As far as my knowledge goes, a "collateralized debt obligation" (CDO) restructures existing bonds into "layers" of debt whereby each layer has similar kinds of bonds with similar kinds of features in it. So, for example, the lowest layer could be the riskiest layers where borrowers are expected to default the most and the uppermost layer would be one where borrowers with relatively higher credit scores would be placed. These are then sold forward to willing investors. These CDO's can be further restructured into a synthetic CDO but lets not get into that.
So now, a "credit default swap" (CDS) could be placed against a CDO thereby insuring against a loan default. So, for example, if a collective bunch of loans in the bottom most layer go bad within the stipulated time, then the insurer (bank) would be forced to pay back to the insuree (any third party).
Now, lets take the scenario of a hospital with cancer patients from Stage 0 to 5. A third party comes up to the hospital and asks the hospital to restructure the cancer patients files into "tranches" such that Stage 5 patients would be at the bottom most layer and Stage 0 at the top. He would then like to buy an insurance against the bottom most layer for a period of 1 month. So, if the insured layer goes bad in that month (which basically means a certain number of people in that layer die), the hospital would have to pay him back 50X the premium amount. The hospital could even create a separate financial subsidiary to carry out the above task.
Of course, this is completely unethical and really sad. My question is: What stops this from happening? Why is it seemingly okay to do this on a housing loan but not medical patients?