Medical tourism is the act of traveling away from one’s local health care market to receive medical care, both domestic and foreign. The promise of medical tourism is that patients can choose to have a procedure performed at a lower cost hospital while still receiving a sufficient level of quality, and this in turn increases the competitive pressure on higher-cost hospitals to lower prices. Medical tourism can take place internationally and domestically, and while domestic tourism may not have as great a cost-saving function, the easier enforcement of liability laws may serve as a greater incentive to maintain quality. Medical tourism can take place either through insurance policies or independent of insurance. While any medical tourism can serve to increase competitive pressure on high-cost hospitals, I will show that tourism through insurance policies provides the greatest enhancement to consumer shopping. I apply the term medical tourism to both domestic and international travel.
Let’s look at the case of the noninsured medical tourist. The procedures that consumers usually purchase are one-offs, so competition may be blunted because the consumer cannot switch providers. Once the procedure is performed and the consumer returns to her home country, the relationship is over. Foreign hospitals can develop a reputation for being high quality, but this can be difficult for the consumer to verify. The consumer can search for quality information from the Joint Commission International (JCI), which rates and accredits hospitals internationally (Labonte 2013). JCI ratings improve a consumer’s ability to shop for health care internationally, but it does have limitations. At face value, JCI does give consumers more information about hospital quality, but rather than relying on what hospitals say about their own quality, now the consumer is relying on JCI to be truthful about the quality of the hospitals it rates. In a sense, by suggesting that consumers can take JCI at its word we are just pushing the asymmetric information problem up a level. Because JCI gains revenue for certifying hospitals, not all of its incentives are necessarily aligned with truthful revelation, though reputation concerns (supported through Internet ratings sites or message boards) may strengthen truth-telling incentives. The foreign hospital can also partner with a high-quality institution in America to signal its own high quality, but the correlation between the partner quality and the quality of the foreign hospital remains uncertain because the oversight of the partner institution may be lax (Cohen 2015).
Facilitators also serve as an information aggregator for medical tourism. These middleman organizations help potential patients plan their medical tourism trip, with many offering packages that include flight and hotel reservations, recommending destination hospitals, scheduling the procedure, and even organizing sightseeing excursions while the patient is in the destination country. This dramatically cuts down the transaction costs incurred by the patient, yet many of the same difficulties of the patient performing all these functions still apply. Many medical tourism facilitators gain revenue from referral fees paid by foreign hospitals (Spece 2010). Just like in the case of JCI accreditation, having a facilitator vouch for a provider’s quality shifts the principal agent problem from the patient-hospital relationship to the patient-facilitator relationship.
One may suggest that liability enforcement can mitigate many of these issues. With regard to accreditors and facilitators, the body of case law has not found the connection between treatments and these third parties to be close enough to justify finding them liable for postoperative complications or malpractice (Cohen 2015).16 Because the consumer’s relationship with the foreign hospital ends upon the consumer’s return to her home country, the foreign hospital is not responsible for any complications that may arise from the procedure. While bringing a malpractice lawsuit against a foreign hospital could mitigate incentives to skimp on care quality, in reality, there are many logistical obstacles of, for example, a US citizen bringing a lawsuit against a Thai provider (Cohen 2015). These liability and malpractice issues are either reduced or completely absent when medical tourism occurs within the domestic market. So while medical tourism independent of insurers can provide competitive pressure on high-cost providers and enhance the effectiveness of consumer shopping, difficulties remain that may be resolved by medical tourism through insurers.
Medical tourism facilitated by health insurers holds the possibility of overcoming some of the difficulties involved with individuals engaging in tourism on their own. We must first note that for insured medical tourism to effectively aid in consumer search, consumers must be able to shop effectively for those insurance policies. This comes with all the caveats mentioned in above in the section “Health Care and Consumer Shopping.” In the case of insured medical tourism, health insurers, like the various accrediting agencies, can act as data aggregators for the price and quality of foreign hospitals, but in this case insurers have an advantage because they will have the ability to constantly monitor the quality of these hospitals. This can occur through the use of the data health insurers have on their customers. If the insurer has customers who suddenly show signs of increasing morbidity or mortality after visiting a particular destination hospital, the insurer is in a position to either stop sending patients to that facility or to aid that facility in correcting any failings. With the accrediting agencies, data on quality may be updated every few years (at most, annually). The insurer’s role as data aggregator reduces any search cost or informational asymmetry that may exist. This allows consumers to shop much more effectively. The prices of medical tourism for both insured and uninsured patients are generally negotiated as a fixed fee and are known to the patient before undergoing the procedure (Herrick 2007).
Even though insurers cannot generally be held liable for medical malpractice, insured medical tourism has an advantage over uninsured in that the insurer has the incentive to verify and enforce quality standards of destination hospitals. This is because the insurer bears the cost of procedures that result from postoperative complications upon the patient’s return home. This is not the case in uninsured medical tourism, in which accreditors and facilitators bear no burden of the cost of complications that arise upon the patient’s return home.
The role of the insurer is to essentially act as a well-informed consumer. The same attributes for successful consumer shopping that characterized the practice of lodge doctors are also potentially available to insurers. The doctor does not have the incentive to overtreat due to the fixed fee transaction. As with lodge doctors, this reduces the doctor’s incentive (at the margin) to prescribe unnecessary procedures and incentivizes the doctor to reduce cost. The quality of care can be sustained by the insurer channeling customers only to high-quality destination hospitals and threatening to exit from the relationship if quality becomes too low. The credibility of threatening exit from these relationships also increases with the available alternatives, and medical tourism is nothing if not a way of increasing the number of available alternatives.
Because the insurer has the data on diagnosis, treatment, and outcome for all of its customers, the insurer can determine the quality of the doctors that the customers choose. This is one of the main characteristics that allow the medical tourism model to scale. Whereas the lodge doctor model relied on relatively tight social networks to ascertain quality, today’s insurers can determine quality from the data they obtain as routine business procedure. The insurer has the incentive to maintain relationships with high-quality hospitals because the insurer bears the cost of postoperative complications when the patient returns home. This expansion of the number of relevant substitutes also puts downward pressure on prices of the local high-priced facilities. So long as the cost savings to consumers are sufficiently high, they will participate in the practice of medical tourism. But if medical tourism holds such promise, we must ask why we see so little of it.
There are several impediments to insurers offering these types of services.17 Federal and state regulations on geographic coverage and accessibility prevent insurers from selling insurance policies based solely on medical tourism. For HMOs these laws require that medically necessary services be available twenty-four hours a day and seven days a week. They also require that services “within the area served by the health maintenance organization be available and accessible to each of its members . . . and in a manner which assures continuity” (Cohen 2015, 142). The assurance of continuity seems to forestall the ability of an HMO to provide medical tourism coverage policies. State regulations on the distance that defines accessibility for preferred provider organizations similarly prevent PPOs from offering stand-alone medical tourism policies.
The main impediments to selling insurance with medical tourism coverage are laws limiting the financial incentives insurers can offer to or the financial disincentives insurers can impose upon their customers. By limiting the deductible, co-pay, or coinsurance difference between a preferred and non-preferred provider (commonly between 20 and 25 percent), these regulations impede the main promise of medical tourism of substantial savings reaped through providing competition with hospitals that have dramatically lower costs.18