Medical Tourism: Global Competition in Health Care

Studies | Health | International

No. 304
Thursday, November 01, 2007
by Devon M. Herrick

Why Treatment Abroad Costs Less

Fees for treatments abroad range from one-half to as little as one-fifth of the price in the United States.  In some cases prices are 80 percent lower abroad. Savings vary depending upon the destination country and type of procedure performed.

For example:

  • Apollo Hospital in New Delhi, India, charges $4,000 for cardiac surgery, compared to about $30,000 in the United States.
  • Hospitals in Argentina, Singapore or Thailand charge $8,000 to $12,000 for a partial hip replacement — one-half the price charged in Europe or the United States.
  • Hospitals in Singapore charge $18,000 and hospitals in India charge only $12,000 for a knee replacement that runs $30,000 in the United States.
  • A rhinoplasty (nose reconstruction) procedure that costs only $850 in India would cost $4,500 in the United States. [See Figure II.]

Patients can also find lower-priced nonsurgical procedures and tests abroad:

  • An MRI in Brazil, Costa Rica, India, Mexico, Singapore or Thailand costs from $200 to $300, compared to more than $1,000 in the United States.
  • six-hour comprehensive fitness exam — including an echocardiogram, stress test, lung-function test and ultrasound of internal organs — costs only $125 at India's Rajan Dhall Hospital; a similar battery of tests in the United States could easily top $4,000. 

Why Are Foreign Hospitals Able to Offer Lower Prices?   Prices for treatment are lower in foreign hospitals for a number of reasons.

Labor costs.   In the United States, labor costs equal more than half of hospital operating revenue, on the average. Wage rates and other labor costs are lower overseas; specifics were not available, but as one example, at Fortis hospitals in India: Private Out-of-Pocket Spending on Health Care

  • Doctors earn about 40 percent less than comparable physicians in the United States.
  • Median nurses' salaries are one-fifth to one-twentieth of those in the United States.
  • The wages of unskilled and semiskilled labor, such as janitors and orderlies, are also much less.

“Prices are lower where patients pay out of pocket for health care.”

These lower labor costs make it much less expensive to build and operate hospitals in other countries. 
Less (or No) Third-Party Payment. Markets tend to be bureaucratic and stifling when insurers or governments pay most medical bills. In the United States, third parties (insurers, employers and government) pay for about 87 percent of health care. So patients spend only 13 cents out of pocket for every dollar they spend on health care.  As a result, they do not shop like consumers do when they are spending their own money, and the providers who serve them rarely compete for their business based on price.

A much higher percentage of private health spending is out of pocket in countries with growing, entrepreneurial medical markets.  For instance, patients pay 26 percent of health care spending out of pocket in Thailand, 51 percent in Mexico and 78 percent in India. [See Figure III.]  When patients control more of their own health care spending, providers are more likely to compete for patients based on price.  Consequently, these countries have more competitive private health care markets.

In the United States, the markets for those medical services for which patients usually pay out of pocket, such as elective cosmetic surgery or vision correction (Lasik), are much more entrepreneurial and competitive.  Patients control the dollars that pay for these procedures, so physicians compete with one another on price.  For example, the cost of standard Lasik has fallen about 20 percent over six years.

“Package prices for services are common.”

Price Transparency and Package Pricing .  One criticism of American hospitals and clinics is that prices are difficult to obtain and often meaningless when they are disclosed.  Patients who ask potential providers to quote a price are likely to be disappointed. In fact, many people have little idea of the cost of medical treatments. A recent Harris Poll found:

Consumers can guess the price of a new Honda Accord within $1,000, but when asked to estimate the cost of a four-day hospital stay, those same consumers were off by $12,000!

  • Furthermore, 68 percent of those who had received recent medical care did not know the cost until the bill arrived, and 11 percent said they never learned the cost at all.

In the international health care marketplace, the situation is quite different. Package prices are common, and medical travel intermediaries help patients compare prices.  [For examples, see Table I.] The Cost of Medical Procedures in Selected Countries Even providers who do not offer fixed pricing will provide reasonably accurate price quotes.  As a result, medical centers and clinics that treat large numbers of medical tourists routinely quote prices in advance and look for ways to reduce patients' costs.

“Cash-paying patients pay higher prices than insurers in most U.S. hospitals.”

Few Cross-Subsidies.   In American full-service nonprofit general hospitals, revenues from treatments for some patients are used to cover the costs of providing treatments to other patients.  This cross-subsidization is possible because some medical procedures produce more revenue than it costs to provide them.  For example, the revenue from routine heart catheterization procedures or diagnostic imaging systems in a community hospital might be used to subsidize indigent health care or the cost of operating the emergency room.  This means that a hospital's charges for the heart procedure more than cover its costs, but its charges for emergency room care do not cover those costs. If there is no competition for the business of heart patients in the hospital's service area, it can cross-subsidize without losing revenue.

However, a provider who does not cross-subsidize could offer the cardiac treatment for a lower price or could make a profit charging the same price.  In the United States, such providers have emerged in the form of highly efficient specialty hospitals.  Nonprofit community hospitals complain that specialty hospitals skim off lucrative surgeries but do not provide the services that community hospitals do, such as emergency departments and charity care for the uninsured.  This has led to a moratorium on new specialty hospitals in the Medicare program.

Streamlined Services.  Some foreign medical providers operate highly efficient “focused factories.”  These are specialty clinics and hospitals where tasks and procedures have been streamlined for the highest efficiency — similar to the way a Toyota automotive plant operates. For example, Fortis Healthcare's Rajan Dhall Hospital in New Delhi uses a business model that combines the personalized service of the hotel industry with the industrial processes of an automaker — both industries in which its senior executives have experience. Jasbir Grewal, Rajan Dhall's vice president for operations, spent years working for the Hilton hotel chain.  He describes their hospital as “a hotel providing clinical medical excellence.”  Fortis chairman Harpal Singh, who came from the automotive industry, emphasizes the need to streamline processes in such a way that procedures can be performed quickly and efficiently. 

Limited Malpractice Liability.  Malpractice litigation costs are also lower in other countries than in the United States.  While American physicians in some specialties pay more than $100,000 annually for a liability insurance policy, a physician in Thailand spends about $5,000 per year.  Thailand does not compensate victims of negligence for noneconomic damages, and malpractice awards are far lower than in the United States. 

“Foreign hospitals have fewer cost-increasing regulations and cross-subsidies.”

Fewer Regulations.   Excessive health care regulations in the United States prevent American hospitals from making the sort of collaborative arrangements many international hospitals use.  For instance, facilities abroad can structure physicians' compensation to create financial incentives for the doctors to provide efficient care, whereas American hospitals usually cannot.  The reason:  Physician compensation arrangements in American hospitals cannot violate the Stark (anti-kickback) laws.

Foreign hospitals can also employ physicians directly — a practice prohibited by many states. For instance, physicians in India contract with hospitals to provide a certain number of hours per month in return for a guaranteed fixed fee.  Patients select the hospital based on reputation and then choose an appropriate doctor who works with the hospital.  In this regard, physicians depend on hospitals for business rather than the other way around.

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