May 21, 2011

The Globalization Of Health Care

The International Trade In Health

By Melvin J. Howard

The US dollar is the hard currency or reserve currency of the world. Everything is measured in terms of the US dollar. And whereas banks once held gold in their vaults to back their currencies, now they generally hold US dollars. This US Dollar standard of money means that if the value of the US dollar ever collapses relative to other currencies, it probably will result in collapse of the global financial system. Remember the Asian Crisis it started with the Thai bath it began as an arbitrage feeding frenzy bankers, on the one hand, advising the Thais to devalue. But they were also were operating in Malaysia and selling financial instruments to Korean banks that would lose money if the Thai baht was devalued! That’s how the devaluation immediately slammed the Korean banks. The Koreans banks then started dumping a bunch of Brazilian bonds that they’d been holding since one of the deals that ended a previous speculator induced crisis the Latin American debt crisis. The cost of borrowing shot up in Brazil and this stripped Brazil of a quarter of its bank reserves in a single month. So then Brazil had a financial crisis on its hands. And so on, and so on, the crisis spread. The Asian crisis spilled over to Russia, already in a precarious position due to high levels of debt. Before long the Russian government defaulted on its debt. After this series of events the international speculative community was in a mad panic and began what is known as a "flight to quality", selling down bonds of foreign governments and riskier firms and buying up on the safer US government bonds. This pushed down the prices on foreign bonds, and pushed up the prices on US treasuries. This is the same as saying that interest rates on US bonds went down and those on foreign bonds went up. In the financial world we say that spreads on foreign debt over US treasuries got bigger, or widened.

The western financial institutions were also over extended in loans to Asia because the 1988 Basel Capital Accord did not adequately set capital requirements for loans to banks in these countries. They also did not differentiate between various types of commercial borrowers. Hence the banks were incented to lend extensively to foreign banks where they could get higher returns, and to more risky corporate ventures. Central banks of these Asian countries were putting their countries financial reserves at risk by allowing their banks to invest them in high risk, high return investments. And much of the loan activity of the time was around over-priced real estate ventures, similar to what happened in our own Savings and Loan crisis. In summary the financial risks taken by banks world over were huge, and the distribution of bank capital could not bear the brunt of the costs if those risky bets should go bad.

As we know the bets went bad and various economies almost collapsed. Many of the financial players did suffer huge losses and those losses were born by both Western financial institutions and foreign players. However, Western institutions escaped the gambling extravaganza bearing a disproportionately small share of the costs. While a myriad of Asian banks were allowed to collapse, not a single Western financial institution went under. At the end of the crisis most major Japanese banks (and insurance companies) were technically insolvent and later dependent on these western institutions to inject capital through acquiring ownership rights something the Japanese never welcomed to their banking system before. Banks collapsed throughout the rest of Asia, the most dramatic case being Indonesia where we still have images of the physical run on banks fresh in our minds. The western institutions were not allowed to fail because if they did, the entire global financial system would go down with it. To prevent such a collapse the IMF bailouts primarily work to ensure that the market does not lose confidence in the financial system. Generally this translates into making sure that the larger financial system players are not hit with large enough losses that could cause them to drop below minimum capital requirements, go insolvent, or suffer a loss of confidence in them by investors and depositors. In a true "free market" those western institutions would bear those defaults and suffer the consequences, which would be consequences for all of us, because we are dependent on the financial markets they dominate. So do we really have free markets or it just an illusion because the so called too big to fail companies and financial institutions seem to get free money when they get bailed out. Maybe that’s what they mean by free markets.  

One of the main complexities of the international monetary system, which is the mechanism through which all international trade and investing happens, is the determination of the value of one country's currency against another, known as the exchange rate. The problem of managing exchange rates has troubled international relations for the past 2 centuries and so far none of the management regimes have worked out very well. Any country involved in international trade would like their exchange rate relative to the currency of trading partners to remain fairly stable and predictable and not to suffer sudden shocks. For if their money suddenly loses value relative to other money their imports cost more and if it gains value their exports are less competitive.

It is for this reasons that health care professionals should understand global capital markets because international trade in medical services will become increasingly more prevalent. For ensuring quality, well-known medical facilities are likely to invest (commercial presence) in countries overseas. The destinations of “consumption abroad”. The supplier of patients mainly due to “poor quality” of medical care rather than the cost of care. International migration of foreign medical graduates will likely be associated with commercial presence rather than traditional migration. New migration pattern will further encourage adoption of consumption abroad approach for reducing overall healthcare cost in both developed and low-income developing countries. Further expansion of consumption abroad will discourage purchase of expensive health insurance plans. In high medical care cost countries; international trade in health services will encourage purchase of catastrophic insurance plans. Health expenditure in the world in 2005 was about $4.8 trillion ($60 trillion was the global income) $4.0 trillion in OECD countries,  $800 billion in the remaining 160 countries of the world. Globalization has increased trading in health care services. Cost of international communication, travel has declined. Time lag has declined significantly and for electronic transfer of information, it has become almost zero (origin to destination). Cost of obtaining services of similar quality varies significantly among developing countries as well as between developing and developed countries of the world. There are types of medical care services that are extremely time sensitive. Waiting will rapidly reduce the benefit of treatment. The benefit function declines rapidly. If the time lag between the onset of the condition and reservation benefit level is shorter than the time needed to travel to a country, the service will be demanded locally. Worldwide, 1.3 billion people do not have access to effective and affordable health care. Low- and middle-income countries bear 93% of the world's disease burden, yet account for only 18% of world income and 11% of global health spending. What are the governance structures that are necessary to encourage the right mix of public and private health care provision? What regulatory framework is needed to induce businesses to provide insurance, provision and finance for health in poor countries? How can the fruits of medical knowledge and technologies be shared among rich and poor countries without destroying incentives to generate more knowledge? What forms of international cooperation are conducive to the finance of health systems in developing countries? What international institutions are required to make health care for the poor an attractive opportunity for business? One thing is clear these provisions must be put in place in order to insure a seamless orderly market in the delivery of health care services worldwide. Health care is not static with globalization the health industry must be flexible to adapt to ever changing needs of a global society.