Tuesday, February 10, 2004
Megan McArdle has an interesting blurb on the outsourcing to India of financial journalism, with the expected consequence of former free-trading journalists suddenly turning protectionist.

Turns out, it's not just techie or journalist jobs that can be outsourced. BusinessWeek has a fascinating report on the growing industry of hospitals in Asia catering to Western clients:

Shaun Reese's bad knee had been nagging him for months. He had torn a ligament a couple of years earlier that never healed properly, and the pain was getting worse. But the 48-year-old building contractor from Wyoming didn't have health insurance, so he kept putting off dealing with the problem. Then a friend suggested he fly to Thailand for some sun -- and a spot of surgery on the side.

After some investigation, Reese took the advice, and in January he hopped a plane for Bangkok's Bumrungrad Hospital, where he had arthroscopic knee surgery. Total cost: $5,000 -- half for the surgery and the rest for airfare and three weeks recuperation on the beach. Back home, he would have paid $6,500 for the operation alone. . .

Welshman Cyril Parry's problem wasn't the cost of surgery. He had coverage from Britain's National Health Service but had been waiting more than four years for a hip replacement. As his pain increased, he decided to take matters into his own hands. Online, he found the Web site of the Apollo Hospital in Madras, India, and discovered that a doctor there had worked with a pioneer of hip-replacement surgery in Britain. . . Although his family thought he was daft, 59-year-old Parry flew to Madras in November and had the operation. Less than two weeks later, he was home. Total cost: $8,300, which he paid out of pocket. . .
I don't care to get into the politics, but strictly in economic terms, this makes a lot of sense.

We keep hearing how medical costs are rising and "soaring out of control," but the reality is a bit more subtle: the main problem isn't so much that the cost of medicine has risen, but rather that it hasn't fallen fast enough. Whatever you might have paid for a procedure in, say, 1960, the cost of the equivalent procedure today (assuming it's still performed), is actually less, in real dollars. (Right here, I should probably dig out some data. But it's late, so I'm going to be sloppy. Hey, you didn't pay much for this blog...) The "problem" is that medical science is progressing, and treatments for diseases that not too long ago could only result in "cheap" suffering and eventual death, can now expensively alleviate the suffering and possibly even cure the cause. (Think of it this way: being an AIDS patient in 1986 wasn't particularly expensive.) As we live longer and have more options, money is spent in ways that simply could not be contemplated a generation ago. But on a strict procedure-for-procedure basis, the cost of medicine has not actually risen.

OK, so thus far, nothing terribly new or revealing. But here's the thing: medicine isn't the only thing we demand more of. We're also used to having more food, more gadgets, more features in our cars (airbags, anti-lock brakes, fuel injectors), all of which should likewise take tolls on our wallets... but they don't. Similarly, not too many decades ago, the cost of food was a non-trivial part of the average person's budget; starvation was not an unheard-of problem among those considered poor, but not indigent. Today, even if you are poor, assuming you live someplace with a stable government, your problem is likely to be obesity, not starvation. In Westernized nations, food shortages affect no one but the most indigent of the population. Simply put, many electronic gadgets and most non-luxury foods are simply not a "scarce resource" any longer. Or, at least, they are much less scarce than they used to be.

So -- hasn't medicine followed the same path? Obviously not: medical services are still extremely scarce. Short of a cataclysmic event, the idea of Britain, France, or Canada rationing their food supply borders on the absurd -- and yet, these countries ration their medical services quite openly. In the United States, medicine is also rationed, though the mechanism is not as straightforward as that practiced under single-payer systems. (Which doesn't make it "better" or "worse" -- it's just more complex. Single-payer systems, HMOs, PPOs, charity hospitals -- they are all ways to ration extremely scarce medical care.) OK, so then why hasn't medicine been subject to the same forces as food or technology? Why is it still so expensive?

The answer is labor costs. Mass-production allowed us to have cheap consumer goods, as machines replaced people, and dropped the input costs significantly. Farm equipment allowed a few men to do work that previously took hundreds. Electronic equipment no longer needs to be made by hand out of vacuum tubes -- it can be made by cheap foreign labor that puts together components pre-fabricated by machines. Labor that could not be easily automated -- such as picking produce -- still got assigned to extremely cheap workers, and the rest of us reaped the benefits. Scale took over, and labor was shifted to the customer. Instead of a lot of small carts delivering groceries daily to tiny general stores, large 18-wheelers now bring it by the ton to huge supermarkets, where they are laid out for customers to help themselves to. The number of people involved in putting together your dinner table has dropped by a huge amount -- which is why, simply put, food is cheap.

The same has happened in medicine, but not to as large a degree. Doctors didn't stop making house calls because they are mean and don't love you; it's just inefficient, and you'd have to get billed for their travel time. Better that you come in yourself, and if you can't, it's more effective to send paramedics in a fully-equipped van to pick you up. Overall, though, medicine has not enjoyed the reduction in labor costs that has affected the grocery or consumer-goods sectors, for the simple reason that, ultimately, there is no alternative to individual treatment. (Indeed, one of the more common complaints from people is that their doctor doesn't listen to them, taking a "conveyor" approach.) Ultimately, a doctor has to dedicate some of his time to you and you alone, and his time is expensive. Your costs rise accordingly. By way of contrast, have you any idea who grew your food or assembled the monitor that you are using to read this? Of course not -- it was someone serving thousands of people like you, and as a result, your cost was proportionally tiny.

So far, I've stressed automation as a solution to high labor costs, but clearly that's not the only way. A labor-intensive process can be made cheaper by being made less labor-intensive, or by making the labor itself cheaper. This is why American factories don't make shoes anymore, and hardly any clothing: production for either is not easily automated, so manufacturers went to China, where labor is cheap. Now other labor-intensive tasks are outsourced, including routine Information Technology work. The latter has become commodified and easy to replicate, but the supply of qualified personnel in the West was low, and prices commesurately high. Countries such as India stepped in with large numbers of reasonably competent IT people, who were able to do the work cheaper. Since much IT work is really commodity labor, off it went.

I'm simplifying, of course, but the basic idea is sound. As soon as the IT industry became pervasive, its product was a commodity by definition, and using shopping for labor by price became appropriate. Wired's cover story on outsourcing to India makes this point most succintly:

As I meet programmers and executives [in India], I hear lots of talk about quality and focus and ISO and CMM certifications and getting the details right. But never - not once - does anybody mention innovation, creativity, or changing the world. Again, it reminds me of Japan in the '80s - dedicated to continuous improvement but often at the expense of bolder leaps of possibility.
That is, in fact, exactly what it sounds like. The Indian outsourcing companies aren't making anything new and bold. They are taking stuff already in place, and trying to make it faster, better, cheaper. Winning through efficiency, not innovation -- the quintessential commodity producer.

Which brings us back to BusinessWeek and "surgical tourism." Just as IT knowledged has been commodified, medicine is not far behind. The demand in the West is huge and growing, and supply can't keep up, especially with the larger society keeping pressure on prices -- be it through outright government rationing or simply populist backlash against high prices. The solution is to find supply elsewhere -- and Asia is the natural choice, with low labor costs, stable societies, and a substantial educated middle class in the midst of a large number of very poor people who can't compete with Westerners for the medical services their own countries can furnish. (I am not particularly interested in discussing the ethics of such an arrangement. Suffice it to say, though, that I don't see any easy way out of it for the countries in question, assuming they wanted a way out.)

Obviously, it is a lot harder to outsource medical care than IT -- you can't just upload a patient to a Bangkok hospital. Still, this trend may prove more valuable to control of medical costs than all the rationing and drug re-importation schemes devised by Western governments. It's also a way around the liability nightmares, insurance bureaucracies, and other problems of the American medical system -- not to mention the shortages and long lines of the more "progressive" government-funded systems in Canada and Europe. Asia has a good supply of medical knowledge but a shortage of patients with funds; Europe and North America have the patients and the money, and clearly a dire need.

It's an interesting shift: for the first time in the history of capitalism, knowledge itself is becoming a commodity. The short-term implications are scary, especially for "knowledge workers." But the long-term benefits may yet make industrialization and mass-food-production look like -- pardon the pun -- small potatoes.

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