What Medical Tourism Tells Us about Our Healthcare System

If you ask a hospital in your neighborhood to give you a package price on a standard surgical procedure, you will probably be turned down. After the suppression of normal market forces for the better part of a century, hospitals are rarely interested in competing on price for patients they are likely to get as customers anyway.

A foreign patient is a different matter. This is a customer the hospital is not going to get if it doesn’t compete. That’s why a growing number of US hospitals are willing to give transparent package prices to foreigners, and these prices often are close to the marginal cost of the care they deliver.

North American Surgery (an enterprise that facilitates medical tourism) has negotiated deep discounts with about two dozen surgery centers, hospitals, and clinics across the United States, mainly for Canadians who are unable to get timely care in their own country. The company’s cash price for a knee replacement in the United States is $16,000 to $19,000, depending on the facility a patient chooses.[1]

Now here is what is interesting: The same economic principles that apply to the foreign patient who is willing to travel to the United States for surgery also apply to any ­patient who is willing to travel. That includes US citizens. In other words, you don’t have to be a Canadian to take advantage of North American Surgery’s ability to obtain low-cost package prices. Everyone­ can­ do ­it.

US patients willing to travel and able to pay cash may get an even better deal by taking advantage of the online service, MediBid. People register and request bids or estimates for specific procedures on MediBid’s website for the services of, say, a physician, surgeon, dermatologist, chiropractor, dentist, or numerous other medical specialists. MediBid-affiliated physicians and other medical providers respond to patient requests and submit competitive bids for the business of patients seeking care. MediBid facilitates the transaction, but the agreement is between doctor and patient, both of whom must come to an agreement on the price and service.

The company facilitated more than fifty knee replacements in 2012. Each request got an average of five bids, with some getting as many as twenty-two. Most prices were between $10,000 and $12,000, and the average was about $12,000.[2]

The implications of all this are staggering. Many US hospitals are able to offer traveling patients package prices that are competitive with the prices charged by top-rated medical tourist facilities around the world. (You don’t have to travel to Thailand, after all.) However, I would insert this note of caution: Although a hospital with excess capacity gains by charging the marginal ­customer the marginal cost of care, it may not cover the full costs it needed to stay in business if it charges every ­customer that price. So the prices we are looking at may not be long-run equilibrium prices.

The final question is: Why are US employers and insurers overpaying by so much, and why does the amount they overpay vary so much?

In part, because in the entire medical marketplace, there is no natural evolution to uniform, market-clearing prices, the way markets work in other sectors of the economy. Even MRI scans vary by over 650 percent in a single town. Furthermore, most providers don’t even know how to price their services because they don’t know what their costs are.[3]

Market prices plays a critical role in coordinating economic activity, but not so much in the healthcare system. The reason is that their effectiveness has been hampered by a variety of government interventions, including those that have fostered the third-party payment system. As I explain in my book Priceless: Curing the Healthcare Crisis, unless we liberate prices and allow them to do their job, reforms that are supposed to significantly improve healthcare will fall far short of that goal.

Notes:

1. Devon Herrick, “Medical Tourism: Have Insurance Card, Will Travel,” National Center for Policy Analysis, Brief Analysis, No. 724, September 22, 2010, http://www.ncpa.org/pdfs/ba724.pdf.

2. MediBid.com website, correspondence, and discussions with Ralph Weber, president and CEO of MediBid.

3. Kelly Kennedy, “Healthcare costs vary widely, study shows,” USA­ Today, June 30, 2011, http://www.usatoday.com/money/industries/health/2011-06-30-health-costs-wide-differences-locally_n.htm.

[Cross-posted at Psychology Today]