Costly Nelson Eye On Free Trade

In 1801 Horatio Nelson put a telescope to his blind eye to disregard signals to retreat from a naval battle.  His valor resulted in a crucial victory over the French fleet.  But the US turning a Nelson eye on solutions through free trade in health services is an act of cowardice and cynicism.

The "W" Bushies are also guilty of such neglect after the benefits of trade grew with the proliferation of world class medical facilities abroad, and the advent of the internet and better communications.  But the failure of Obama's team is more poignant when new laws covering the uninsured add to overall costs, as well as to the scarcity (and resultant leverage) of domestic providers.   

On trade in health services, Prof. Bhagwati and I in mid-2008 highlighted promising approaches and reiterated these in my December 2009 post. Four subsequent posts have elaborated on each category (or mode) and quantified potential savings.  The overall picture is compelling.

Highly qualified foreign doctors who have cleared the required US medical board exams can remotely consult through video-conference with a nurse at hand to assist with the patient, if necessary.  Diagnostic radiology does not even need direct patient contact.  This type of telemedicine can easily replace a fourth of primary care visits and diagnostic radiology readings, as well as a tenth of specialist visits, and all at a fifth of the cost.  This will not only help meet the crisis of additional demand due to health reforms and an aging populace, but also save $16B in 2006 terms.  This translates to $267B of savings over the next 10 years, $133B in public funds.  Even the states can authorize telemedicine within their areas, if the federal government doesn't act.

 In medical travel, US patients go to reputed hospitals abroad for major surgeries and medical procedures, often performed by US or UK trained doctors, at a fraction of the cost.  The movement can receive a huge fillip if lawmakers and the leadership reduce legal exposure through legislation, create protocols and procedures to select and qualify foreign hospitals, and identify procedures to be covered.  They should also send publicly funded patients and lay down the incentives for such patients to volunteer, so that private insurers can follow suit and get legal cover.  There are some 30 major procedures costing $300B in 2007 terms that are suitable for medical travel.  Assuming a fourth of these are off-shored the savings are $57B annually in 2007, which comes to $950B over the next 10 years, half of this in public funds.

The third way of trading in health services is to allow and encourage foreign entities to set up hospitals here.  This will allow under-served areas to be covered and introduce greater competition in MSAs, 90% of which face highly concentrated markets for hospitals.  But most importantly, this will bring badly needed reverse innovation to the egregiously expensive and inefficient US hospital system.  Policy changes needed include easing the process and shortening the time line for approval, creating standard guidelines and norms for facilitating this, and doing away with state regulations holding up such hospital creation.  The resultant savings due to competitive pressures and forced changes bringing US costs halfway down to European levels (or "just" 1.5 times instead of being twice as high) are $175B in 2007.  This comes to $2.73 trillion over the next 10 years, with $1.36 trillion of this in public funds.

The final piece is allowing highly qualified foreign doctors trained in one of the pre-approved list of accredited foreign institutions to practice in the US, without going through a US residency.  Other conditions can be imposed on them, like requiring them to clear the required US board exams, or tying their visas to practicing in designated under-served areas.  This will immediately boost doctor supply and should be undertaken in parallel with expanding the domestic pipeline that will start having an impact in 10 years. The US has 2.4 doctors per 1000 people compared to the OECD average of 3.4.  Boosting this US ratio from 2.4 to 3.0 will require 200,000 additional doctors, but this increased number will ensure better access by patients, as well as reduce the scarcity related prices for doctor services.  If these prices go down by 23.5% to the Medicare rates dictated by the (never implemented) SGR formula that are still generous by European standards, then the savings are $79B in 2007.  That is $1.26 trillion over the next 10 years, with $630B of this in public funds.

Therefore apart from the vital increase in access to badly needed services by US patients, the total savings from all four modes of trade are estimated at $5.2 trillion over the next 10 years.  Nearly half of this or $2.6 trillion will be in public funds.  To get some perspective, compare this with the $1 trillion projected added cost of the health reforms bill that created such a firestorm among Republicans.  Had they faced the trade option squarely (requiring them to face down their health industry lobbies which is why they didn't, of course) we'd have saved substantially even after the passage of health reforms.

There is hope yet.  Dr. Donald Berwick's appointment as Director of CMS (during Congressional recess, over Republican objections) is a positive development.  He has studied and talked extensively about the merits of foreign health systems, including Britain's.  If he can look not just at these systems, but to them for solutions (and carry the political will of the Obama team with him) then a lot of these desirable measures can become reality.

Trade of course is not the only answer.  Several unrelated domestic policy initiatives can make a huge difference (more on these later.)  But its potential and benefits are so large that Obama and the lawmakers should urgently look at it - with their good eye for a change - and act accordingly.

Medical Billing Tricks From Up Close

I had of course read accounts like the $75 to $129 hospital charges for a box of tissues. But even somewhat less eggregious billing tricks make you sit up when they affect immediate family. Yesterday I heard of two such instances from my father and brother who live in the (California) Bay Area.

Story 1: My father has been getting hormone suppressing injections of Lupron at Stanford Hospital to treat prostate cancer. A dose of about 22.5mg given every three months was being billed to Medicare for about $1,800. This price is somewhat on the high side considering that it is freely available online in the US for about $1,250. And in India a generic version made by the reputed Wockhardt company has been sold since 2002 for about $140 for the monthly 7.5mg dose, or $420 for three months. So we were surprised to learn that the price of this injection has been almost tripled to $4,800 for the three month dose.

Medicare paid almost the entire amount billed, so my father was hardly affected. But like him enough of my father's urologist's patients noticed these dramatically increased charges to Medicare to enquire about them. This doctor is excellent, and he called the hospital administrative point person to find out what was going on. He was advised "not to worry about it" as this "was a management decision." In other words, the hospital simply jacked up the rates and hit pay dirt, including with Medicare and the taxpayer's money.

Story 2: My brother told me his wife Deanne's car was rear-ended at high speed by a teen-age driver. Her Audi S4's rear as well front scrunched like an accordian (since the impact caused her car to hit the one in front of her) but did its job in protecting her. She heeded the advice of the paramedics called to the scene and was taken to El Camino Hospital to ensure there weren't internal or whiplash injuries. A doctor examined her and ordered a blood test to ensure she wasn't pregnant since X-Rays can harm a fetus. (I thought a simple pregnancy kit can do the job but never mind.) Deanne then had a couple of X-rays taken which didn't show anything abnormal, and was out within an hour of having first entered the emergency room.

The hospital bill for this was $5,000 though they received "only" $1,500 at the discounted insurance rates. The surprising part was the cost of the blood test. The same hospital has in the past ordered these at the adjoining Quest Diagnostics lab which bills $220 and receives a payment of $110 for these services. But this time the attending doctor ordered the test to be done in the hospital's own diagnostic lab. They billed over $1,000 - the amount a hapless uninsured or self-paying patient would have had to pay for this simple test, though Deanne's insurer paid at the "in-network" rate of $110.

Why should the hospital lab charge such exorbitant amounts, that ambushed uninsured or "out of network" payers would be fully on the hook for? Even the negotiated rate of $110 is quite high. In contrast, my in-laws in Pune, India pay only $30 for a far more extensive blood and urine routine. This even includes two home visits by the technician (since my in-laws are largely bed-ridden) to collect samples while fasting and then eating something.

Both of these stories show how providers can and do game the system. Patients and payers have a very limited set of hospitals in the vicinity, and these keep pricing opaque while raising rates at will. Reforms and regulations should put an end to such price gouging, and Medicare as a major payer should be allowed to directly negotiate drug prices. Yet the opponents of reform mislabel the present system as a "free market" and the recent medical overhaul will do little to check such practices. The budgetary crisis and pressures from the crushing health care burden will hopefully allow follow on measures that change the situation.

The first case of Lupron over-pricing also points to administrative lapses by Medicare. I'd have expected their payment systems to automatically flag claims where prices were so high relative to drug costs, rose suddenly or were out of whack with those from other institutions. That's even if Stanford Hospital had tried to disguise its moves through some clever upcoding to beat detection software. Donald Berwick has now been appointed Director of CMS and Obama has been in office for almost a year and a half. So such weaknesses should be fixed quickly - you can't keep blaming these on your preceding Bush's team forever.

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.

Savings Through Free Trade - Medical Travel

Medical travel is the second (and most talked about) of the four modes of trade in health services envisaged under GATS. It's also popularly called medical tourism, a term the industry wants to change, to stress the more serious treatment aspect over any incidental entertainment or sightseeing.

While the first mode telemedicine described earlier is an alternative for some doctor office visits, medical travel does the same for some costly inpatient hospital procedures. Its potential was touched upon in our December 10 overview. Here's a further and updated look.

The main reason for outbound US medical travel are cost savings, which can be up to 90% for a destination country like India. This holds even for procedures performed by US or UK trained and certified doctors in JCI accredited hospitals, with outcomes at least as good as back home. Naturally, only patients who have strong financial or other incentives (not just to save their insurers or employers money) will opt to go.

So far almost all US medical travelers have been the self-payers, either the uninsured or those coming for cosmetic or dental procedures not covered by their insurance. This is a sliver, estimated by Deloitte to be 878,000 in 2010, of the total potential clientele. After all, even among the uninsured who are 15% of the populace or 45 million, less than a third can afford to pay the still significant sum up front for travel and treatment abroad.

Medical travel's ability to significantly address US health costs will be unlocked only if the largest payers (private insurers, employers and public agencies) sign on. They can induce their patients to voluntarily opt for medical travel by passing on some of the savings. But they haven't done so yet. Why?

Private insurers and employers are most worried about legal and PR exposure if some surgeries abroad end badly (which is inevitable, even if complications occur at much below US rates.) These payers fear multimillion dollar lawsuits in which capricious juries may side with their "home boy" plaintiffs regardless of the merits and the precautions taken. Even a few "jackpot" awards can wipe out the entire savings, not to mention any fallout from adverse publicity. In analogy to G.W. Bush paraphrasing the IRA on terrorism, trial lawyers just have to get lucky once, while defending payers have to win (almost) 100% of the time. Given the almost random outcomes of jury trials, successfully defending all cases is a tall order, and in any event involves high legal costs.

Prior safeguard or dispute resolution agreements are of limited value as courts may rule that patients cannot waive their basic right to sue in US courts. Then there's the problem in getting patients to volunteer through financial rewards, like passing along a portion of the savings to them. Even when it's purely voluntary, such financial incentives can be portrayed in malpractice lawsuits as coercive or unduly influencing patients.

There are also other reasons why private insurers hesitate to embrace medical travel:

• Fear that the lure of financial gain may cause patients otherwise hesitant or on the fence about undergoing procedures to go for them along with the medical travel option. This can increase expenses and offset some of the savings. (This is largely fixable through a proper screening, eligibility and incentive design process.)
• Collective inertia among the oligarchs (the major insurers) who feel that their launch of such an initiative will trigger similar actions by their rivals. Thus their potential gains are reduced through the resultant competitive activity, so the effort isn't worthwhile.
• Where insurers are merely administering plans and passing on the costs, say to the self-insured employers, they may have little incentive to push such innovation.
• Insurers are aware that health reformers will push them to lower rates, and are holding such options in hand to use only when these exigencies arise.

The government agencies like CMS have neither legal exposure nor many other private payer concerns as an impediment to the medical travel option. Juries identifying with taxpayers are less likely to award huge payments to plaintiffs that come out of public funds. Public agencies also lack the motive to profit from misdeeds or to cut corners to save money that can form the basis for punitive damages.

But the government and the lawmakers have very different, political and protectionist reasons for staying clear of medical travel. US providers portray foreign medical travel in protectionist terms as loss of American business and jobs. They also raise concerns (sometimes ignoring the facts) about the quality of treatment overseas, and lack of recourse of aggrieved patients to US courts. Their most potent weapon of course is their lobbying and financial clout with Congress and the administration. It's primarily for this reason that you don't hear anyone in CMS, HHS, the rest of the Obama administration as well as in Congress seriously considering the medical travel option.

All this may change as sky high prices, domestic supplier shortages, the health costs related crises in federal and the states budgets, and public awareness trumps the current political nexus. If the government acts effectively on medical travel this will not only save taxpayer funds and benefit publicly funded patients, but also pull along the private payers on this. Here's how:

• Medicare and Medicaid should create protocols to select and qualify foreign providers, identify procedures to be covered, offer financial and other incentives for patients to volunteer, track and disseminate quality and outcomes information, redress treatment problems, etc.
• Private insurers and employers strictly following the same (or better) practices and procedures will get legal cover from adverse outcomes beyond their control. Besides, if the government agencies are doing it, then private payers will also be shielded from adverse publicity or allegations of insidious motives.
• The lawmakers and the administration should pass measures reducing legal risks and costs for public and private payers adopting and implementing this option in good faith. These steps can include laws to restrict jury shopping, requiring arbitration by bodies set up for the purpose, limiting damages and imposing malpractice caps. Such laws will need to be carefully crafted to avoid being struck down as unconstitutional by the courts.

So what are the expected savings from medical travel other than for cosmetic, dental and medically unnecessary procedures? Prof. Jagdish Bhagwati and I looked at all the major surgical procedures and identified 30 that are suitable for medical travel to places as far as Asia. These cost at least $25,000 each, are commonly performed, involve standard techniques, have quick recovery times, and are typically one-time surgeries.

In 2007 these 30 procedures cost a total of $300B. Assuming 25% of patients of these procedures opt for medical travel, the direct savings are $57B annually. The data sources, assumptions and basis for calculations are described in the footnote below. This does not include the effect of lower US prices as a result of competition, or medical travel for smaller procedures to Mexico from border areas like California and Texas. It also excludes possibilities from ideas going as far back as 1993, like hospital ships catering to coastal cities like New York.

Over the next 10 years the savings come to $950B, about half in public funds. Looked another way, these direct savings in public funds from medical travel alone meet half the projected cost of the recently enacted health care reforms.

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Footnote: Data sources, assumptions and calculations leading up to the projected savings from medical travel:

1) The online query system HCUPnet (part of AHRQ in HHS) is used to get the statistics on all hospital procedures. This includes the aggregate charges for all hospital stays, their breakdown by procedures under the simplified CCS categories, the number of each principal procedure and mean charges per procedure. These are for the latest available year (2007).

2) HCUP only has hospital charges (billing), not the actual payment to the hospital, which is less than what is charged. On the other hand HCUP charges do not include the physician (surgeon, anesthesiologist, etc.) fees that make up almost a fourth of the total payment, which we need. So we need a factor to reduce the charges to actual estimated payments, and then add back payments to physicians.

3) To get the factor in (2) above we compare the aggregate civilian hospital charges for all stays nationally ($1,032B obtained from HCUP) with the actual hospital expenditures obtained from the NCHS (CDC / HHS) Health publication, 2009 ($696B from Table 127, less $38B for VA hospital expenses, equals $658B). This gives us the overall conversion factor of 64% to convert charges into actual payment received by hospitals. We then take physician fees to be added to be 30% of hospital payments, or 23% of the total payment.

4) From the list of the top 200 procedures in HCUP nationally we select 30 that meet our selection criteria. These include a minimum cost of $25K in the US, no need for a subsequent procedure / trip, short recovery time allowing the patient to return to the US within a month, and only highly standardized procedures (e.g., excluding cancer treatment where better US care may be available.)

5) Our total cost of overseas treatment is based on package rates (including air travel and hotel stay while recuperating) to the most popular JCI accredited medical travel destination hospitals in India with US or UK certified / trained physicians. Savings for other destinations like Singapore, Turkey or Costa Rica will be lower.

Savings Through Free Trade - Telemedicine

You've probably heard it often. The recently enacted health reforms are great for increasing coverage of Americans, but not (in Obama's words, despite his assertions) for "bending the cost curve." The HHS experts said they will actually increase costs (though there are benign views of this). Millions of the newly insured will also further strain our health resources.

To lower costs, plus improve access and quality, Prof. Jagdish Bhagwati and I have long espoused free trade in health care. Here's a closer look at telemedicine, the first of the four types of trade in health services.

There is a commonality in these true-life (except for the last) stories:

• Our older daughter Sheena was visiting us on a Thanksgiving weekend when she developed high fever with chills. I took her to our Danbury Hospital emergency room. A physician's assistant examined her, ordered chest X-rays and preliminary treatment while consulting with the supervising doctor (who subsequently billed for his services). She was diagnosed with pneumonia, and three hours later we were back home with prescribed antibiotics that subsequently cleared her condition.

• Our younger daughter Rubina had an MRI taken of her injured knee (all fine now) at St. Luke's Hospital in New York. Of the payment of $2,000 for the MRI, $400 went to the radiologist who studied the MRI and reported his findings.

• In October 2008 Daddy (my father-in-law) suffered grave complications after a surgery in Inlaks Hospital in Pune. I learned that his surgeon Dr. P sought and received guidance from Dr. L who is very well regarded, and the head of surgery at Inlaks. When I subsequently spoke with Dr. L he knew all the details and assured me all will turn out well. Fortunately, it did.

• In the famous TV serial House, the brilliant and eccentric Dr. Gregory House has a team of diagnosticians reporting to him about patients with complex diseases. In a typical episode House orders a series of tests and treatments while playing mind games with his hospital colleagues and mulling over feedback from his team. He finally arrives at a brilliant solution that saves the patient's life.

In all these instances the doctor in question was never in the same room as the patient. Sheena's doctor guided his assistant from a different part of the hospital. Dr. L needed just to see the charts and hear the accounts about Daddy's condition from Dr. P. The same holds for House except that he generally ends up coming to the patient to make some caustic personal remark while announcing his conclusions and the cure. Rubina's radiologist got all information and images digitally on his computer screen and sent reports back the same way.

Any of these tasks could be performed by an appropriately qualified doctor half way around the world. Online access and video conferencing would give that doctor even closer contact with the patient than in the instances above. Given the scarcity of doctors in the US and their extreme prices, remotely delivered services hold vast promise provided we can overcome the obstacles and entrenched interests. In time, even complex medical interventions can be done routinely and cost effectively through remote surgery. Over three years ago a surgeon in New York removed a woman patient's gall bladder in France 4,000 miles away, and the technology is maturing.

The biggest obstacle to such treatment of Americans by foreign doctors is that they need to be licensed in the state where the patient resides. The license requirements typically include clearing all three parts of an examination (USMLE) that in turn require completing at least a year of US residency. So these very residency slots that constrain US doctor supply prevent foreign doctors from treating US patients as well.

But here's the kicker: it looks like any of the states can break free of this restriction. They can set up parallel criteria to let foreign doctors get licensed to practice within their jurisdiction, including through telemedicine. The states of course can and should impose stringent eligibility and screening criteria to ensure they permit only eminently qualified foreign doctors. Ideally the federal government should lead in orchestrating the requirements to be adopted by the states. There will of course be strong political pressures and lobbying against this by special interests. After all, even ideas since 1998 for telemedicine within the US across state lines have gone nowhere.

Still, the states are free to proceed on their own even if such a federal initiative is lacking. In particular, the states with large under-served areas and/ or those facing big health care budget shortfalls can benefit themselves and their residents by going this route. They can require information about all foreign doctors and their qualifications to be explicitly disclosed so that patients can stick to US trained doctors if they so want. That will conform to the mantra of consumer directed choice, free markets and transparency of information.

If it's allowed to happen the enormous benefits of this approach will depend on how well it is conceived and implemented. Some aspects and ways to make it more effective:

• Emphasize quality. Restrict eligibility only to foreign doctors who have substantial experience and are trained in reputed, approved institutions, so they are expected to be on par or better than their typical US counterparts. They should clear the USMLE provided the doctor dominated bodies sponsoring the tests agrees to let them participate.

• Even if only highly qualified foreign doctors are licensed the price difference can be enormous, and should be fully leveraged. For example, such doctors in India charge about $5 per consultation, and (after taking the trouble to fulfill US licensing requirements) can be paid, say, just $10 per remote consultation.

• Make the most of health IT and electronic medical records so that these doctors can readily see the patient's reports and medical images, prescribe medication, refer to other doctors (including US based ones) as needed, and bill for their services.

• Offer patients multiple ways to consult the doctor. They can do it right from home, either over the phone, or by video conference since Skype, cheap broadband and PCs make it all too easy. Even a "copay" of $10" covers the full cost while virtually (pun intended) making it as convenient and effortless as an instant house call. Or the patient can be allowed to walk into any of the designated facilities staffed by nurses who can participate in the consultation, follow the doctor's directions, take measurements, draw samples for testing, etc. Again, since a US doctor's services are not involved, the copay can be waived or kept very low so both the patient and the insurer/payer benefit.

What are the expected savings? Here are ballpark figures under some realistic assumptions:

• Primary care. CDC's NAMCS 2008 report estimates 902 million doctor office visits in 2006. Of these 50.6% or 458 million were to primary care doctors in general or family medicine, internal medicine or pediatrics. Assuming an average payment of $70, and 25% of these off-shored through telemedicine at 20% of the cost, the total primary care savings are $6.4B annually.

• Specialist care. Of the remaining 49.4% or 444 million specialist visits with an average payment of $140, assume 10% can be substituted by off-shore telemedicine at 20% of the cost. The savings are $5B annually.

• Diagnostic radiology. According to CDC's National Center for Health Statistics in its 2009 complete report (Table 108) there are over 17,000 diagnostic radiologists. RSNA news says they bill $1.46 million on average, or $25B annually. Assuming a fourth of these are off-shored at a fifth of the payment, the annual savings are $5B.

So apart from meeting the crisis of extra demand, telemedicine saves over $16B annually as in 2006, about half of this in public funds, in proportion to their share of the total US health expenditure. The 2006 total health expenditure was $2.1 trillion and the CMS Actuary projections (Table 5, p. 37) over the next 10 years is over $35 trillion. Using this extrapolation, telemedicine will save $267B over 10 years, of which $133B is in public funds.

These figures don't factor in the effect of extra competition and supply of physician services that will almost certainly help reduce the "scarcity premium" in US physician prices. This can dwarf even the considerable direct savings projected above, not to mention the benefit of increased and convenient access to services by patients.

Finally, all this is from just one (the remotely delivered kind) form of trade in health services, out of the four modes envisaged by GATS. More on the remaining three later.

Dec. 21, 2012 update: Telemedicine within the US is now maturing - see The Atlantic Dec. 11, 2012 article.  The same thing can be done with foreign based doctors.

Will These Reforms Set Back Democrats?

Finally, the health reforms bill passed by the Senate and now the House has been signed into law. Paul Krugman calls it transformational and a triumph over fear-mongering even though it is far from ideal and a parallel legislation to fix some flaws is going through contentious reconciliation. This legislation is also expected to clear. With all the Democratic missteps along the way, this is a historic moment.

Reformers had wanted President Obama to do much more and earlier in time, but his final push was key in getting enough Democratic Congressmen to sign on. Among the side shows the Catholic nuns commendably came forward to support the health reforms bill even as the Conference of US Bishops opposed it on tangential abortion issues. More worrisome are possible accommodations made to get the support of the AMA and the pharmaceutical industry. That's because this bill does little to fulfill the other vital imperative of lowering costs, that will require follow on action affecting the interests of these providers.

The most credit goes to House Speaker Nancy Pelosi, whose quiet resolve and deft dealing with Democratic colleagues has been highlighted by the WSJ.

What about the dire Republican warnings of Democrats paying the price in the 2010 mid-term elections? Obama and other Democratic leaders have publicly accepted this assessment. It's a wise move showing their pro-reform lawmakers in shaky seats as sacrificing their political future for doing the right thing. This paradoxically may help these very Democrats come November.

Anne Kornblut in an MSNBC discussion also rightly opined that the health care issue may well recede from center stage come November, with some other issues driving voter decisions. In any case the Democrats would have lost a lot more if they failed to accomplish health reforms.

In a rational world the reformers should face no downside. The vast majority of Americans either benefit or (for those insured through employers) lose nothing while having the security net of affordable coverage even if their circumstances change. The people who pay more through higher taxes are a small minority of tax earners and some businesses on whom the mandates are accompanied by some offsetting (may be even over-compensating) concessions.

With the increased number of Americans covered the providers all gain up to this point. It is definitely a mixed bag for private insurers whose practices on pre-existing conditions, lifetime caps, rate hikes and recissions will be banned. But even they may benefit in the net, and the stock prices of Aetna and other insurers have risen after passage of this bill.

Still, the voters haven't always been rational in the past - they did elect GWB to a second term in 2004. There's also the uncertainty injected by 13 Republic state attorney generals challenging the law that will take over a year to wend its way and be decided by a Republican leaning Supreme Court. So I'll allow Republicans their hopes and the Democrats their nervousness, though I wouldn't bet with the many pundits on Democratic reversals as a result of these health reforms.