Tyler Cowen quotes Raghuram Rajan on health care in India:

Hospitals in the United States could learn more from each other, as well as from hospitals elsewhere, including India, where costs have been brought down by bringing mass-production techniques perfected in manufacturing to health care….Greater competition between hospitals could also bring down costs; an easy way of encouraging cross-border competition is to authorize Medicare and Medicaid reimbursements for procedures performed by authorized hospitals in other countries, like Mexico and Thailand.

This reminded me of a paper from last years Health Affairs which compared the cost of open heart surgery at a hospital in India staffed largely by U.S. trained doctors, to the typical cost in the U.S. They found that the costs were $6,000 in India compared to $100,000 in the U.S. The obvious explanation is low labor costs, but the authors argue that does not explain the entire difference, and that innovation and efficiency played an important part.

One of the Indian hospitals the paper looks at, called Care Hospital, uses a textbook application of price discrimination:

Care, for example, has deployed a “multi-tariff ” system for the provision of standard services, charging higher fees for comparable services to higher-income segments of the patient base. This tiered pricing model is one of the cornerstones of the Care business model, allowing the organization to provide services either with minimal margins or below full cost (but above variable cost) to approximately 75 percent of its patients.

Having to charge a uniform price would mean that the quantity of medical treatment would be lower, and the price discrimination allows them to increase output. This is a literally an example you will find in economics textbooks under “how price discrimination can make people better off”.

Outsourcing medical care by allowing U.S. citizens to take their Medicare and Medicaid to get treatment in other country’s (where people understand the benefits of price discrimination) seems like low hanging fruit for bringing down health care costs.

About these ads