mouth within the gay community. Most of the playersthat is, the viatical brokers and owners of viatical companieswere themselves gay men who first learned about the industry when helping out HIV-positive friends with their finances. Being smart puppies, they realized the concept’s money-making potential and elbowed their way into the game.
And the money rolled in. Last year, for example, the industry viaticated almost half-a-billion dollars’ worth of life insurance policies, according to Ken Klein, president of two New York-based viatical companies. That’s about $150 million more than were viaticated the year before.
Naturally, big insurance companies soon wanted in. At first the old guard of the insurance industry dithered under the onslaught, seemingly unable to decide whether to welcome or fear the energetic new viatical entrepreneurs in their midst. There were a few nasty exchanges between the two camps. Viatical entrepreneurs accused insurance companies of undercutting the new industry because fewer AIDS patients were letting premiums slip near the end of life and thus losing policies. Insurance companies, while denying that viaticals were hurting their business, called for stricter regulation of the new industry anyway. (Washington state and Texas now require viatical companies to be licensed.)
Then in April 1994, CNA Financial Corp., parent of CNA Insurance Cos. of Chicago, jumped in the pool. It made a big splash, buying Viaticus, one of the larger companies in the viatical racket, and embarking on an aggressive bidding strategy. According to CEO John Banks, the company’s goal was to build a half-billion-dollar portfolio in five years.
Other viatical companies stayed independent and pursued other avenues to raise capital. Early this year, a San Francisco-based viatical company named Dignity Partnerships Inc. went public, selling 2.3 million shares of common stock.
Brian Pardo, president of Life Partners Inc., a viatical company based in Waco, Texas, predicted in an insurance trade magazine that viaticals would blossom into a $3- to $4-billion industry by 2000.
The excitement of a gold rush filled the air. And it wasn’t only investors who were cashing in. Fierce competition among new viatical companies created a seller’s market, and HIV patients with as much as a five-year life expectancy suddenly found themselves in a position to get rich quick. Especially if they had more than one policy to sell.
“The first thing I did when I learned that I was HIV-positive was to go out the next day and take out a bunch of insurance policies,” says Paul. (This was back in 1988, before insurance companies began specifically testing for the AIDS virus before selling policies.)
So far, he has viaticated five of them. His take: a cool quarter of a million. He bought a house about six blocks from Dupont Circle. He bought a brand-new sport-utility vehicle. He paid off about $20,000 in credit-card debts. And he’s still got a few life insurance policies tucked under the mattress. For a rainy day, you know.
What’s more, all this money has come under the table. He didn’t report any of it, and he didn’t pay a cent of taxes on any of it. “To tell you the truth,” he says, “I don’t know of anybody who’s reported any of this money to the IRS.” Which makes sensehow hard do you think the IRS is going to come down on somebody who’s dying of AIDS?
Even with the occasional scam, the viatical industry was growing like a weed, creating wealth as if by magic. Then in July came the AIDS conference in Vancouver. Talk about a black day for the money guys.
Fifteen years and a month after U.S. health officials first officially reported a strange new type of pneumonia among gay men, researchers had astonishing news to report. For the first time ever, AIDS patients’ T-cell counts were actually risingand their viral loads droppingfrom treatment. In a few isolated instances, researchers found no trace whatsoever of the virus in the blood of infected patients. The conference bubbled with measured giddiness. For a community long used to gloomy news and activists with police whistles, it was a nice change.
The news hit the viatical industry upside the head like a brick. “There was a precipitous drop in prices (that companies were offering for policies) across the board. It happened almost overnight,” says Klein.
For companies that had been collecting policies like trading cards, the timing couldn’t have been worse. “What these companies were trying to do was build large portfolios of policies so that they could get into an actuarial posture,” Klein says. “It’s like insurance. If an insurance company owned just one policy, and that person got hit by a bus, it would be a disaster. So insurance companies sell enough policies that they can create actuarial tables and manage the risk.”
You had companies with upwards of 10,000 policies in their portfolios, with each policy representing a significant unrealized investmentand suddenly their actuarial tables disappeared. The people behind the policies were doing something the companies had never contemplated: They were getting better.
Shortly after the conference, Dignity Partnerships, the company that went public this year, announced that it wouldn’t be buying policies from AIDS patients anymore. Overnight, its stock, which had been trading at a high of $14.50 a share, fell off the table and shattered on the floor, hitting a low of $1.38.
A sign of things to come? Asked whether some viatical companies are going to go down, Klein replies, “It’s certainly not unlikely. Because quite a few peopleGod blessare living longer.”
Many viatical companies are hanging their hopes for survival on the possibility of expanding into other terminal diseases such as cancer or heart disease.
Ron Chancellor, a District-based viatical broker, wishes them luck and thinks they’ll need it. “Cancer’s not predictable until the very end. You never know when somebody’s going to go into remission. Heart disease? It’s even less predictable,” he says.
Unlike other diseases, AIDS had a horrible predictability. “When someone has an exceedingly low T-cell count, they become susceptible to an array of opportunistic infections and AIDS-specific cancers,” says Dr. Timothy Price, who owns a practice near Dupont Circle and has many patients with AIDS.
By now people know that it’s not the virus itself that kills. By destroying the immune system, AIDS opens the door to myriad randomly striking infections. It’s generally these infections that do the actual killing. Before protease inhibitors came along, AIDS patients were reduced to praying that anti-retroviral drugs such as AZT would buoy their T-cell counts. Even with treatment, though, “you didn’t see rises in T-cell counts,” Price says.
All of which made it very easy for viatical companies to look inside a person and estimate when their time would be up. “Our ability to project life expectancy is the key to this industry,” says Klein.
Strangely enough, Chancellor’s business remains brisk. It’s a market thing, he says: With prices falling, people with salable policies are selling now rather than waiting. Chancellor says he’s been averaging about 30 to 40 clients a month.
And new investors, for some reason, keep putting money into these types of investments. “It does seem odd to me,” says Klein. “I do know, from what I see in the marketplace, that new money certainly is coming in. The only way I can think to explain it is that some of these investors are not getting all of the information they should be getting.”
And what if the new treatments indeed turn the virus into a manageable disease like diabetes? Won’t the bottom finally fall out of the bucket?
“It’s not going to happen,” says Jaeger. “Honestly, they’re not going to find a cure. I don’t think the government would allow it. They’ve got too much invested in the status quo.”
Jaeger has confidence born of experience. And he’s looking for new investors.
It’s easy to feel a wonderful sort of malicious gleethe Germans call it Schadenfreudewhen you ponder the crisis of viatical companies. This is an industry, after all, that fastened onto the AIDS epidemic like a leech and bloated itself on tainted blood.
But that would be too easy. The whole story is more complex. No matter what the motivations of the players may have been, the very existence of such an industry has meant freedom from stress and financial hardship for people living with a gun to their head.
Consider Steve, a gregarious man in his mid-30s. Earlier this year, he lost his assistant manager’s job at an Alexandria restaurant after big purple blotchesthe characteristic external sign of Kaposi’s sarcomashowed up on his face. His T-cell count was about 1.
With no savings and no job, Steve applied for disability and got a shock. “I found out there was a five-month wait before you could start receiving your benefits.”
But Steve was growing weaker each day, and decided he couldn’t wait five months for his next meal. So last March Steve cashed in a $40,000 life insurance policy with a viatical company in Arizona. He walked away with $30,000. He used the money to keep the wolves from the door until disability kicked in. He doesn’t think he would have made it through the summer without it.
In fact, there are thousands of Steves out there right now, trying to make ends meet while struggling to live long enough to take advantage of the new treatments. If it hadn’t been for the viatical industry, a lot of them would have been both dying and broke.
That said, though, you’ve got to laugh when you hear that Steve’s T-cell count has been climbing since he started taking protease inhibitors. Every so often he calls the viatical company that bought his policy just to tell them the good news.CP