Health Reform and International Trade: Lost Opportunity?
About This Event

Throughout the long debate on health reform, policymakers have overlooked one simple fact: giving everyone health insurance will greatly increase the demand for health services. Without expanding the supply of doctors and the capacity of the health system, health reform means skyrocketing costs and long waits for care. Proposals to Listen to Audio


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limit those costs by imposing price controls will have the perverse effect of making medical practice less attractive, widening the gulf between patient demand and the system's ability to supply services. Dropping the barriers to international trade in medical services could help the U.S. health system cope with the new demands created by health reform. Some 750,000 Americans went abroad for health care in 2007, taking advantage of services that can be 10 percent of the cost of equivalent care in the United States. One study estimates that at least $1 billion could be saved every year if more Americans took advantage of less expensive offshore care.

A distinguished panel of experts will discuss the prospects and barriers to expanding international trade in medical services. Panelists include Jagdish Bhagwati, professor at Columbia University and senior fellow at the Council on Foreign Relations; Aaditya Mattoo, lead economist of the Development Research Group at the World Bank; and Dean Baker, codirector of the Center for Economic and Policy Research. AEI's Joseph Antos will moderate and participate in the discussion.

Agenda
Event Summary

WASHINGTON, DECEMBER 11, 2009--As we approach the end of a year-long health care debate in which legislators argued numerous proposals and amendments, one proposal with significant cost-savings potential was noticeably absent from the discussion: international trade in health services. A panel of trade and health experts assembled at AEI to consider the opportunities and obstacles of trade in health care as it relates to the current health reform debate.

Joseph Antos, a resident scholar at AEI, opened the conference by taking stock of the current health care landscape. As it is now, demand for health care services exceeds the supply of providers and facilities, and costs are increasing. The uninsured consume roughly 60 percent of the health care services of their insured counterparts. If the new legislation brings health insurance to 30 million more people, Antos said, "we will be expanding demand substantially in a system that is already fairly stressed." The government typically responds to these shortage and cost increase problems with price and utilization controls, Antos explained, but increasing supply is one superior alternative. The current bills make no explicit mention of trade in health services, and although they include grants for increasing physician training, such approaches are "nonsolutions" to the fundamental problems we face, Antos said.

"If you bring people into insurance and you can't find doctors or medical personnel to take care of them, that is not going to help either," echoed Jadgish Bhagwati, University Professor at Columbia University and senior fellow in international economics at the Council on Foreign Relations. International transactions in medical services could partially alleviate the pressure of higher costs and scarce availability of health services caused by expanding access to comprehensive health insurance. Telemedicine and online administrative processing, medical tourism (where patients go abroad for procedures), importing medical professionals, and setting up hospitals abroad are four ways such transactions can take place.

The potential to save costs is substantial, Bhagwati noted. A typical knee replacement in India costs roughly $5,000-$10,000, compared to approximately $70,000-$80,000 in the United States. But there are significant political forces at work preventing the realization of these gains, he explained. For example, the American Medical Association has required that doctors who interpret the results of diagnostic testsbe certified by American boards. According to Bhagwati, only three firms currently make use of "night hawk" services, where doctors in places such as India and Australia interpret test results while doctors in the United States are asleep. Further, the emigration of trained physicians from less-developed countries to the United States may raise concerns about brain drain, but such emigration is already occurring. Bhagwati said he is not surprised that the topic of international transactions in health care has not featured in current discussions, however, because of the perception that it would kill jobs in the United States, a view he considers overly simplistic.

Aaditya Mattoo, lead economist in the Development Research Group at the World Bank, argued that the most obvious impediment to international trade in health care is insurance. "It is not, as is commonly believed, consumer inertia or consumer caution, it's the fact that as soon as you are insured, your incentive to save costs disappears," he stated. Insurance companies almost never cover nonemergency care abroad, which creates a substantial impediment to medical tourism.  For example, a hernia repair costs more than $5,000 in the United States (based on Medicare prices) and just $1,300 in Hungary. Insurance with a 20 percent coinsurance rate would require the patient to pay $1,000 for treatment in the United States, but no coverage outside the United States means the patient would pay the full cost of care plus travel--$1,300 plus approximately $600 for round-trip airfare--to get treated in Hungary. Even if the insurance company agreed to pay 80 percent of the cost of care in Hungary, the patient would still have to pay $260 for treatment plus travel costs, creating only a weak cost-savings incentive of approximately $140 for the patient. "The big cost savings, which are about $3,000, are still accruing to the insurance company," Mattoo explained. But, if the insurance company agreed to cover all care--abroad or domestically, including the cost for travel abroad--at the 20 percent coinsurance rate, treatment in the United States would cost the patient $1,000 compared to $380 in Hungary. "It's not about forcing people to travel, it's about giving consumers genuine choice by eliminating the existing bias in health plans against treatment abroad," he explained.

In a 2006 Health Affairs article, "How Health Insurance Inhibits Trade in Health Care," Mattoo and his coauthor estimate that at least $1.4 billion could be saved annually if even one in ten people decided to seek treatment abroad for fifteen procedures that could realistically happen in other countries. In light of these tremendous potential cost savings, it is puzzling that private insurance companies are not covering treatment abroad for their patients, he mused, while public plans like Medicare and Medicaid might be expected to exhibit protectionist behavior and not  cover treatments outside the United States. Mattoo is not convinced that liability concerns or worries about the quality of care explain private insurers' behavior. He argued that the insurance industry may be unwilling to destabilize the current order because insurers may benefit from today's high prices (and resulting high premiums) more than they would if health costs fell universally. "We might be seeing what is referred to as a subgame perfect equilibrium where each insurance guy is saying, 'I won't rock this boat by suddenly offering dramatically cheaper cost savings if nobody else does it,'" he explained.

Fear of retaliation from hospitals' and doctors' associations might be one reason insurers have not tried this approach, offered Dean Baker, codirector of the Center for Economic and Policy Research. Baker shared his study of a Medicare voucher system, in which beneficiaries in the United States could buy into the health system of any of the twenty-six countries in the Organisation for Economic Cooperation and Development (OECD) with higher life expectancies than the United States. Beneficiaries would be given vouchers, valued at the midpoint between the cost of the average Medicare patient and the cost of their counterparts in those countries. Countries would negotiate voucher arrangements with the United States, explained Baker, who assumed that a ten percent premium in addition to the voucher would be necessary to entice countries to participate. Assuming a 30 percent beneficiary participation rate, the savings would be $3,000 per beneficiary per year by 2030, or $80 billion nationally. "[The] potential gains from this are enormous," asserted Baker, adding that they could be even bigger if beneficiaries made use of even cheaper health care available in the developing world, outside of these OECD countries. Beneficiaries could also increase their retirement income, he said. "It's not my dream to envision people in the United States going all over the world for their health care," Baker clarified, but if we cannot fix our broken system "this is certainly preferable to having a situation where we, in effect, force people to stay in the United States and use a very inefficient system." In many cases, our current system means people live very poorly in their retirement years and also impose an enormous burden on taxpayers, Baker said.

--WISTAR WILSON

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Speaker biographies

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy. He is also a commissioner of the Maryland Health Services Cost Review Commission, a health adviser to the Congressional Budget Office (CBO), and an adjunct professor at the Gillings School of Global Public Health at the University of North Carolina at Chapel Hill. Before joining AEI, Mr. Antos was assistant director for health and human resources at CBO. At AEI, Mr. Antos's research focuses on the economics of health policy, including Medicare reform, health insurance regulation, and the uninsured. He has written and spoken extensively on the Medicare drug benefit and has led a team of experienced independent actuaries and cost estimators in a study to evaluate various proposals to extend health coverage to the uninsured. Mr. Antos also writes for AEI's Health Policy Outlook series.

Dean Baker is codirector of the Center for Economic and Policy Research in Washington, D.C. Mr. Baker previously worked as a senior economist at the Economic Policy Institute and was an assistant professor at Bucknell University. He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the Organisation for Economic Co-Operation and Development's Trade Union Advisory Council. Mr. Baker has written several books, and his latest is Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPointPress, 2009). Mr. Baker also writes a weekly column for the Guardian Unlimited (United Kingdom), and his blog, Beat the Press, features commentary on economic reporting. His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London edition of the Financial Times, and the New York Daily News.

Jagdish Bhagwati is University Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations. He has been economic policy adviser to the director general of the General Agreement on Tariffs and Trade (1991–93), special adviser to the United Nations (UN) on globalization, and external adviser to the World Trade Organization (WTO). He has served on the expert group on the Future of the WTO, on the advisory committee to secretary general Kofi Annan on the New Partnership for Africa's Development, and in the Eminent Persons Group on the future of the UN on Trade and Development. Mr. Bhagwati has published more than three hundred articles and has authored or edited over fifty volumes; he also writes frequently for the New York Times, the Wall Street Journal, and the Financial Times, and he writes reviews for The New Republic and The Times Literary Supplement. Five volumes of his scientific writings and two of his public policy essays have been published by the Massachusetts Institute of Technology Press. Mr. Bhagwati's latest book, In Defense of Globalization, was published by Oxford University Press in 2004 to worldwide acclaim. The recipient of six festschriften, he has also received several prizes and honorary degrees, including awards from the governments of India and Japan.

Aaditya Mattoo is a lead economist in the Development Research Group at the World Bank. He is leading a project on international trade in services, specializes in trade policy analysis and the operation of the World Trade Organization (WTO), and is helping to enhance policymaking and negotiating capacity in developing countries. Prior to joining the bank in 1999, Mr. Mattoo was an economic counselor at the Trade in Services Division for the WTO in Geneva, Switzerland. He also served as an economic affairs officer in the Economic Research and Statistics and Trade Policies Review divisions at the WTO. Mr. Mattoo was a lecturer in economics at the University of Sussex and was lector at Churchill College, Cambridge University. He is coeditor of Development, Trade, and the WTO: A Handbook (World Bank, 2002), India and the WTO (World Bank, 2003), A Handbook of International Trade in Services (Oxford University Press, 2008), Moving People to Deliver Services (World Bank and Oxford University Press, 2003), and Domestic Regulation and Service Trade Liberalization (World Bank and Oxford University Press, 2003). Mr. Mattoo has published and been cited widely in academic and other journals, including The Economist, the Financial Times, the New York Times, and Time magazine.

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