International Trade in Medical Services

An Expert's View about Medical, Health and Cosmetics Products in the United States

Posted on: 25 Apr 2010

International Trade in Medical Services


Clas Wihlborg, Chapman University, Orange CA

April 25,2010

Almost 900,000 Americans are expected to travel to foreign countries for plastic and major surgery abroad in 2010 according to a recent report from Deloitte and Touch. The number is expected to grow by 45 percent from 2010 to 2011. Traveling abroad for medical purposes goes under the name “Medical tourism” because the travelers often combine the surgery with tourism or the medical need may arise while being abroad as a tourist. The medical travel often goes to developing or emerging market countries like India, Thailand and Poland from the US and Western Europe. We do not see much medical travel the other direction, however.

From the perspective of international trade theory it may seem surprising that countries with relatively little human capital in medicin export medical services.  Trade theory predicts that countries export the goods and services that uses the relatively abundant (internationally non-mobile) factors of production intensively. The US is the worlds most well-endowed country (in relative terms) in medical human capital used intensively in the production of medical services in general and surgery in particular. The mentined countries are relative well endowed in less skilled labor. They would therefore be expected to import the medical services.

Even extensions of the traditional trade model cannot explain the above contradiction to the traditional so called factor endowment model. The so called Linder theory that contribute to explain intra-industry trade would predict that countries with high demand for medical services would become exporters of these services.

One explanation why the prediction from standard trade theory is contradicted by facts could be that there is not free trade in medical services. This industry is probably is highly regulated in most countries. Supply as well as demand is strongly influenced by public policy everywhere. In many relatively wealthy countries there is excess demand for medical services at subsidized prices. This excess demand can spill over to other countries even if the patients must pay full price in the country supplying the surgery or other service. No doubt, some medical tourism can be explained by this type of excess demand driven search for access to surgery in foreign countries. The prices in some of the medical exporters may not deter people from buying services in , for example, India since the prices generally are much lower than in the US.

The excess demand in the relatively wealthy countries could also be met with migration of doctors from other countries. Many students from around the world obtain their degrees in the US, UK or other countries and remain there after completion of studies.

The trade model as an explanation for medical tourism remains relevant if we take into account that large parts of the costs of medical services consist of labor costs of running hospitals and costs of equipment. Costs of equipment are indpendent of the country it is located in while labor costs tend to be relatively low in developing countries. The total costs of many medical services including various types of surgery may be relativly low in developing countries although the capacity for various types of surgery may be constrained by lack of specific medical expertise.

A new model for medical tourism that resolves these problems and uses the comparative advantages of different countries in an efficient manner is developing. According to this model surgeries would be performed in high quality hospitals in, for example, India and Lebanon while the medical experts performing surgeries would be flown in from, for example, the United States. There is at least one company in California, Global Medical Excellence, operating this model. It would seem to be the logical application of international trade theory combining the comparative advantages of different countries to produce medical services at the lowest possible costs.

Posted: 25 April 2010

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