The healthcare sector rarely features prominently in trade policy. This is unfortunate, since the enormous differences in healthcare costs between countries imply that there are large potential gains from increased trade. Consider the United States. The potential benefits from increased openness and trade in health would be especially large, simply because its costs are so much higher than in any other country. But liberalization would bring benefits to other countries as well, even if these may not be quite as large.
By most measures, doctors in the US are paid far more than doctors in other countries. The disparities tend to be largest in highly paid areas of specialisation, but the gap is substantial in most areas. This gap is preserved through licensing policies that are deliberately designed to restrict both domestic and international competition.
The benefits of more open trade in healthcare would be several, though three major gains stand out.
First, supply would rise; to achieve this, greater standardization and transparency in licensing standards for medical professionals, especially doctors, would be required.
Second, more medical tourism would encourage health systems to compete for patients hunting for large savings.
And third, there would be savings for government-funded retiree healthcare, notably by introducing international healthcare vouchers.
Look at standardization first. Simplifying and standardizing professional licensing requirements so that foreign doctors could more easily qualify to practice across borders would not be qualitatively more difficult than many other issues addressed in trade pacts. In the US case, this would first require some amount of uniformity within the country. Currently, each of the 50 states has its own licensing requirements. It should be possible to have the core elements of this licensing standardized, with each state having the option to add requirements that are clearly linked to the quality of care.
These requirements should then be fully transparent, so that training for them would be as easy in India or Mexico as in the United States. The testing could even be done in foreign countries, albeit by authorized officials. Successful foreign doctors could be given the same right to practice medicine in the United States as American doctors.
A clear advantage of this would be to increase the supply of physicians in the country, leading to sharp reductions in compensation and more doctors in underserved areas. Average compensation for physicians in the US currently exceeds $200,000 a year. With 800,000 practicing physicians, if pay was reduced by 30%, the savings would exceed $50 billion annually (0.3% of GDP). It would also be easy to construct a tax structure on the earnings of foreign-trained physicians with the proceeds going to the home countries. This revenue flow could allow them to train more physicians, ensuring that the sending countries benefit from the arrangement as well.
Medical tourism is a second mechanism through which the US and other countries can benefit through trade liberalisation in healthcare (see article by David Morgan in this edition). There already is a substantial flow of medical tourists to developing countries where procedures are provided at far lower costs. Most of the medical tourism from other OECD countries with near universal coverage involves cosmetic surgeries that are not covered by their healthcare systems. Not so for the US, where medical tourists often travel for major operations that are done at a fraction of the cost in the US.
There are several facilities in many developing countries that have been designed to serve a clientele of medical tourists from wealthy countries. These facilities have fully modern equipment and doctors who are trained at standards comparable to those in the wealthy countries.
However, they have a much lower cost structure. For example, heart surgery in a US hospital can easily cost more than $200,000. Hospitals in India and Thailand can offer comparable quality care for $25,000. This cost difference can easily cover the travel expenses of the patient and immediate family and still allow for enormous savings.
Medical tourism has grown rapidly, not least among people without insurance in the US. However, its growth could be facilitated through regulatory changes that would allow insurance companies to offer patients the option of using foreign facilities and sharing the savings. It would also be helpful to have a licensing system that could ensure the quality of foreign facilities. A private licensing system is already in place, but some governmental oversight could bolster confidence.
Clear rules on medical liability would also be useful in making patients more secure in taking advantage of facilities catering to medical tourists. It would also be useful to encourage developing countries to tax medical tourism and use the proceeds to support their domestic healthcare system. Such a tax would be small compared to the cost savings for patients.
Finally, the gap between healthcare costs in the US and the rest of the world offers enormous potential gains through the use of healthcare vouchers for the government-run Medicare system for retirees. It should be a relatively simple matter to negotiate a system whereby Medicare beneficiaries could buy into the healthcare systems of other wealthy countries. The US could offer a premium of 10-15% above the cost of treating older patients in these countries to give them an incentive to participate in such a program.
The potential savings would be substantial, especially when coupled with the savings from Medicaid, the program that covers non-Medicare expenses for lower income elderly. Based on pre-healthcare reform projections, in 2020, the US government could save $1,700 a year for each person in the Medicare program who opted to accept a voucher and $8,200 for each person who was dually enrolled in both Medicare and Medicaid (all numbers in 2008 dollars).
The savings to beneficiaries would vary by country, but a Medicare beneficiary using their voucher in the UK in 2020 would save $5,800 a year, including money that was refunded from the voucher. A dual eligible would save $13,700.
The savings on both sides would increase rapidly through time. By 2060, the savings to the government for each Medicare beneficiary would be $12,000 a year. For each dual beneficiary the savings would be $42,000. Someone using their voucher in the UK in 2060 would be able to pocket $26,000 a year, and a dual beneficiary would get $45,000. The savings may be somewhat less if the increased demand from patients from the US was large enough to affect prices in the receiving countries.
These projections imply enormous savings to the government from this sort of global healthcare voucher, as well as large gains to beneficiaries. The latter would be able to more than double their retirement income in many cases. In addition, the reduction in demand from having large numbers of beneficiaries getting care elsewhere would also lower healthcare costs in the US more generally.
While the potential gains to other countries may not be as marked, the savings from liberalized trade in medical services is still likely to be vast, compared with most of the areas that currently dominate the trade agenda. There is no excuse for not focusing more attention on this issue.
DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.
This article originally ran in the OECD Observer.