Savings Through Free Trade - Importing Doctors

Why does the US need to import doctors? First, to lower the prices of medical services that are vastly inflated relative to peer economies as a result of an engineered shortage of doctors. And second, to improve (or even maintain) access to doctors as need for their services expands due to the rising numbers of the elderly, and health reforms covering the uninsured.

According to the OECD Health Data 2009 the US has 2.4 doctors per 1000 people, compared to the OECD median of 3.4. Even this doesn't reflect the true differences in availability, as US doctors on average spend less time seeing patients. This is due to more of their time being wasted dealing with complex insurance plans, regulations and payment procures, and the practice of defensive medicine. The US also has a higher proportion of women doctors (who typically work shorter hours).

The WSJ on April 12 reported on a looming crisis of doctor shortage. But Dean Baker in his April 16 critique pointed out that neither the Journal nor experts talk about the protectionism that brings this about, or the obvious solution of allowing in foreign doctors. Here are answers to typical questions and objections over just this proposal, from genuine doubters as well those benefiting from physician scarcity:

• a) Adding doctors won't save money, as more of them peddling their costly services will instead add to the overall cost. This is the (unfounded) logic of "supply-induced demand" as in this rather shallow and disappointing McKinsey Quarterly December 2009 article on managing the clinical workforce. This and even Clay Christensen in May 2009 argue that having more doctors will increase use of their services and further inflate the bill. If this analogy holds, our energy costs should shoot up when there is a glut of natural gas, or of crude oil. Countries like India and China with their vast work force should have the highest labor costs. Exactly the opposite happens, because prices drop a lot more than demand rises. This is also the case with medical services for which (as economists will say) the demand is not very elastic. Another fact contradicts the McKinsey and Christensen assertion. In their world the surplus doctors should be readily accessible to patients. Instead, US patients typically face wait times stretching to several weeks to see their doctors, including specialists.

• Doctor scarcity is not the reason for the high cost of their services. After all countries like Japan, Singapore and UK have the same or fewer doctors. This argument overlooks two things. First, in all these countries it's the government that pays most of the bill, and doctors tend to accept whatever price is decided by the government. Second, simple payment and regulatory structures ensure that their doctors spend most of their time attending to patients. This vastly increases their actual capacity of collective medical services, eliminating the kind of "scarcity premium" that their US counterparts command.

• The brain drain of importing the best doctors does their countries of origin a disservice when they are facing acute doctor shortages themselves. Such concern for developing countries by US doctors is like US workers opposing imports out of professed concern for foreign workers toiling in sweat shops. Dean Baker in a May 18, '09 article "The Health Care Industry: Protectionism the Free Traders Love" suggests the US pay "a fee to compensate for the medical training offered to foreigners, so that two to three doctors could be trained for every one that practiced in the United States." But even this is unnecessary. The investments in and remittances to their home countries by such doctors in well paid US jobs would generate enough resources for this task anyway. This is typically the case with other immigrant professionals from other developing countries - why should this be any different here?

• These well paying and good American jobs should be preserved for Americans, and not go to foreigners. At present we do not have enough Americans for such jobs. Over a fourth of our doctors are foreign born even today, except that we are only taking them in as residents whose total numbers are capped to artificially constrain supply. The result essentially is that foreign medical residents displace Americans from those coveted slots. Importing fully trained and experienced doctors on the other hand will actually increase overall supply. Consider also the indirect but heavy impact of sharply lower health care costs through such a step. This can make hiring US workers cheaper for employers and increase their international competitiveness. This can create millions of additional jobs as compared to, say, the 100,000 doctors needed to be imported to relieve doctor scarcity.

• Why import doctors? Why not take in more Americans to make them doctors? See answer above. But yes, our long term policy should be to ensure that future requirements are met internally, and our educational and training efforts are expanded accordingly. More on this later. When - and if - we finally decide to sufficiently increase domestic supply, it'll take a decade before the first of them start to practice. Then it will be another decade or more for the deficit to be corrected. By bringing in qualified foreign doctors we can have enough within a year or two.

• Doctors are NOT overpaid due to scarcities. They face high education debts, long years of training, and malpractice costs. And now Medicare cuts are further squeezing them. Going by media accounts of Medicare cuts and hardship stories it would appear that doctors are facing tough times and their earnings are getting squeezed. But a closer look at CPI data by category shows that medical professional earning rates have risen at one and a half times overall averages (3.19 times 1982-84 rates as against 2.14 times overall.) Even in the past 2008-2009 recession period, when the overall index declined by 0.4%, medical professional services rates increased by 2.7%. The official statistics data also shows how US doctors earn twice as much as their West European counterparts. Their average education loans of about $100K - $150K on completing training are comparable to those in other disciplines, and amount to about 6 months of their starting income. Further, as described in my March 1 post, the HHS and CMS haven't bothered to check and correct numbers, and US doctors on average earn much more in reality. Of course, once they are used to such compensation levels, any correction, however justified, is met with considerable angst and opposition.

• Foreign doctors unfamiliar with US practices, regulations and the English language may provide substandard care and put US patients at risk. This is protectionist propaganda at its best, cloaked in feigned concern for patients. Here you have the chance to attract the best and brightest experienced doctors from around the world. How then do you expect them to be inferior to the average domestic physician? Suitable systems and criteria can easily be set up to ensure that the approved doctors are the same or better than domestic ones. They can be required to have been educated and trained in one of the approved list of the best foreign medical institutions. They should pass rigorous Board and competency medical exams, as well as clear a test of English. They can also be required to possess some minimum experience, and their visas be tied to their practicing in designated under-served areas.

A logical and effective way to import doctors is for the federal government and Congress to lay policy, make the necessary legal and regulatory provisions, and orchestrate the initiative. But if politics come in the way, the states also can make changes on their own for some of this happen. For instance, as mentioned in my April 30 post, the states can allow foreign doctors possessing the right qualification and under conditions that they stipulate, to be licensed to practice. This will doubtless face vociferous objections and vigorous lobbying by domestic doctor bodies, but can help solve states' shortages and increase leverage in setting medical service rates. In this scenario the foreign doctors will still face visa issues, but some can find their way in, for instance, by marrying US citizens or permanent residents.

Allowing in foreign doctors can have a silver lining for US doctors who find greater opportunities to work abroad and make this more of a reciprocal trade.  How?  Many reputed foreign medical facilities will strive to be included in the US approved list of those whose doctors are allowed to practice in the US.  This will be like a super-certification, better than the JCI, which lends added prestige and recognition to the foreign institution, even for its home clientele.  Such facilities will seek US doctors who can enhance their standing, spread awareness of the best US practices and procedures, and thus help these institutions to obtain the coveted accreditation.  This will vastly increase the demand and employment opportunities abroad for US doctors.  Still, this may not fully offset the effect of improved US doctor supply in reducing "excess" earnings here.  So political leaders will still need the courage (and public pressure) to do the right thing in the face of opposition from a powerful lobby.

How many doctors do we need, and what are the expected savings and other benefits? If we want to increase availability from the current 2.4 per 1000 people to 3.0, that will be an additional 25%, or close to 200,000 additional doctors.

For projecting savings, a narrow way is to assume that we will then have enough doctors to implement the sustainable growth rate formula (SGR) for Medicare rates. According to the SGR (much decried by the AMA and other doctor bodies) Medicare rates for doctor services were to be cut by 21.2% this year. As in prior years, due to protests by doctors and the fear they will turn away Medicare patients, this cut has been temporarily suspended by Congress. Instead, it has been replaced with a 2.2% raise through November, amounting to a 23.5% difference. Even such reduced Medicare rates compare favorably with payments in West Europe, for example of about 25 euros for a primary care doctor office visit, and 40 euros for a specialist.

Private insurers' rates tend to be negotiated as a premium on the Medicare rates, so overall expenses can drop in the same proportion as Medicare's. With physician and clinical services making up 21% of the health care bill, a 23.5% reduction would amount to $109 billion in 2007. Adding back the costs of the additional doctors the savings may drop to "only" $79 billion, or $1.26 trillion over the next 10 years, half of it in public spending.

But correcting an imbalance in doctor supply can do a lot more than reduce payment rates. It can make doctors available for a new approach that utilizes their services more efficiently. The present fee for service system rewards excessive treatment, creates adverse incentives for providers, and raises costs. Doctors and their staff also waste time and effort chasing payment for services rendered, maintaining accounts and in related administrative work. But it pays very well, so it's hard to recruit doctors for alternative systems, for example, where they work on a base salary averaging say, $150K a year for primary care providers and $200K for specialists, with a target bonus of 30% based on criteria like the number of patients seen, quality and patient satisfaction scores, etc.

Having enough doctors may enable a switch to this model that enormously lowers costs while maintaining or improving patients' health. And in exchange for a lower but steady pay check, doctors will bear much less administrative burden and business worries, and can devote more time to patients in an improved environment. They will still earn substantially. Consider hypothetically if all one million doctors (800K currently plus the additional 200K) were put on salary with average annual pay and benefits of $400K each. This totals $400B going forward, as compared to the tab of $479B in 2007.

Savings Through Free Trade - "Their" Hospitals Here

Of the four modes of trade in health care services we saw how the first (telemedicine) and the second (medical travel) can together save the US well over a trillion dollars in ten years. But they have a key limitation.

That is, the major chunk of health care services still cannot be delivered here remotely, or obtained by patients going abroad. Even if medical travel is nurtured and allowed to mature, over 80% of hospital care will still be availed domestically. This is where the third mode of trade, namely foreign entities setting up hospitals in the US itself can play a key role. How? Primarily by applying the same innovations, practices and experience domestically that enable hospitals abroad to thrive while charging a fraction of the typical US prices.

Let's revisit some instances, starting with my personal experience. Instead of the $1000+ typically paid per MRI in the US, we paid between $80 and $160 each for my in-laws' MRIs (including radiologist fees) in Pune, India. US providers frequently cite high capital costs to justify their pricing, but the Indian providers used the same MRI machines. My father-in-law's 25 day hospital treatment and stay including two major surgeries cost just $6K in Pune, India, compared to a $200K+ expected tab at "negotiated" rates in the US. A heart bypass or a heart valve procedure costs about $8K each in a top JCI approved facility in India, compared to about $60K and $100K respectively in the US.

This UK TimesOnline May 14, 2010 article about Dr. Devi Shetty builds on a Nov. 25, 2009 WSJ report, describing his "assemby line" no-frills approach to heart bypass surgeries. It reduces average costs to just $2K, while bettering overall US outcomes. At the more luxurious facilities like the Asia Heart Institute in Mumbai the mortality rate for these surgeries is 0.6% - 0.8% which matches the best in the US, at the Cleveland Clinic and the Mayo Clinic.

Now Dr. Shetty is setting up a 2,000 bed hospital in the Cayman Islands, primarily to serve US medical travelers at much lower prices than back home. An obvious question is, why aren't foreigners setting up such facilities right here in the US, making them more convenient and accessible to patients, and serving far higher volumes? The reason is onerous legal and regulatory barriers to starting of new hospitals. These restrictions are a lot worse when foreign entities are involved - as a result, I am not aware of the existence of any foreign owned hospitals in the US.

It is important to note that we need more hospitals regardless of ownership simply to reverse the trend since the early 1990s of hospital consolidation that have jacked up prices. A February 2006 RWJF report finds (p. 4) that 90% of MSAs (metropolitan areas) face concentrated markets. This results in at least a 5% price increase (may be a lot more) purely due to this lack of competition. But foreign-run hospitals with their overseas experience and cost efficient practices introduce a whole new dynamic that will likely drop prices much more dramatically.

Some policy changes needed to increase hospital supply, particularly with foreign participation, are:

• Easing the process and shortening the time line for approval. A February 2007 CFR report describes the policies around foreign ownership of US infrastructure that includes hospitals. In response to the 9/11 attacks the February 2003 National Strategy for Critical Infrastructure and Key Assets specifically mentions hospitals (p.41). It makes perfect sense to ensure that key hospitals that are owned by US entities are there to cope with any mass crisis. But if foreign owned hospitals are simply adding to this core health capability, why restrict their entry or discourage it with a torturous, uncertain process of scrutiny?
• Creating standard guidelines and norms, and identifying under-served or non-competitive areas where foreign hospitals are encouraged, facilitating quick approvals.
• Doing away with state regulations that hold up hospital creation in general, like the CON (Certificate of Need) laws. The rationale cited for these is to restrict hospital build up and expansion that may push unneeded services on to patients, in order to utilize the extra capacity, thus raising costs. But such restriction cause greater damage by reducing competition. They make as little sense as for the government to disallow more auto factories, or more planes for airlines, or to needlessly trip up free markets in other ways.

Another question is, if foreign hospitals can be so cost effective, can US hospital managers copy their practices to rejigger existing hospitals or set up new ones to be just as economical? Then costs can be controlled just as effectively without the need for foreign entities to set up shop here. The answer: while this is theoretically possible, it's very unlikely in practice (except for the caveat below in the concluding para.)

Why? First, because incumbents need to unlearn many or most of the ways they've operated all this while, and then internalize and implement radically different procedures. Second, they'll be weighed down by their own legacy of decisions and agreements with constituents like health worker unions. For example, a cardiologist had told me years ago how he could schedule 20 patients a day for nuclear stress tests on the expensive equipment in his own clinic. In contrast the hospitals typically scheduled only 5 or less patients daily, due to lack of flexibility in functions and procedures agreed upon in collective agreements with their staff.

In contrast, foreign management may far more easily adapt their low cost systems to accommodate US regulations and circumstances. It's the concept of reverse innovation that includes GE inventing the hand held ECG and portable ultrasound machines in India and China respectively. These cost a tenth of the traditional versions, and have now been brought into the US market. Another example: the Tata Nano is a $2,500 car developed in India, and is coming into the US with adaptations and a $4,500 price tag - still much below anything attainable by US manufacturers.

In the service sector too traditional companies typically fail to match innovative rivals using disruptive systems, even when they have a chance to study the new systems. Delta Airlines and United Airlines sought to create "an airline within an airline" with their Song and Ted subsidiaries respectively, in an effort to emulate the success of SouthWest Airlines. Both failed as have almost all similar efforts by other airlines.

All this underscores the advisability of letting foreign hospitals enter the US market.

What are the potential savings? As we have seen, just the re-introduction of competition in the concentrated hospital market saves at least 5% through hospital price reduction. From NCHS (CDC/HHS) health publication 2009 (Table 127) this shaves off $35B from hospital expenditures in 2007, or $545B over the next 10 years, half of it in public funds. The CBO tends to restrict savings projections to hard data so it may concede only this amount.

But the actual savings are likely to be much higher. These will partly be from reductions in payments agreed to by foreign-run hospitals and the rest from sea changes forced upon traditional hospitals through increased competition. European hospital prices are almost 50% less than in the US, so it is realistic to expect price drops halfway to that level, or 25%. That will be savings of $175B in 2007, or $2.73 trillion over the next 10 years, with $1.36 trillion in public funds.

But didn't I say earlier that US hospitals would resist drastic changes? That won't hold when their very survival is threatened, as when foreign competitors move in. In that case they will have to change, and can recruit foreigners or outsiders as advisers or senior management to help make the transition. To see a parallel, this has recently happened in the US auto and the airline industry. The prospect of foreign presence and forced change leading to dramatic price drops may not be eagerly welcomed by the domestic hospital industry, but it will be of great benefit to nearly everyone else.