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Editorials |
1 From the Department of Radiology, Temple University Hospital, 3401 N Broad St, Philadelphia, PA 19140. Received March 3, 2006; accepted March 14; final version accepted June 30. Address correspondence to the author (e-mail: ReinusW{at}TUHS.Temple.edu).
American labor is under pressure to make wage and benefit concessions to management. American wages and benefits far exceed those in developing countries and even those in many developed countries. The question, of course, is not whether these wages are fair but rather what has changed economically that is forcing wage and benefit concessions in America. The simple answer is that the market has gone global, and less costly labor is available elsewhere.
Not only has it become possible to move goods around the world inexpensively, but also trade agreements such as the North American Free Trade Agreement, or NAFTA, have meant relaxation, if not the complete abolition, of many tariffs and duties once levied on importation and exportation of goods. The theory of free trade is that nations should produce those goods that they can produce most competitively and let other nations produce goods at which they are more efficient. Allocating good production to the most competitive producer will lead to a global economy that is maximally efficient in terms of producing the most goods for the least cost.
Tariffs, it is argued, promote inefficiencies in the production of goods because they not only add to the cost of imported goods but also promote the survival of inefficient industries in the face of what would otherwise be overwhelming competition. Such is the story of the American television industry. Once protected against Japanese imports by import tariffs, the vast American television industry all but disappeared within a few years of losing its tariff protection.
Of course, many Americans were hurt by the loss of this industry. Jobs were lost in droves, not only the primary manufacturing jobs but also the jobs that came from businesses that provided services to the laborers—groceries, clothing stores, drug stores, restaurants, and all the other businesses that a community requires (1,2). Indeed, whole towns dried up in a flash, reminiscent of the days in the wild west when a mine's ore was exhausted or the railroad went through and wagon trains ceased their slow march across the countryside.
In the past decade or so, technology overtook the farming industry and farms consolidated because new combines, fertilizers, and pesticides allowed fewer people to till larger farms (3). Instead of an entire family being needed to farm small-acreage farms, a single individual could use technology to farm vast pieces of land. Instead of having to stay on the farm and help the family business survive, the children of farmers became free to pursue other careers—often in large urban areas far away from the family homestead. The supply of farmers declined, and, thus, despite technologic advances, wages have been maintained in the industry. The excess supply of labor moved into other industries.
In fact, that is precisely the point of the doctrine of free trade. In each case, where an industry is lost—whether because of loss of a resource, a change in technology, or some other factor—people ultimately enter new industries, and new jobs replace old ones. Economies become stronger as a result of the competition, and goods become available at the least possible price.
Today, new technologies and free trade agreements have allowed suppliers from distant nations to bid for contracts. As domestic manufacturers work to minimize costs, they are more likely than not to award contracts to suppliers overseas where the standard of living and the cost of labor are lower than those in the United States. The effect on the domestic textile, automobile, and other industries has been a large-scale emigration of production jobs overseas.
Ultimately, as overseas economies grow through new jobs created by outsourcing, so too will their workers' wage and benefit demands. This must occur because other countries, regardless of population size, have a finite supply of labor. Sooner or later, increasing demand for labor in any country will push its labor cost higher. In fact, this is beginning to occur in China, where the increase in demand for labor is beginning to outstrip the increase in supply (4–6).
By the same token, the loss of demand for labor will force wage rates to decline in high-cost countries. All things being equal in a global economy, the average price of labor will ultimately equilibrate across countries. The more business moves from higher- to lower-wage countries, the more the standards of living of lower-wage countries rise as, simultaneously, the standards of living of the higher-wage countries decline. Thus, over time, the haves and the have-nots will achieve similar wage structures.
Of course, all things are generally not equal. Any number of factors can prevent equalization of labor rates and of standards of living. First and foremost is quality. Manufacturers need to maintain a standard of quality. If lower-cost labor centers cannot guarantee quality, they become irrelevant. Poor-quality products ultimately may be more costly to the consumer and, hence, fail to be competitive with higher-priced domestic goods. Today, however, many less expensive suppliers can and do meet quality requirements; their products are simply less expensive but not of lesser quality.
The second factor is the contractual power of American unions. As long as American labor is required to produce a portion of the product, it can use this power as leverage to keep other jobs from moving overseas. This leverage is viable only in the short term. If the draw of overseas labor is strong enough, manufacturers will chip away at the current job base, sending as many jobs as feasible overseas. As more jobs are outsourced, the power of this type of leverage declines. Alternatively, if this leverage remains effective despite the temptation of lower costs elsewhere, manufacturers will have a strong incentive to find ways of outsourcing production of portions of the products that they otherwise must produce domestically.
A third possible factor is the protection of domestic labor markets through barriers that directly limit competition. These barriers may take the form of legislation, regulation, or tariffs. These are forms of protection that run counter to free trade in a global economy and, for reasons specified earlier, reduce economic efficiencies. For example, early in the last decade, American car companies promoted and passed legislation that put quotas on the number of cars that Japan could export to the United States. By using the government to provide regulation, home industries are protected from too much competition through a reduction in the number of units foreign producers can sell in this country despite what our real demand might be. If demand for the commodity is above the quota, according to the law of supply and demand, the price of the imported goods will rise, making the higher-cost home-produced product more competitive.
The American steel industry has long claimed that foreign competitors "dump"—sell below cost—steel in the United States in order to gain market share. To protect against this, they argue that we should place tariffs on these imports. Governmentally imposed tariffs directly raise the price of the imported goods and again make home-produced goods relatively more attractive.
On the other hand, if the goods are being dumped below cost in another market for the purpose of gaining market share, such a practice cannot go on indefinitely. Sooner or later the losses incurred by the foreign producers must impact their ability to survive unless, of course, they have subsidies from other sources such as their governments. The provision of subsidies implies a concerted effort on the part of the dumping nation and hence is a form of economic warfare. The practice has been escalated from business-to-business competition to nation-to-nation competition. As such, this is one of the few occasions on which even free trade advocates might defend imposition of government-supported protective tariffs.
In a global economy, it is not only manufacturing that is subject to foreign competition. As recently pointed out by Steve Lohr of the The New York Times (7), outsourcing tends to climb the job ladder. Indeed, Microsoft already develops its software products by using not only domestic labor but also labor in nations where the educational level is high and the cost of living is low (8). Many American firms (eg, H&R Block) transmit American tax returns to workers overseas where the returns can be completed less expensively (9,10). These practices have several important effects: First, they allow faster and more efficient product development and completion, whether the latter pertain to the latest version of Microsoft Windows or John Doe's personal tax return. Quite literally, the work is performed while Americans are asleep. Second, outsourcing reduces the producer's cost structure and hence allows the producer to offer the product at the same quality but at a lower price. Third, jobs are lost at home. Careers are threatened, and, ultimately, standards of living change. Fourth, the higher-cost economy must learn to innovate to survive.
Microsoft and H&R Block are not alone. In one survey, 72 multinational companies from 15 industries, which are based in either the United States or Europe, reported at least considering restructuring the worldwide distribution of their research and development operations (7,11). Although they state that the decision was multifactorial, they assent to the fact that cost was a factor. Dow Chemical is investing heavily in overseas laboratories in India and China (7,11,12). IBM and Hewlett-Packard have also joined (7,11).
Ultimately, the only high-cost industries that are safe from the threat of outsourcing are those in which the raw material exists exclusively on location. One can only pump oil where the oil to be pumped exists, but oil can be refined anywhere. Once it is out of the ground, it can go anywhere.
How does all of this relate to medicine? From a business perspective, patients share certain characteristics with commodities such as oil. They are where they are and cannot easily be moved elsewhere. Superficially, at least, this suggests that medical care must be delivered where the patients live. That is true for the most part, but what of specialties like radiology? Today, imaging is digital, and thanks to the Internet imaging can be moved easily virtually anywhere.
Indeed, radiologists in American radiology practices may employ this technology for their own purposes, but perhaps they have not considered that such technology could one day be their complete undoing. Groups can use overseas evening radiology coverage services to provide continuous interpretations to lessen their call burden. These services, literally based half a world away, provide quality examination interpretations, either preliminary or final, while the home radiologists sleep. That alone is not a threat. What is a threat, however, is that these services can provide their readings at a significantly lower cost than that of the home radiology group. Not only are these readings less costly but current evidence in the marketplace (my experience) is that costs are continuing to decrease as the number of suppliers in the market increases, especially since many newer companies are starting to offer services from countries with low costs of living. Suppliers of radiology outsourcing services are arising in India, and they offer these services at substantially lower prices than prices from Australian suppliers, the original site of radiology outsourcing.
Ironically, the current differences in costs between interpretations of these services and those of the domestic radiology groups present an arbitrage opportunity in its purest form. Arbitrageurs take advantage of temporary price differences for the same commodity between two markets. Ethical and legislative considerations aside, a radiologic entrepreneur could buy interpretations from overseas and sell them at home, and such an activity could result in a profit. The operant concept here is that this situation must be temporary because free markets will seek an equilibrium price. In so doing, either the markets achieve similar pricing or one of them disappears, and it is usually the higher-cost market that disappears.
Therefore, if radiologists are working on the higher-cost side of the equation, certain expectations hold. First, these radiologists must expect a decline in the price of their service. Second, they are challenged to meet the new realities with innovation or they will succumb to the evolutionary economic pressure. Third, domestic radiologists may look to the time-honored means of protecting an industry—some form of trade barrier that will keep foreign competition at bay.
Trade barriers, in this instance, may take any of a number of forms. First, radiologists may look to their professional societies to impose certification standards that force interpretations by domestically based or at least domestically credentialed radiologists.
Second and alternatively, professional societies, which lack the power to prevent outsourcing through their own credentialing process, may lobby for laws that require that imaging study interpretations be performed domestically.
Third, radiologists may rely on hospitals to reinforce their position through institutional credentialing requirements. This will only occur if it is in the hospital's interest to maintain its radiology in its own department. Maintaining in-house imaging will be in the hospital's interest if its medical staff demands it. Thus, it is incumbent on radiologists not only to provide the highest possible level of service to referring physicians but also to network with clinicians and administrators.
Fourth, radiologists may rely on insurance companies to enforce their status because many payers currently will not reimburse for a non–hospital-credentialed physician. Of course, this last barrier relies on protection from the one party in particular (insurance company) whose interest it is to lower costs wherever possible. This reliance ultimately cannot be practical in the long term even though most payers currently require an in-house reading for an examination to be reimbursed.
Finally, radiologists can employ marketing techniques to raise public awareness of their contribution to health care and so foster demand for domestically based medical imaging interpretation. This may be accomplished either through ad campaigns directed by major radiologic organizations or at a more grassroots level. Either way, these campaigns are prohibitively expensive and take a long time to become implanted in the psyche of the public. Therefore, they usually are not effective.
Other specialties besides radiology also may be threatened by outsourcing. Clinical specialties, by definition, require direct patient contact, and, as such, their services are more difficult to outsource. Even so, it is possible to conceive of situations where clinical specialties may be outsourced to one extent or another. For example, if price structures and quality are favorable, one can conceive of elective surgical procedures being outsourced to low-cost countries. In fact, an industry has already sprung up that is based on these premises. This industry, known as medical tourism, may save patients as much as 75%–90% of the American medical cost without exposure to undue risk (13,14). Entrepreneurs have established medical centers in emerging economies with geographically favorable climates, such as Thailand. Patients combine their elective procedure—performed by highly trained medical personnel and appropriate backup medical care—with a recuperative vacation. In 2005, more than 100 000 patients traveled to India to save on their medical care, and this number has increased from 10 000 in 2000 (15). Outsourced medicine has been in place for many years in some highly specialized private clinics, even in well-established Western countries. For example, the Shouldice Clinic in Canada specializes in herniorrhaphy and offers patients a complete package to have their hernias repaired by the best surgeons in the field at a lower price (16). In fact, at least one American congressman has taken advantage of their services (17).
Perhaps even internists could see many of their duties outsourced. Medicine is primarily a cognitive specialty. Were it not for physical examinations, most contact with patients could be accomplished by lower-cost skilled interviewers—nurse practitioners or physician's assistants. Even the physical examination could be performed by these workers or replaced—as is more and more common—by high-technology imaging (18). The information gleaned from patient contact could be shipped electronically to a lower-cost internist overseas who could analyze the data, and the lower-cost internist could return, through a similar route, requests for further tests or diagnoses and prescriptions.
Although some of these schemes seem unlikely or even far fetched, the point remains that, to one degree or another, health care experiences the same market forces as do other industries. Whether in manufacturing, accounting, law, research science, or medicine, ultimately efficient markets will carry business activity to the lowest-cost and highest-quality supplier. At the current time, radiology is particularly vulnerable to outsourcing because of recent technologic developments. Other specialties, such as pathology, may soon follow suit. As the level of education rises in other countries, it is likely that medical tourism will also grow. If nothing else, American medicine should expect some major changes in its way of doing business in the coming years.
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