Category Archives: Medical travel/medical tourism

Sovaldi: a near-perfect example of price discrimination

The controversy over the pricing of Gilead’s Sovaldi for Hepatitis C is a textbook example of price discrimination in action. I hope that my quick review of some of the principles involved will help explain what’s going on.

Gilead sells Sovaldi for high prices in the US: up to $85,000 or so for a course of treatment. The price is a little lower in Europe, substantially lower still in middle income countries and less than  $1000, or 1 percent of the US price in poor countries such as India. Such stark differentials set up major financial incentives for people in richer countries to obtain the product in poorer countries. With more than $80,000 per patient at stake, grey marketers could easily make millions of dollars and even an individual patient from a rich or middle income country would find it financially worthwhile to go to a low income country to procure the medicine.

This isn’t just theoretical. I was approached by a consultant representing large US employers who were exploring pharmacy tourism that would send patients abroad for their drugs.

Gilead has responded by taking steps to limit diversion of product. Patients must present IDs showing they are residents of the country to be eligible for the low-income country price. Patients can only get one bottle of medication at a time. Naturally some folks, including Doctors Without Borders, are complaining about the burden on patients and caregivers, and accusing Gilead of being greedy and maximizing profits.

Although the anti-Gilead people have a valid perspective, my sympathy is mainly with Gilead. The concept of price discrimination: charging different prices to different customers based on willingness or ability to pay, maximizes a monopolist’s profits but it also maximizes societal benefit. As the simplified chart below illustrates, Gilead makes the most money if it can sell the medication at different prices in different countries. That also leads it to sell the highest quantity of product, meaning more people can be treated.


Price discrim

If Gilead were required to charge the same price everywhere in the world –as shown below– it would result in a windfall for consumers in high income countries (“consumer surplus”) and lack of affordability in poorer countries (“deadweight loss”), because patients in poorer countries could not afford to be treated. Even assuming Gilead wanted to maximize its profits in that scenario fewer people would get the treatment.

No discrim


Because of the opportunity for price discrimination, Gilead was willing to introduce Sovaldi in rich and poor countries at the same time –something that doesn’t usually happen.

For price discrimination to work, the following conditions must hold:

  1. The firm (Gilead) must have some monopoly power. In this case the monopoly is based on patent rights. Gilead critics can try to undermine this power by encouraging governments to ignore patents.
  2. Markets must be able to be segmented and kept separate. Here that means segmentation by country, but theoretically it could be done down to the individual level so that rich people in poor countries pay the same or more than poor people in rich countries. (In rich countries there are other mechanisms to do this, such as patient assistance programs, but let’s not make this even more complex.)
  3. There can not be leakage between markets, otherwise the price is eroded in the expensive market. That’s why Gilead needs to confirm residency and why pharmacy tourism undermines societal benefit.

Price discrimination maximizes profits and maximizes societal benefits by increasing the number of people who can afford treatment, while rewarding the monopolist for bringing a valuable innovation to market. It’s not necessarily true that patients are harmed when Gilead maximizes its profit.

Allowing and even encouraging price discrimination is good global health policy. It encourages innovation and lessens global disparities.

By healthcare business consultant David E. Williams, president of Health Business Group.

Health Business TV: Cash for specialists, eVisits again, nursing shortage mythology this fifth episode of Health Business TV, I discuss my interview with HelloMD about cash payments to specialists, the long and slow evolution of eVisits, more on the nursing shortage myth, the United Independent Party in Massachusetts, and an update on the proposed 29% health insurance premium hike for our business..

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By healthcare business consultant David E. Williams of the Health Business Group


Cracking Health Costs: Interview with Al Lewis

Al Lewis, inventor of “disease management” and Tom Emerick, former head of global benefit design at Walmart, have teamed up to write Cracking Health Costs: How to Cut Your Company’s Health Costs and Provide Employees Better Care a guidebook for businesses looking to save on health care expenses right away.

In this podcast interview, Al discusses the “snake oil” wellness industry, explains why an ounce of prevention is not worth a pound of cure, touts domestic medical tourism and describes how the disease management field has reacted to his earlier indictment of them: Why Nobody Believes the Numbers: Distinguishing Fact from Fiction in Population Health Management.

As always, Al is informative and entertaining.

Rerun: What questions should health plans and employers be asking about medical tourism?

The Health Business Blog is on summer vacation until Labor Day, and will be re-running some classic posts from now till then.

This item originally ran on August 9, 2007. I was into medical tourism at the time, traveling to Singapore and South Korea to check it out for myself. If you’d like to comment, please do so on the original post.

Until now, medical tourism has mainly been a self-pay phenomenon. But over time the patient base has expanded from the plastic surgery crowd to the uninsured and underinsured. Now health plans and employers have started to ask what role medical tourism can play for them. We’ve been receiving a number of inquiries on the topic at my consulting firm, MedPharma Partners. Soon we’ll be developing a medical tourism white paper. In the meantime, here are some questions health plans and employers should be asking:

  1. Should I include overseas providers in my network at all? If so, which ones?
    • For some payers the time is now. For others waiting to learn from the experience of others will make more sense
    • The providers that are popular with self-pay patients may or may not be the right ones. Proximity, local infrastructure, quality and capacity may be more important considerations for employers and health plans
  2. How should I engage my employees or members? Should I require patients to travel or should I make it optional?
    • The moment health plans and employers start to encourage the use of overseas providers they will be met with suspicion, but there are ways around this. Making overseas care optional will reduce the suspicion but limit the savings
    • It’s important to let prospective traveling patients engage with their peers. That’s one objective of the forums at MedTripInfo
    • It can also make sense to share some of the financial benefits with employees and members or simply to grant them additional vacation time, which they can enjoy overseas
  3. How do I guarantee quality and overcome the challenges of patient safety?
    • You might want to ask this of your local providers, too! But seriously, there are international accreditation bodies like JCI. Also, many overseas hospitals are going over and above those requirements
  4. What about medical malpractice and liability?
    • That’s a tough one to address and we’ll see what evolves. There are promising approaches emerging involving arbitration and insurance for complications
    • This may be a hard argument to make, but patients actually don’t have great recourse in the US when things go wrong. Cases take several years to reach trial and plaintiffs usually lose, unlike in other personal injury cases
  5. How will pre- and post-travel care be coordinated?
    • This issue needs to be addressed differently depending on the procedure and patient population
    • It’s essential to work with your existing provider network rather than handling medical tourism in a vacuum
  6. Should I contract with providers directly or work through an aggregator?
    • It will be difficult to develop and maintain a comprehensive network on your own so working with one of the emerging provider networks is a better idea
  7. What procedures and treatments should be included?
    • This will depend on your patient population but it will generally include orthopedic and cardiac surgery
  8. How much am I likely to save and how can I increase that number?
    • Most of the estimates tossed around, touting “90% savings” and so on are based on a comparison of US charges with the price paid overseas. First of all, only the uninsured get stuck paying charges, plus you’ll need to factor in the costs of travel –maybe also for a companion. I haven’t seen a really good estimate of the true savings potential for an insured population
  9. How will domestic providers react?
    • Depends on how they’re managed, and this is one place where the interests of health plans and employers may diverge. Health plans may want to use the threat of sending patients abroad in order to beat down providers on price. Employers are more interested in maintaining relationships
  10. What is the relationship between medical tourism and consumer directed health plans?
    • In theory patients with consumer directed plans are a great fit for medical tourism. In practice, they may blow through their HSA even at steeply discounted international prices, so it may not make that much of a difference
  11. How well does medical tourism fit with limited benefit/”mini-med” plans?
    • Potentially very well. It offers the opportunity to include a major medical component at an affordable price

If you’d like to comment, please do so on the original post.

Medical tourism in South Korea

Yesterday’s New York Times devoted an article to the emergence of medical tourism as a growth industry in South Korea. (See South Korea Joins Lucrative Practice of Inviting Medical Tourists to Its Hospitals)  If you’d like a more in-depth look at the topic, check out the series I wrote on the topic when I visited South Korean hospitals a year ago.

The entries can be accessed as follows:

I also did a podcast interview with James Bae of the Council for Korea Medicine Overseas Promotion.

Disruptive innovation in Health Affairs

The first time I heard Clayton Christensen describe his disruptive innovation concept more than 10 years ago I was impressed. By the fiftieth or so time I heard it a year ago –complete with the same old anecdote about the Kaypro computer not being able to keep up with his typing– I was mainly impressed that he was able to be so successful using the same material for so long. He’s been talking about disruptive innovation in health care for a while, too. I first heard him apply disruptive innovation to in-store diagnostics at a conference in 2001. But now he’s really turning his focus to health care with an upcoming book and a section in the current edition of Health Affairs.

Christensen’s introductory article is more of the same: using the example of how the lousy but cheap PC disrupted the mini and mainframe and explaining that innovative business models are needed in health care in order to allow disruptive innovation to occur. Despite my comments above this article is interesting and worth a read.

Christensen’s article is followed by a nearly unreadable paper authored by his Harvard Business School colleague Richard Bohmer and ex-Kaiser CEO David Lawrence: Care Platforms: A Basic Building Block for Care Delivery. It seems like a lot of gobbledygook to me, but maybe you can figure out what they’re talking about and what it has to do with real life.

My favorite article in the whole section is by Mark Pauly from the Wharton School. In ‘We Aren’t Quite as Good, But We Sure Are Cheap’: Prospects for Disruptive Innovation in Medical Care and Insurance Markets, Pauly provides a solid critique of the Christensen and Bohmer approach.

[H]ow well does medical care fit the template of introduction of a disruptive innovation? The answer is that such occurrences are very rare –much more so than in other industries– but that there are reasons for this beyond failures of the imaginations of medical managers who are accustomed to moving in the same rut…

…[W]hatever might be true in the photocopying and computer industries, it is very hard to offer an innovation that explicitly or detectably lowers medical care quality, no matter how much it cuts costs. The trial bar seems ever vigilant for the idea that whatever is done elsewhere in life, no rational person could agree to accept somewhat lower expected health status in exchange for lower costs.

I think it’s consumers, purchasers and physicians who drive this behavior, not just the trial bar, but other than that I think Pauly is right on the money. Pauly describes HMOs as an example of a disruptive innovation, which inaccurately tried to proclaim themselves as equal or higher quality. He faults Christensen and Bohmer for a “wishful thinking” mentality because their health care examples promise lower cost and higher quality, which “confuses the application and devalues the construct” of disruptive innovation. In general Pauly is a lot more complimentary to Christensen than I am in this post, but read his article carefully and you’ll find a few zingers mixed in with the praise.

Pauly’s right that disruptive innovation is unlikely in the US. However, I think it is quite likely that disruptive innovations can occur outside the US and then be imported. An example is medical devices in emerging markets. For example, US medical device companies face a real dilemma in their approach to markets like India. That’s where the growth is, but they also face up-and-coming challengers offering affordable –if not leading edge– products. J&J has introduced an India knee, supposedly for the unique needs of the Indian lifestyle, but really as a source of price discrimination and to fight against low-end competitors. I don’t know the technical specs on these devices, but they are probably just variations on discontinued first-world products –similar to Pauly’s “heritage” Jeep Cherokee example.

The existence of medical tourism provides a pathway for disruptive innovation to reach the US. US patients who go abroad already receive a mixture of first-world and emerging market devices. One reason medical tourism savings can be so high is the lower cost of the device (sometimes lower cost for the same device, sometimes just a simpler “disruptive” device). Over time as these patients return to the US market and the adequacy of the lower cost devices is established –especially as those devices improve over time– there will be acceptance of these disruptive products for the US market.

By the time cost pressures reach the breaking point –in another 3-5 years or so– some disruptive products will be ready for prime time in the US.

Another intriguing article in the same issue, Lessons from India In Organizational Innovation: A Tale of Two Heart Hospitals provides another path to dramatic cost savings that seems to me to have little to do with the disruptive framework. Put the two concepts together and maybe we’ll really get somewhere.

Medical tourism in Israel

Here’s one more reason to visit Israel. From the Jerusalem Post (The Medical Tourist)

When one-and-a-half-year-old Anna Sherevenko was diagnosed with a rare form of cancer, her physicians in St. Petersburg, Russia, recommended a bone marrow transplant in the U.S., Germany or Israel. Her parents chose Israel because it was the least expensive of the three. Anna is one of many who come to Israel to receive medical treatment. The money that these “medical tourists” spend is a valuable contribution to the economy. In 2006, 15,000 foreigners came to Israel’s hospitals for treatment, generating some $40 million in revenue; in 2007 the number of patients grew to 20,000 and hospitals more than tripled their intake to $150 million because more complex, and therefore, costlier, procedures were performed. The sum includes money spent by family members who stay at hotels and might do some sightseeing and shopping on the side.

Amitai Rotem, marketing director at the Hadassah Medical Organization, says Hadassah started the medical tourism program in earnest just five years ago and it generated some $500,000 in its first year. Today revenue has topped $10 million, with 200 to 300 admissions each month. Herve Deknuydt, administrative director of medical tourism at Sheba Hospital, near Tel Aviv, says his institution treated several hundred patients in 2008. Most came from Mediterranean countries, such as Cyprus, Greece and Turkey, or from the former Soviet Union, particularly the eastern states, such as Azerbaijan, Georgia and Kazakhstan.

I’ve written on this topic before in case you’re interested. See Dubai Healthcare City or Hadassah Medical Center?