Offshoring and Healthcare

Events have a way of overtaking analysis, as the contrast between a Foreign Affairs article earlier this year and a New York Times article last week drives home with great force. 

Executives seeking to understand the offshoring challenge became very excited about an article on “Offshoring: The Next Industrial Revolution?” (subscription required) which appeared in the March/April 2006 issue of Foreign Affairs.  The article drew considerable attention in part because it was written by Alan Blinder, a prominent economist at Princeton University and former Vice Chairman of the Federal Reserve.

In brief, the article sought to define what kinds of jobs were vulnerable to offshoring and what kinds were not.  Highly critical of the focus on manufacturing jobs in discussions of offshoring, Blinder observed that

. . . the boundary between what is tradable and what is not is constantly shifting. . . . this change . . . moves in only one direction, with more and more items becoming tradable.

The old assumption that if you cannot put it in a box, you cannot trade it is thus hopelessly obsolete. . . . the key distinction will no longer be between things that can be put in a box and things that cannot.  Rather, it will be between services that can be delivered electronically and those that cannot.

So far, so good.  Anyone who has watched the phenomenal growth of the IT services business in India and the move of call centers to offshore locations certainly understands that the provision of many services has already started to move offshore. But Blinder is really interested in trying to define the boundaries between what is tradable and what is not in services. He draws the line between “personal services” and “impersonal services”.  Blinder elaborates:

Services that cannot be delivered electronically or that are notably inferior when so delivered, have one essential characteristic: personal, face-to-face contact is either imperative or highly desirable. Think of the waiter who serves you dinner, the doctor who gives you your annual physical, or the cop on the beat.  Now think of any of those tasks being performed by robots controlled from India – not quite the same.  But such face-to-face human contact is not necessary in the relationship you have with the telephone operator who arranges your conference call or the clerk who takes your airline reservation over the phone. He or she may be in India already. 

The first group of tasks can be called personally delivered services, or simply personal services, and the second group impersonally delivered services, or impersonal services.

For those seeking to find a “safe haven” from the challenges of offshoring, this seemed like a compelling distinction.  After all, who could imagine a waiter, physician or police officer providing their services from India?

Well, not so fast.  This is where that New York Times article on October 15, 2006 comes in. Written by Jennifer Alsever under the headline “Basking on the Beach, or Maybe on the Operating Table”, it provides an interesting view of the emerging “medical tourism” industry.

It turns out more and more patients in need of expensive operations are traveling to distant locations to have these procedures performed. Certainly one of the key drivers of this trend is the escalating cost of medical care in developed economies. There's a potential for significant cost savings when the procedures are performed in countries like India or Singapore. The New York Times article tells the story of Gary Hulmes, a furniture store manager from Florida who went to New Delhi to have spinal surgery done and paid a total of $9,000 including airfare, a five-day hospital stay, and a total stay of three weeks in India (with some sightseeing thrown in).  If performed in a US hospital, the same procedure would have cost $36,000 – 50,000.

But like the broader offshoring trend, cost is only part of the story.  The interesting part (only briefly addressed in the article) has to do with the emergence of highly specialized hospitals in offshore locations that offer state of the art equipment and highly trained physicians that can equal or better the quality record of US physicians. The surgeries being performed include very challenging cardiac, spinal and ophthalmologic procedures. 

In part, the sophistication of these hospitals stems from a high degree of specialization in terms of procedures performed (something that US healthcare providers are also starting to do). But many of these offshore facilities are also pioneering innovative organizational approaches that give the surgeons exposure to higher volumes of procedures than their counterparts would typically see in a US or European facility. The organizational approaches also provide much more rigorous performance feedback to physicians and analysis of complications that may arise during the procedures.

The New York Times article does a great job of describing the rich and varied ecosystem that is emerging to support the medical tourism business.  For example, specialized travel services like Medical Tours International in the US have nurses and doctors on staff to help patients plan medical treatment and trips. The article observes that

. . . medical tourism has spawned a cottage industry of travel agencies willing to book hotels and air travel, find doctors and arrange surgeries. Often, they provide concierges who pick up patients at the airport, provide them with cellphones and wait with them at the hospital, consulting with doctors and keeping relatives apprised.

Books like Patients Without Borders: The Smart Traveler’s Guide to Getting High-Quality Affordable Healthcare Abroad (to be published in 2007 by a new imprint – Health Travel Communications) will help to raise awareness and reduce the perceived risk of heading abroad for medical care. According to the article, Joint Commission International, an arm of the US-based Joint Commission on Accreditation of Healthcare Organizations “. . . ensures that hospitals [overseas] have translators, qualified doctors and nurses and are up to American standards for safety and cleanliness."

On the other side of the healthcare equation, a growing number of insurers are becoming interested in the medical tourism option and offering it to their clients. The article reports that the British government in certain cases is now authorizing patients to seek medical care overseas.

Both the tourism and the healthcare industries in a number of offshore locations are joining forces to create attractive destinations for patients from the US and Europe. The projections for growth are very promising. A joint study performed by the Confederation of Indian Industry and McKinsey & Company in 2004 estimated that the medical tourism business in India alone might generate revenues in excess of $2 billion by the year 2012.

So, bottom line, Blinder got blindsided by focusing on personally delivered services. He assumed that the customers of these services will remain in developed economies rather than seeking out higher quality experiences at more affordable prices in offshore locations.

So, large segments of the healthcare industry might move offshore over time under the banner of medical tourism (of course, Emergency Room facilities will remain onshore, but big ticket elective procedures all seem vulnerable).  This is bad enough, especially given Michael Mandel’s recent analysis of the role of the healthcare sector in job creation over the past five years, both in a cover story on "What's Really Propping Up the Economy?" in Business Week and in his blog postings.

But is this the only personal services sector vulnerable to movement offshore?  A broad range of leisure businesses like health spas and gambling are already on the radar screen of ambitious entrepreneurs in offshore locations.  Anyone who has watched the construction frenzy in Macao will think twice about the complacency of destinations like Las Vegas that card dealers cannot be offshored (even though the US Congress is doing its best to protect domestic gambling businesses from Internet based competition).  Similarly, the notion that masseurs and masseuses are protected from offshoring crumbles when one looks at the rapid growth of the health spa business offshore. You can't find much more of a high touch business than massage. Those counting on serving aging boomers also better study the migration of a growing number of retirees offshore.

We need to broaden our horizons on offshoring.  This is not just about service providers moving offshore.  In a growing number of cases, it is also about service customers heading offshore in the quest for higher quality experiences at lower cost.  OK – I can’t resist one more pun – let’s not put blinders on and assume that the customers stay fixed.  In this flat world, that is a dangerous assumption.

Comments

[Andres Gibson]

Good healthcare tips.

[AngelaMiller]

Great informative post.

[Stephanie Sulger]

Thanks for the article and a tip of the pen to the nurses and doctors at MTI who are very concerned about the medical appropriateness of overseas hospitals, the patients who travel there and sometimes those who facilitate the process.

And on a lighter note: isn't it called offshore if the procedure is procured far away and nearshoring if its close? So one could say that a patient traveling to Thailand is offshoring, unless they are traveling from India. And having a procedure in Costa Rica is nearsourcing only if you are from the US but offshoring if you are a traveling patient from Europe. No wonder they call it medical tourism.

[neelakantan]

Medical tourism has arrived in India and it is not just from the US. The fallout of this is the arrival of super speciality hospitals in India - and better facilities in general.

Hospitals can service the rich who are willing to pay and can also use some of it to cross subsidise the really poor - if they wish.

[Som Karamchetty, PHD]

1. As unchecked healthcare costs are expected to cause serious negative economic impacts on Western economies, medical offshoring has to be included in national economic planning.
2. As offshoring will not likely to provide relief to the middle class and poor in the Western countries, a new model of inshoring should be tried. This model envisages the creation of special economic zones (SEZ); let us call them Import Promotion Zones (IPZ), the opposite of Export Promotion Zones (EPZ). IPZ’s are specially designated geographic areas in Western countries where foreign medical practitioners are allowed to locate facilities and perform procedures at affordable rates. It is generally stated that middle class and poor people do not seek timely medical help as they cannot afford the high cost of medical care. By locating IPZ’s in easily accessible new immigrant neighborhoods, reasonable and good healthcare can be provided to the poor in the rich countries.
As the US government designs ways to legitimize the estimated eleven million illegal immigrants, the IPZ’s, with liberalized entry of medical practitioners, can keep them in good health and reduce costs, which would otherwise cripple the US and/or citizen budgets.

[Nitin Goyal]

This is a nice point. However for one moment consider the example of a service in which " face-to-face human contact" is necessary - hair cuts. Assuming that the consumer does not move to an offshore location (I wonder if one can in the near future be able to fly down to Shanghai for a hair cut), there are still parts of the service that can be outsourced:
- Making an appointment
- Deciding on what haristyle suits you best from available styles
- The total package - haircut, massgae, hair coloring etc you want to avail of.
- Advance payment
All these can be delivered seamlessly from an outsourced location over a phone call or the internet. In such a scenario, even though the consumer is captive, the service is fully commoditized. I wonder if there is any barber who will prefer this scenario. Even having a captive, immovable consumer base for your service does not necessarily mean that the service can be fully delivered onsite and there are no offshore components to it.

Just my 2 cents worth.

Nitin
http://nitnblogs.blogspot.com

[vinnie mirchandani]

I am in the outsourcing advisory business - but I think your reaction and those of others to medical tourism is way too "wow". Somehow, we expect consumers as against corporations to be far more local rather than global in their sourcing. As we help our corporations globally source at an accelerated pace, we will also take advantage of global products and services for ourselves. In the 80s, there was a gray market as US residents used to pick up BMWs in Germany drive on a holiday there and ship it back. In my travels in the 90s I would try and buy most of my airline tickets in London as the bucket shops there and the rate of exchange made it 20 to 30% cheaper than getting them issued here. Hong Kong was known as the place to buy affordable electronics (and get tailored suits), Dubai (smack in the middle of the Muslim world) had a great duty free. There is no law that says consumers cannot take advantage of arbitrage, only corporations can. That does not mean it is one way - all hurting the US. Disney has known for a while that many UK residents prefer to come to Orlando rather than go to Euro Disney - it's cheaper, sunnier etc. There are plenty of stores in NYC that sell 220 v gadgets to tourists from around the world. There is a cottage industry of folks who help offshore staff from India find insurance, apartments etc in the US when they are here. As you know these things go in waves, though. I can no longer afford to buy tickets in London or that BMW there and have it shipped back.

[John Maloney]

Hi --

Thanks for the post. Not sure I agree that when a product or service is consumed proximately, i.e., in the location it was produced, that it is 'offshoring.' Getting a facelift with a nice vacation in Brazil is just good global development and competition.

Building a KIA in Korea and shipping to Long Beach is just import/export.

Geometry tutors in Mysore with 12-year old clients in Iowa is offshoring.

It important to elaborate the stunning corporate train wrecks in service offshoring. The picture is not very rosy. A lot of offshore service projects have been called back. Indian service firms are hiring like crazy in the USA.

For service offshoring success, the principle is to understand and lead intangibles. The technique is value network analysis. It allows mgmt to understand the real sources of value before making expensive geographical mistakes. See:

http://www.vncluster.com/

-j