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.