International trade in medical services

Pierre-Yves Geoard Thierry Verdier Preliminary version August 25, 2011

Abstract This paper develops a theoretical analysis of international trade in health services, considering explicitly the interaction between the market for health care services and the market for health care professionals in a "general" equilibrium model. After analyzing the autarkic" equilibrium in two separate countries (a poor, and a rich one), we consider trade in medical services when travel costs may substantially dier across patients according to their health conditions. This feature induces a selection bias in patients movement, which has important consequences on the patterns of international trade. For intermediate travel costs, only patients who would not have been treated in their origin country travel for treatment. There is no eect in the rich country while in the poor country, the positive demand shock may increase equilibrium medical wages and health care prices, which aects doctors positively but southern patients negatively. In contrast, if travel costs are low, the health sector in the rich country is also aected. At the margin, patients in a better condition than those who stay at home to get treated abroad, worsening the case-mix of patients treated in the origin country. This has conicting eects on medical care prices, but unambiguously puts a downward pressure on medical wages.
Paris School of Economics, and CEPR Paris School of Economics, and CEPR. We thank the WHO for the organisation of the Kobe workshop (February 2009) which triggered the present paper and its nancial support, Mathias Helble for his insights, suggestions and comments, conference or seminar participants in Lausanne (conference in honour of Alberto Holly) and Paris (Sciences Po). Remaining errors are ours.

Keywords: International trade, health care. JEL codes:

Introduction

To this date, there is no consensus about the overall net benets of international trade in health care services in general, and of patients movements in particular. Some WTO agreements are relevant to health, in what the GATS denes as four dierent modes: mode 1 refers to cross-border service trade such as telemedicine, medical education, and e-health; mode 2 refers to patients seeking treatment abroad; mode 3 refers to foreign direct investments in health care services; mode 4 refers to international movements of health care professionals. However, only a limited number of countries (mostly developing countries) have committed to full liberalisation of health services under GATS1 . In contrast, many organisations seem to be express strong reserves about international trade in health care. That position, which is highly prevalent among the medical profession, is exemplied by the American College of Surgeons, which recently issued a statement about medical tourism, stressing the numerous risks for patients2 . Indeed, the eects of international trade in health services may share common features with international trade in other sectors: overall eciency gains may be obtained by greater specialisation, a more systematic exploitation of increasing returns to scale, and increased competitive pressures on local producers, but these gains also lead to signicant redistribution within societies, among producers and consumers alike. 3 . The current paper develops a theoretical analysis of mode 2 international trade in health services, a phenomenon also referred to as medical tourism, or patients movements.4 Our objective is to provide a comprehensive theoretical model upon which a welfare analysis may be may be constructed, and to guide future empirical analysis by pointing out what should be measured to evaluate the costs and benets of patients movements for dierent components of the society, in origin as well as in destination countries. Our general framework is, to our knowledge, the rst which tries to blend two branches of economics : an international trade approach (a general equilibrium with two countries), together with elements specic to health and health care which the health economics literature has identied
Davis and Erixon, 2008. American College of Surgeons, 2009 3 For some theoretical analyses of international trade in services, see Markusen (1989) 4 For earlier analyses of trade in services, see Markusen (1989) and more recently Markusen and Bridget (2007).
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USA Heart ByPass 130 Angioplasty 57 Hip Replacement 43 Hysterectomy 20

Cost (in 1000 USD) Singapore Thailand 18.5 11 13 13 12 12 6 4.5

India 10 11 9 3

Table 1: and analysed. We focus on patients movements across countries which signicantly differ in terms of per capita income. Such movements may take two main forms. First, as resources devoted to health care are limited in poor countries, health care is usually of poor overall quality. However, some rich customers from these poor countries may aord to, and be willing to, pay for a better quality of treatment. This drives a rst type of patients movement, which is associated to two features of poor countries : poor quality of health care services, high degree of inequality. In this type of medical trade, rich countries export health care to poor ones. Second, in contrast with this situation, rich countries devote a substantial share of their income to the health system. Nevertheless, the growth in health expenditures puts health nancing under pressure. Households nance health care expenditures through a combination of taxes which subsidise public insurance organisms, private insurance premiums, and out of pocket expenditures. In most rich countries, public or private insurance is the main source of health care nancing; but in some countries, in particular the US, a substantial share of the population remains uncovered for non emergency care, or some medical services are poorly covered by existing insurance schemes. Faced with increasing health care costs, all countries have attempted to contain this increase, through various forms of health care demand and/or health care supply regulation. Demand side regulation usually attempts to decrease the demand for health care services, and may take the form of co-payments (deductible, caps on insurance reimbursement,...) or waiting lists. These trends make patients in rich countries more sensitive to price dierences between producers. Obviously, this sensitivity to prices is particularly high for uninsured patients. For many elective care procedures, cost dierences between the home country and other countries may be very large. Einhorn (2008) reports the following gures for recent years: 4

Based on similar gures, Mattoo and Rathindran (2002) estimate that if 10% of US patients underwent elective surgery abroad for 6 procedures5 , more than 1 billion US dollars could be saved. These gures illustrate that the potential gains from trade are considerable. Many health insurers limit coverage of health care treatments received abroad; but uninsured patients, cost savings which may result from receiving treatment abroad may lead them to seriously consider this possibility. We focus in this paper on the analysis of the second kind of patients movements, where patients originate from rich countries. At this stage, our analysis is theoretical. Our analysis aims to identify the main economic issues aected by international travel of patients. Two main markets may be aected: the market for health care services, and the market for health care professionals. The interaction between these two markets lies at the heart of our analysis, and we investigate the equilibrium on these two markets simultaneously, in a general equilibrium model. In a very standard way, we rst look at the situation in two separate countries (a poor, and a rich one), and study the autarky equilibrium in each country. The rich country enjoys an overall higher productivity of unskilled labour, which aects overall income, but also unit costs of medical care; the rich country also has a higher number of health care professionals (per capita); in addition, it prohibits health care price discrimination across patients of dierent health conditions. These ingredients induce potential gains from trade. Such gains from trade may substantially dier across patients as they are related to each patients health condition, which aects both willingness to pay for health care, and treatment costs. In addition, travel costs may be substantially larger for patients in very bad condition, and may be less willing to travel abroad for treatment. This induces a selection bias in patients movement, which has important consequences when we investigate the open economy case. If travel costs are large but not so large as no trade would occur, only patients who would not have been treated in their origin country travel south for treatment. There is no eect in the rich country; in the poor country, the positive demand shock may increase equilibrium medical wages and health care prices, which aects doctors positively but southern patients negatively. If travel costs are low, these eects are amplied in the poor country, but the
knee surgery, hysterectomy, cataract extraction, tubal ligation, hernia repair, and skin lesion excision
5

health sector in the rich country is also aected: some patients who would have been treated at home now travel for treatment. At the margin, these patients are in a better condition than those who stay at home to get treated: in addition to the negative demand shock in the rich country, the case-mix of patients treated there gets worse. This has conicting eects on medical care prices, but unambiguously puts a downward pressure on medical wages.

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2.1

International trade theory and health economics

International trade in services

The main message drawn from international economics is that the increase in competition due to international trade puts local producers under more pressure, and factor prices for input factors to tradable goods show a tendency to equalise across countries. Overall, in the rich country this is benecial to consumers, but may hurt workers, especially those with low qualications, which are employed in sectors for which the good may be imported rather than locally produced. Symmetrically, in the poor country the increase in exports may be benecial to employment and wages, but international demand for locally produced goods may lead to an increase in prices, which may hurt local consumers. Conversely in the North, supply of health care from lower wage countries may put northern health care producers under pressure, and increased competition may lead to a decrease in production costs, which are mostly labour costs.

2.2

Specicity of health care

Health care is often thought of as a very special kind of service. First, at an individual level, health is a risk. This risk induces an income risk of having to pay for potentially very important treatment costs, even though the likelihood of being a health condition which requires extensive treatments is very low for most individuals. This induces an important demand for health insurance, and this demand has been met in all developed countries by an important health insurance sector. In addition to eciency argument in terms of risk sharing, ethical arguments often consider that since health is a basic need, individuals could legitimately claim they have a right 6

to health care. Together with potential market failures due to asymmetric information6 , this explains why in most countries, public health insurance is very prevalent, and markets for private health insurance are strongly regulated. Second, patients characteristics are heterogeneous. Even for a precisely dened medical condition, the degree of illness severity may show substantial variation, which leads to dierences in treatment costs; this is reected, for instance, by the residual variance in treatment costs within a given diagnosis related group7 . Some of these dierences may be anticipated when patients enter the health production facility, and some may not. Even when treatment costs dierences can be anticipated by the health care production unit, this does not automatically translates into dierences in payments received by this unit, insofar as hospital payment schemes are usually, at least to some extent, prospective. This risk pooling form of payment induces strong incentives for hospitals to select patients: try to attract less costly patients (creamskimming), try to reject more costly ones (dumping), and try to reduce the quantity or quality of services provided, especially to the more costly patients (stinting). However, as reported by Newhouse (2002), there is very limited empirical evidence of risk selection by hospitals. What is true at the hospital level is also true for insurance plans. Whether it is due to regulation or to technical limitations of insurers, segmentation is always limited, and a typical health insurance contract covers, at least to some extent, insurees with dierent levels of expected costs. In contrast with the absence of risk selection by hospitals, there is some empirical evidence of risk selection by health insurance schemes8 . Finally, insofar as patients movement is concerned, travel costs may also depend on patients health condition. Patients in very poor condition may require some medical car to travel to and back from airports. Medical bodies such as the British Medical Association also claim that ying soon after surgery can cause complications because of the stress travelling puts on the body, which may be particularly strong for patients in very bad health. And
Arrow, in what is known recognised as the founding contribution to health economics (1963) was the rst to stress that asymmetries of information were an important feature of medical care and health insurance markets. In particular, individual patients may be unable to observe quality of care, even after they have been treated, which makes health care a credence good. 7 McClellan, 1997 8 Newhouse, 1996; Newhouse, 2002.
6

of course, some patients are simply too sick to travel on long distance ights, as their health condition puts them at risk of needing some rapid medical intervention. However, other aspects of health care make it similar to other services in other sectors, in which demand depends on prices and quality. As said in the introduction, one of the main drivers of patients movement from rich to poorer countries is the very large dierences in treatment costs across countries. Do these huge cost dierences result in important export ows? The available data is of very poor quality, but it seems that the potential benets from trade are far from being all exploited. In a recent paper, Herman (2009) reports actual known gures on cross border trade in health care services in the four modes dened by WTO, with an emphasis on European countries. Within the EU, consumption of health care services abroad is still of a very small magnitude with respect to total health care spending. Outside Europe, it seems that no reliable data exists about US import ows (US patients travelling abroad), or about export ows of visible destination countries such as India, Thailand, Cuba, or Singapore (to name only a few). Yet, actual trade ows between the US and the countries mentioned in Table 1 seem to be very small as compared to the potential benets. Mattoo and Rathindran (2006) claim that the main reason for this discrepancy between potential and actual gains from trade lies in the nature of existing health insurance plans, which discriminate explicitly or implicitly against treatment abroad. Indeed, if not organised by health insurers themselves, patient demand may respond to price dierences only if the share of out of pocket payments is suciently large. This is the case for uninsured patients, as well as for medical treatments poorly covered by existing insurance schemes, like dental care. In that case, the health economics empirical literature has shown that demand does react to prices, especially for ambulatory care (including dental care) and non emergency hospital care9 . Quality dierences may also be an important driver of patients movement. Indeed, this is the main driver for traditional patients movements from poor to rich countries, which stems from rich individuals from poor countries willing to pay for a high quality of health care that cannot be found at home.
9 The reference study of price elasticity of demand for medical care is based on data from the RAND Health Insurance Experiment (Manning et al., 1987, Newhouse, 1993). Other estimates on more recent data and in dierent countries conrm the fact that demand for medical care responds to prices (e.g., Gardiol et al., 2006; Geoard, 2006).

However, recent trends have shown signicant improvements of hospital care quality in many developing countries, many of local hospitals now being accredited by international certication bodies such as the Joint Commission International (US) or Trent (UK)10 . Moreover, not only do some hospitals in developing countries provide top quality services, but in many cases there are no waiting times, in contrast of what can be observed in some countries, especially the UK, for some elective care procedures. In short, not only price is lower, but overall quality may even be higher in destination countries. As the current paper is devoted to the analysis of patients movement from developed to developing countries, we abstract from quality dierences across countries by simply assuming that the health care service under consideration is of homogenous quality. Thus, the only driver remains price dierences. Important dierences in treatment prices may provide incentives on insurance funds to promote, or even organise, medical travel for their insurees. Indeed, some private US Health Maintenance Organisations (HMO) do cover non emergency care received in neighbourhood or even distant countries, but this is not the case for public insurance schemes such as Medicare or Medicaid in the US, or other similar schemes in other countries 11 . In other words, for most individuals in rich countries, insurance coverage distorts prices, and out of pocket costs paid by patients who could consider to travel for medical care do not reect dierences in complete treatment costs. We nevertheless investigate a model in which the patient faces the true dierences in costs across countries: this is obviously the case for uninsured patients, which constitute the bulk of potential demand for cross border health care services, but may also be interpreted as a situation in which an insurer sets its reimbursement policy to make its insurees internalises these cost dierences12 .

2.3

Trying to combine both insights

The arguments above lead us to point out some elements which need to be taken into account in a formal model. First, health care costs should be endogenous. Since production of health care mostly relies on labour, the market for medical labour should be explicitly modelled, in interaction with
Burne, 2008 Mattoo and Rathindran, 2006. 12 Indemnity insurance, as opposed to reimbursement insurance, is a common feature of insurance schemes outside of medical care, and gives incentives to the insuree to seek for the best service at the lowest cost.
11 10

the market for medical care. Second, individual health is a key determinant of demand for medical care, but may also aect treatment costs, as well as travelling costs. Third, regulation in rich countries imposes cross subsidies, in the sense that patients in bad (resp., good) health are charged a price below (resp., above) their treatment cost. In the sequel, we develop a simple framework which tries to capture these elements. To start with, we present a model of the health sector that integrates both a market for health services and a market for health care professionals. An important institutional element of the model relates to how health prices are determined on the supply side of the sector. Two alternative regimes are discussed. The rst one (identied to be the situation of the Northern country) considers that regulation prevents health care suppliers to base their price on patients health state. This implies therefore some pooling and average cost pricing of health care services. The second possibility (corresponding to the case of the Southern country) assumes in contrast that price discrimination across health states is fully possible, implying marginal cost pricing, under perfect competition. We derive then for each regime the health sector equilibrium under autarky in each country, assuming as well that Northern patients are richer than their Southern counterparts.

A simple model of the health care industry

Consider an economy with two goods: a non health care consumption good c and health care services H. We assume that the consumption good is produced under competitive conditions with unskilled labour only, under constant returns to scale: one unit of unskilled labour produces g units of the consumption good. For simplicity we assume an innitely elastic unskilled labour supply. This implies that the equilibrium wage rate w for unskilled labour must be equal to pg, where p is the price of the consumption good. Finally, we normalise the price of the consumption good to 1, so that the unskilled labour equilibrium wage w = g.

3.1

Health care supply

This paper focuses on patients movement from rich to poor countries. Many reports insist on the fact that hospitals which attract Northern patients oer a quality of service which is comparable to what can be obtained in the origin 10

country. We translate this fact into the assumption that their cost function is identical. Naturally, unit cost of inputs may be dierent, in particular labour costs, which make an important share of hospital costs. We assume that health care production requires two kinds of input: skilled labour L, and unskilled labour l. To translate the fact that treatment of less healthy patients may require more labour time, we assume that the treatment cost of a patient of health level h is given by C(h; w, m) = x(h)c(w, m). c(w, m) is a standard cost function homogenous of degree 1 and strictly concave in w and m (respectively the wage rate of unskilled labour and skilled labour); x(.) is a decreasing function of health h and captures the fact that patients in better health conditions are less costly to treat13 . The cost C(h; w, m) therefore represents the marginal cost to treat one patient in state h. If patients are ranked according to their health h and if patients treated are the sickest, then the average cost to treat all patients in a health condition s lower than a given value h is given by: Rh
0

AC(h, w, m) =

C(h; w, m)f (h)dh = F (h)

Rh
0

x(h)f (h)dh c(w, m). F (h)

(1)

with F (.) and f (.) respectively the cumulative and density function of the distribution of health levels in the population. Under the assumption that the marginal cost decreases with h (ie. x(h) is decreasing in h), then the average cost AC(h, w, m) also decreases with h, but always remains above the marginal cost curve (ie. AC(h, w, m) C(h, w, m) for all w, m). The supply of medical doctors (skilled labour) is xed and denoted by M. By Shepards lemma, the demand for skilled labour to treat a patient of C c health h is given by L(h; w, m) = m (h; w, m) = x(h) m 14
In the special case of a Cobb Douglas technology of health treatment, we would get C(h; w, m) = x(h)[aa (1 a)(1a) ]wa m1a with 0 < a < 1. Alternatively, when there is no possibility of substitution between skilled and unskilled labour in health treatment, the cost function would take the following linear form: C(h; w, m) = x(h)[w + m], with , > 0. 14 In the case of a Cobb-Douglas production function, it is given by L(h; w, m) = x(h)(w/m)a aa (1 a)a . Alternatively for the Leontie production case, it is given by L(h; w, m) = x(h).
13

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3.2

Demand for health care

We assume that demand for health care is induced from utility of health. In a given country, agents have identical preferences over consumption and health, represented by a utility function u(c, H). We assume that u is increasing in both arguments, with decreasing marginal utility of consumption or health (ie. u0c > 0; u0H > 0, ucc < 0 and uHH < 0). We also assume that the cross derivative ucH 0: a better health makes consumption goods more enjoyable. We also assume for simplicity that in a given country all agents have the same income Y . Agents however dier in terms of health h, which is distributed among the population according to a distribution function denoted by f , with cumulative distribution denoted by F (.). Medical treatment of someone of health h improves health with after-treatment health h0 given by h0 = Max (H(h), h) with H(h) an increasing function of pre-treatment health h, and H(0) > 0 0 and Hh < 1. These assumptions imply that there exists a level of health hsup such that for all h hsup , medical treatment does not improve health conditions (ie. after-treatment health h0 is just equal to pre-treatment health h); This will imply that all individuals with health conditions better than hsup will never demand for health care services. Indeed, consider now the willingness to pay z for health care treatment. For a given individual with health h, it is given by the following condition: u(Y z, h0 ) = u(Y, h). (2)

The willingness to pay z is a function z(h, Y ) of income Y and initial health state h. Dierentiation of (2) for h < hsup provides:
0 u0c (Y z, h0 )dz = [u0c (Y, h) u0c (Y z, h0 )]dY + [u0h (Y, h) u0h (Y z, h0 )Hh ]dh (3) With the above assumptions on u(.) and H(.) and the fact that h0 h, simple inspection of (3) gives immediately that z(h, Y ) decreases with initial health h and increases with income Y . Moreover it is easy to see that z(hsup , Y ) = 0. Given that all individuals with health conditions larger than hsup never demand health care services, we can usefully restrict ourselves to distributions of health levels on the interval [0, hsup ]. In terms of demand for health care, two dierent cases can then be analyzed, depending on whether the supplier can post a price which depends on health or not.

12

 Uniform pricing regime We rst investigate the case in which a uniform price p for health care is charged to the patient. In that case, since willingness to pay decreases with health, demand is directly determined by the distribution of health within the population. Let us denote by h(p, Y ) the largest level of health state for which the patient demands one unit of health care at price p. Formally, it is determined by u(Y p, H(h(p, Y )) = u(Y, h(p, Y )). Equivalently, we have that h h(p, Y ) if and only if z(h, Y ) p. Note that h(p, Y ) < hsup for all p > 0 and h(0, Y ) = hsup . Demand for health care treatment is then given by: D(p, Y ) = Z
h(p,Y )

f (h)dh = F (h(p, Y ))

(4)

In short, at a given price, only patients in bad health (below the threshold level h(p, Y )) demand health care. The threshold value h(p, Y ) is decreasing with p. Since the income level also determines willingness to pay, a higher income Y leads to a larger health demand. Marginal pricing regime z(h, Y ) C(h; w, m)

In that regime there is perfect discrimination across patients and medical care to a patient in state h is just priced to its marginal cost C(h; w, m).The demand for health care stems then from patients for whom the willingness to pay is larger than that production cost. Note however that a marginal improvement in patients health h negatively aects the willingness to pay for health care z(h, Y ) as well as the marginal cost C(h; w, m) = x(h)c(w, m) to treat this patient. In the sequel, we assume that the rst eect dominates in absolute terms the second one. More precisely we assume that Assumption H1 : For all relevant income level Y and h [0, hsup ] ,
0 zh (h, Y ) x0 (h) < <0 z(h, Y ) x(h)

Under assumption H1, only patients with poor health conditions will demand health treatment. Indeed, one gets easily the following lemma :

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 Lemma 1: Suppose that assumption H1 holds, then there exists a unique threshold value h [0, hsup ] such that all patients with health h h demand health treatment while all those with health h > h do not demand health treatment. When h ]0, hsup [ , the health level h is given by the relationship z(h, Y ) = C(h; w, m), or alternatively the w, m), H(h)) = u(Y, h). condition u(Y C(h; Proof : See the appendix. It follows from the above discussion that in the marginal pricing regime, the demand for health treatment is equal to F (h). Notice as well that in contrast to the uniform pricing regime, now there is no single price for medical care, but a competitive price p(h) = C(h; w, m) for each value of h.

3.3

Equilibrium

Before allowing the possibility of medical travel, we rst look at autarkic equilibrium in each country: the North and the South. The main purpose of our theoretical analysis is to identify how each of these reference situations is aected by international trade in health care. In order to do so, we assume that patient income in each country (YN and YS respectively for the North and the South) is not aected by international trade in health services. This keeps each equilibrium analysis tractable, and seems a reasonable assumption.

3.4

Northern country

As said above, we assume that in the Northern country, health care is supplied at a uniform (pooling) price p, independent of patients health and under a balanced health sector budget. The total cost to treat all patients with health h lower than h(p, YN ) is equal to: Z
h(p,YN )

C(h; w, m)f (h)dh = c(w, m)

Under a balanced health sector, this must be equal to total revenue, which is equal to pD(p) with D(p) given by (4) One gets therefore the following

h(p,YN )

x(h)f (h)dh

14

average pricing rule:p = AC(h(p, Y ), w, m) = c(w, m) p= F (h(p, YN )) Z

h(p,YN )

c(w,m) F (h(p,Y ))

x(h)f (h)dh = AC(h(p, YN ), w, m)

R h(p,Y )
0

x(h)f (h)dh (5)

with h(p, Y N ) determined by the condition z(h, YN ) = p It will be convenient to dene 1 Ax(h) = F (h) Z
h

(6)

x(h)f (h)dh

(7)

such that the average cost AC(h, w, m) = Ax(h).c(w, m). Notice that, since the marginal cost C(h; w, m) = x(h)c(w, m) decreases with health h, then the average cost AC(h, w, m)) = Ax(h).c(w, m) is also decreasing in h; Also the average cost AC(h, w, m) remains above the marginal cost curve C(h; w, m)15 . Joining (5), (6) and (7), we get therefore the rst equilibrium condition z(h, YN ) = AC(h, w, m) = Ax(h)c(w, m) which is represented on Figure 1. In analogy with the marginal pricing regime and assumption H1, to ensure a well dened equilibrium we make the following assumption Assumption HA : For all relevant income level Y and h [0, hsup ] ,
0 Ax0 (h) zh (h, Y ) < <0 z(h, Y ) Ax(h)

This condition essentially ensures that the health demand curve decreases relatively more rapidly with h than the average cost curve, ensuring that in the average cost pricing regime, again only patients with poor health conditions will demand health treatment. Indeed, in analogy with lemma 1, we get the following lemma 2
Inspection of (1) shows that indeed Ax(h) > x(h) for h > 0. LHospital Rule provides as well that Ax(0) = x(0).
15

15

 Lemma 2: Suppose that assumption HA holds, then there exists a unique threshold value hN [0, hsup ] such that all patients with health h hN demand health treatment under average health pricing while all those with health h > hN do not demand health treatment. When hN sup ]0, h [ , the health level hN is given by the relationship z(hN , YN ) = N ; w, m), or alternatively the condition u(YN AC(hN ; w, m), H(hN )) = AC(h u(YN , hN ). Proof: See the appendix. For a given Y and w, this rst equilibrium condition links the medical doctor wage m and hN , the threshold value for health which characterises which patients get treated (ie. those with health h below hN ). An increase in m shifts the average cost curve AC(h, w, m) upwards, and therefore increases the pooling health price p = AC(h, w, m) ; This in turn decreases hN : less patients get treated. When m is very low, average cost is small, and the equilibrium corresponds to a small value of z(h, YN ), i.e. a high value of h; in the opposite case, when m is very large, average cost is high, and only those in very poor health are willing to pay for health care.

The second market is the one for medical doctors (or for their labour time). The market clearing condition writes as: Z
hN

C (h; w, m)f (h)dh = MN . m

The right hand side term MN is simply the xed supply of medical doctors R h C in the North. The left hand side term LT (hN ; w, m) = 0 N m (h; w, m)f (h)dh is the demand for medical labour to treat all patients with health below hN . Due to substitution between skilled and unskilled labour, the cost function is quasi-concave in (w, m), the marginal cost is decreasing with m and the demand for labour also decreases with m for each value of hA . Given that the supply of medical labour is xed, a decrease in used labour for each value of the threshold hN implies that more patients may be treated with the same supply of doctors. In short, for that equilibrium condition, an increase in m generates an increase in hN . For a very small medical wage m, the demand for doctors is large, and not many patients may be treated with the available 16

 xed supply: the corresponding value of hA should be small. When m is very large, the opposite holds: mostly unskilled labour is used in the production function, and therefore many patients may be treated. Notice that this pos itive relationship between m and hN depends crucially on the possibility to substitute between skilled and unskilled labour in the health care production function. In the extreme case of a Leontie production function with perfect complement inputs, demand for skilled labour does not respond to changes in medical wages, and the total number of patients treated is determined by the available supply of doctors MN , independently of their wage. Given that the consumption good is produced with unskilled labour only and under constant returns to scale, the equilibrium wage rate is equal to g. However, the model is not yet fully specied: the demand for health care depends on income. Labour income is made of three parts: unskilled labour used in consumption good production or in the health care sector, at the equilibrium wage rate w = g; skilled labour, supplied at the equilibrium wage m. A complete general equilibrium approach would require to specify unskilled labour supply, but such an extension is beyond the scope of the current paper. Instead, we assume that countrys income YN is exogenously given. Under this assumption, and given that the equilibrium wage w is equal to g for unskilled labour, the set of equations (8) determines the equilibrium skilled wage m and the threshold value hN : z(hN , YN ) = AC(hN ; g, m) (8) T MN = L (hN ; g, m) These can be rewritten as : ( z(hN ,YN ) = c(g, m) Ax(hN ) MN = Ax(hN )F (hN )c0m (g, m)

As said above, each of these conditions links m and hA ; the rst gives a negative relationship, the second a positive one. Under reasonable boundary conditions, a unique equilibrium (m , hN ) can be ensured. More precisely we get the following proposition: Proposition 1: Suppose that assumption HA holds and that limm0 c(g, m) = 0, limm0 c0m (g, m) = + and limm c0m (g, m) = 016 , then there ex ists a unique health sector equilibrium ( m , hN ) satisfying (8).
16

These boundary conditions are equivalent to Inada conditions and are satised for

17

Proof : See the appendix. The complete equilibrium may be analysed on the following gure. The downward sloping curve reects the health care services market and describes the health threshold hN (m) below which get treated for a given medical doctor wage m. The upward sloping curve describes the equilibrium medical doctor wage m(hN ) coming from medical skilled labour market clearing. The e intersection of the two curves provides the health sector equilibrium (m , hN ) under autarky in the North. Notice that the upward sloping curve which corresponds to the market for medical labour is vertical when substitution between inputs is not possible.

3.5

Southern country

In the poor country, the situation is dierent in two main respects. Firstly, population income is lower (YS < YN ), which leads to a lower willingness to pay for health care, and thus a lower demand. Secondly, skilled labour supply is lower, in particular for medical doctors MS < MN . Thirdly, the overall productivity of the economy is lower, which may be represented by the assumption that gS is lower than g = gN . Finally, we assume that health care is sold at competitive price, which may depend on patients health state h. In other words, the market for medical care is perfectly segmented. There may be also dierences in terms of population health distribution F (.), but we abstract from that dierence in the analysis. The cost to provide one unit of medical care to a patient in state h is equal to C(h; w, m), but here wages refer to southern wages. Given our discussion of the marginal cost pricing regime, under assumption H1, applying lemma 1 to the South context tells us that there exists a threshold value hS [0, hsup ], dened by: u(YS C(hS ; w, m), H(hS , 1)) = u(YS , hS ),

such that health treatment demand in this country is equal to F (hS ). The above condition also induces that willingness to pay z(h, YS ) is larger
instance for cobb-douglas treatment technologies of the health sector. Note that it requires some degree of substituability between the two factors skilled and unskilled labour. In particular, it is not satised for the leontie technology with no substituability. However direct inspection of (8) shows that one can directly characterize the equilibrium values (m , hN ) in such a case as well.

18

 than treatment cost C(h; w, m) if and only if health h is smaller than hS . Therefore the equilibrium condition on the market for health care is now given by: z(hS , YS ) = C(hS ; w, m). The second equilibrium condition on the market for skilled labour is unchanged, and may be written in a compact format as: MS = LT (hS ; w, m). Hence nally, the following health sector equilibrium conditions of the South z(hS , YS ) = C(hS ; gS , m) (9) S T M = L (hS ; gS , m) which can be rewritten as (
z(hS ,YS ) x(hS )

MS

= c(gS , m) S )F (hS )c0 (gS , m) = Ax(h m

The equilibrium analysis proceeds is the same than in the richer country. In particular we have the following proposition ensuring the existence and unicity of the autarkic equilibrium (m , hS ) in the South. Proposition 2: Suppose that assumption H1 holds and that limm0 c(g, m) = 0, limm0 c0m (g, m) = + and limm c0m (g, m) = 017 , then there ex ists a unique health sector equilibrium ( m , hS ) satisfying (9). Proof : See the appendix.
These boundary conditions are equivalent to Inada conditions and are satised for instance for cobb-douglas treatment technologies of the health sector. Note that it requires some degree of substituability between the two factors skilled and unskilled labour. In particular, it is not satised for the leontie technology with no substituability. However direct inspection of (8) shows that one can directly characterize the equilibrium values (m , hN ) in such a case as well.
17

19

3.6

Comparison of equilibria

As said above, four elements are dierent between the rich and the poor country: income level Y , medical supply M, unskilled wage rate (productivity) g, and pricing regulation. We study in turn the eect of each of these dierences. The reference country is the Southern (poor) one. A higher income increases the willingness to pay for health care, and shifts the demand curve upwards. This implies that for a given m, more patients will demand health care. This shifts the threshold health - medical wage curve 1 on Figure 2 upwards, which increases medical wages and, to a degree which depends on substituability of inputs, increases the total number of patients treated. A higher medical supply (per population) has dierent eects. For a given m, more patients may be treated with the available supply of doctors, and this shifts the threshold health - medical wage curve 2 to the right. Equilibrium medical wages decrease, and the total number of patients treated increases. A lower overall productivity g directly aects the cost of unskilled labour in the health production function. A higher unskilled wage increases production costs. For a given m, less patients will be treated, and the threshold health - medical wage curve 1 shifts downards. But unskilled labour wage may also aect the demand for medical labour: a higher value of w = g increases demand for medical labour, which shifts the THMW curve 2 to the left. The overall eect on medical wage is unclear; the eect on the total number of patients treated is negative. The last dierence comes from pricing regulation. As said above, the curve function to be considered on the market for health care is the marginal cost curve C(h) in the poor country, whereas it is the average cost curve AC(h) in the rich one. All other things being equal, the average cost curve is above the marginal cost curve. Regulation implies that less patients will be treated in the rich country. However, notice that in the rich country patients in very bad health pay the pooling price, which is lower than their treatment cost; patients in better health pay more than their treatment costs; and patients in even better health are not treated, even though their willingness to pay is above their treatment cost. But the point is that the THMW curve 1 shifts downwards, decreasing both medical wages and number of patients treated. The fact is that medical wages are higher in rich countries, and more 20

patients are treated, even when we consider treatments which are not or poorly covered by health insurance, for which patients pay a substantial share of the price. Overall, it seems that the income eect dominates all the others. The two situations may be represented on the same gure 3, where the threshold health value is on the horizontal axis, price of medical labour (i.e., medical wage) is on the upper vertical axis, and price of medical care is on the lower vertical axis. In the sequel we will note the autarkic values in the North (m , hN ) and N A in the South (m , hS ) with a superscript A and respectively (mA , hN ) and S N A in the South (mA , hS ). S

Open trade

International trade in a good may occur when transportation costs are suciently low, so that the total cost of the good produced in an origin country, including production, transportation to the destination country, and delivery costs, is competitive with respect to a similar good produced in the destination country, which bears lower transportation costs. In terms of services, the denition of transportation is less clear. Indeed in terms of medical services, for mode 2 international trade, the consumer has to travel to the point of service. The transportation cost is nothing but the costs associated to this travel: they include pure transportation cost (airight ticket) and costs of stay (housing costs, and opportunity cost of time), which may also have to be paid for other persons accompanying the patient. We denote this total transportation cost by t(h). These costs may depend on patients health condition. The opportunity cost of time may be lower for individuals in poor health, but bad health also increases travel costs, especially for very poor health conditions: this may include the need to use an ambulance to travel to and from airports, or simply the pain or hassle to travel when ill. Overall, it seems that the association between health and transportation cost may depend on the specic illness for which a treatment is seeked. More specically, we consider that a northern patient with health h who decides to consume one unit of health care in the South has to pay transportation costs t(h) = r(h) + . The xed component reects standard trade policy impediments such as regulations and taris. On the other hand, 21

the variable part r(h) is a decreasing convex function of h (ie. r0 (h) < 0 and r(h) > 0) and reects the intrinsic cost to trade health services internationally. As discussed, it depends negatively on the patients individual health level. We further assume that these transportation costs to medical services are decreasing in health levels at a decreasing rate, so that the r(h) function is convex. We also impose for convenience the boundary conditions that r(0) = + and limh r(h) = 0 and r0 (0) = and limh r0 (h) = 0 so that it is prohibitively costly to move the least healthy individuals to the South, while on the opposite, there are no moving costs for the most healthy patients. We will denote all variables which refer to the Northern (resp., Southern) country with a subscript N (resp., S). Also, we restrict ourselves to the main case of northern individuals going to the south in order to benet from cheaper medical treatments18 . The homogeneous good is freely traded across the two regions and we consider trade regimes with non specialization and positive production of that numeraire good in both regions. We assume that unskilled labour productivity in the North g is normalized to 1 and that unskilled labour productivity in the South is gS < 1. Competitive pricing in that sector therefore pins down the wages of unskilled labor in both regions as wN = 1 and wS = gS < 1. Getting now to medical services, for a northern patient with health h, the full cost of treatment in the South writes as x(h)c(gS , mS ) + r(h) + . That patient will opt for treatment when z(h, YN ) Min (pN , x(h)c(gS , mS ) + r(h) + ) where pN is the price of medical services in the North and given by average costs in that region. Formally, a North-South medical service trade equilibrium can then be described by a non-discriminating northern medical price pN , medical doctor wages mN , mS in the North and South, a health threshold hS below which
Conceptually, some southern patients could also want to go to the North to benet from new medical technologies that do not exist in the south pr because of the "cross subsidizing" medical regime associated to average pricing in the North. We assume the marginal willingness to pay for medical services in the South is be small enough compared to the transportation costs so that this kind of South-North medical trade ows are not present in the current model.
18

22

southern patients get treated in the South and sets of northern patients N , 1 N satisfying : 2 N (pN , mS , ) 1 h [0, hsup ] such that = z(h, YN ) Min (pN , x(h)c(gS , mS ) + r(h) + ) h [0, hsup ] such that N 2 (pN , mS , ) = pN > x(h)c(gS , mS )) + r(h) + R x(h)f (h)dh hN N c pN = R 1 2 . c(1, mN ) N N c f (h)dh h
1 2

(10)

(11)

(12) (13) (14)

z(hS , YS ) = x(hS )c(gS , mS ) # "Z c (1, mN ) = MN x(h)f (h)dh m hN N c 1 2 "Z x(h)f (h)dh #

L (hS ; gS , mS ) +
T

hN N 1 2

c (gS , mS ) = MS m

(15)

(10) describes the set N of northern agents with health levels such that 1 they prefer to be treated in the North or in the South. Conversely, if Nc 2 denotes the complementary of N , then N Nc reects the set of north2 1 2 ern patients that are treated in the North while N N denotes the set 1 2 of northern patients treated in the South. (12) simply restates that there is average cost pricing in the North while and (13) characterizes the threshold hS below which southern patients get treated in the South, given that that there is marginal cost pricing. Finally, (??) and (??) describes the medical doctors labor market clearing conditions in the North (respectively in the South). In the South, this includes the labor demand LT (hS ; gS , mS ) emanating from treatment of southern patients plus the demand that comes from medical tourism of northern patients to the South. In the sequel, it is useful to denote (h, m) = z(h, YN ) x(h)c(gS , m) r(h) as the dierence between the willingness to pay for medical care and the direct cost (net of trade frictions ) of medical services in the South (recalling that the unskilled labor wage is given by wS = gS ). We assume 23

r(h) to be convex enough so that for all m, (h, m) is a concave function of 2 h (ie. < 0) (see the appendix). We also show in the appendix that for all h2 m the function (h, m) reaches a maximum at some value of health b h(m). Moreover, this maximum (m) = Maxh (h, m) is clearly decreasing in m and negative when m is large enough. We then make the following assumption: h(mS h(mS h(mS Assumption E: (mA ) = z(b A ), YN ) x(b A ))c(gS , mA ) r(b A )) > 0 S S A A and b S ) > hN h(m

This assumption means that there is at least one individual in the North that is not treated in autarky (as b A ) > hA ) and is ready to pay for medh(mS N ical services in the South when labor wages there are the autarkic ones (gS and mA ) and there is no trade friction ( = 0). Without such an assumpS tion, there would be no possibility of international trade in medical services between the two regions. We then get the following proposition characterizing the ow of international medical services from the South to the North (and associated ows of northern patients to the South) as a function of trade barriers and medical doctor wages mS in the South: Proposition 3: Under assumption E, we get the following:

i) There is a value of prohibitive trade frictions such that for , there is no international trade in medical services.

ii) For 0 < , there exists a wage threshold mS ( ), such that for all mS mS ( ), then, again there is no international trade in medical services. The threshold mS ( ) is decreasing in and mS ( ) = mA . S iii) For 0 < , and mS < mS ( ), then there exists an interval [h1 (mS , ); h2 (mS , )] such that all individuals from the North with health h [h1 (mS , ); h2 (mS , )] are ready to pay medical services in the South. The size of this interval is decreasing with trade frictions (ie. h1 (mS , ) is increasing in and h2 (mS , ) is decreasing in ) and h1 (mS ( ), ) = h2 (mS ( ), )).Finally at the threshold mS ( ), the size of this interval is zero (ie. h1 (mS ( ), ) = h2 (mS ( ), )). Proof: See the appendix. 24

Part i) of proposition 3 obviously says that trade barriers need to be suciently small for international trade in heath services to occur. Part ii) indicates moreover that the cost of medical treatment in the South (as indexed by medical doctor wages mS ) should also be low enough for such transaction to be attractive to northern patients. More interestingly, part iii) indicates that when individual transport costs r(h) are decreasing convex enough, then only northern patients with intermediate values of health (ie such that h [h1 (mS , ); h2 (mS , )]) are likely to travel to and get treated in the South. The reason for this is the following. Individuals with very bad health conditions and low values of h face prohibitive transports costs r(h) and therefore cannot be treated eciently in the South. Conversely, individuals with good health and high values of h, have a low willingness to pay for medical treatment,implying tha they are also unlikely to pay the transaction costs r(h) + of international trade to be treated in the South. It follows that only northern individuals with intermediate values of h may nd it attractive to get medical treatment in the South. Indeed such individuals face moderate personal costs r(h) of moving abroad while still having a relatively large willingness to pay z(h, YN ) to pay for medical care. Given the precedent discussion we are now ready to describe the nature the international trade equilibrium in medical services. Two basic cases can be dierentiated. In the rst one, all northern patients that get treated in the South were not treated in the North under autarky. Trade in medical services between the two regions comes from a pure northern demand expansion eect of medical services to the South without changes in the demand for medical services treated in the North itself. Consequently, all variables in the North remain unaected at their autarkic values. The second case corresponds a situation where additionally there is a displacement of the demand for medical services in the North induced by international trade with the South. In that situation, some patients that are treated under autarky in the North, shift to be treated in the South. In such a situation, obviously, the equilibrium variables of the northern region are dierent from the autarkic ones. Recall that in the sequel we note all autarkic values in the North and in the South with a superscript A 1) "Pure North demand expanding" trade equilibrium 25

North imply pN = pA , mN = mA and the conditions in the South write as: N N z(hS , YS ) = x(hS )c(gS , mS ) "Z
h2 (mS , )

Consider rst the situation where all trade in medical services between North and South trade comes from a pure expansion of the demand in medical services from northern patients stimulated to choose to be treated in the South. In such a equilibrium hthe set of treated individuals in the North i A N Nc remains the interval 0, hN and the equilibrium conditions in the 1 2 (16)

LT (hS ; gS , mS ) +

x(h)f (h)dh
A

h1 (mS , )

c (gS , mS ) = MS m

(17) (18)

The rst equation (16) determines the health threshold hS = hS (mS ) below which southern individuals want to consume medical services in their region, given that there is competitive pricing there. Under the assumption H1,this threshold is a decreasing function of mS . The second condition (17) is the labor market clearing condition for medical doctors in the South. Total demand is made of two terms. The rst term LT (hS ; gS , mS ) is simply the demand emanating from local southern consumers. The second term is the additional demand coming from new northern patients going to the South in the interval [h1 (mS , ); h2 (mS , )]. Finally, the last condition (18) ensures that only northern patients who were not consuming medical services under A autarky (ie with health levels h hN ) are willing to consume medical services in the South. Looking at equation (17), one may denote (mS , ) the aggregate demand for medical doctors in the South : "Z # h2 (mS , ) c (gS , mS ) x(h)f (h)dh (mS , ) = LT (hS ; gS , mS ) + m h1 (mS , ) We then get the following lemma: Lemma 3: Assume assumption H1 holds, then : i) (mS , ) is decreas ing in mS ; ii) there is a unique equilibrium wage me ( ) mA , mS ( ) S such that (me ( ), ) = MS ; iii) This equilibrium wage me ( ) is a decreasing function of trade frictions . 26

h1 (mS , ) hN

Proof: See the appendix. Substituting in (16) provides then the equilibrium southern health thresh old he = hS (me ( )) that is increasing in . Indeed, reduced trade frictions S tend to increase the demand for medical services in the South from northern patients. This creates a larger demand for medical doctors in the South and increased pressures on their wage mS . As the price of medical services in the South increases, less southern patients get treated and he goes down. S To be in an "pure demand expanding" equilibrium, nally condition (18) should be satised ie. h1 (me ( ), ) hA . The following proposition provides N conditions under which this is going to happen. Proposition 4: When the autarkic price of medical service in North pA N is high enough, there exists a threshold [0, [ such that a "Pure North demand expanding" health trade equilibrium exists for all value of [ , ]. Proof: see the appendix. 2) A "North demand shifting" trade equilibrium: When direct trade costs are below the threshold , trade in medical services between the two regions leads to a situation where additionally there is a displacement of the demand for medical services in the North. In that situation, some patients that are treated under autarky in the North, shift to be treated in the South. It follows that aggregate demand for medical services in North is reduced, aecting therefore as well the northern medical costs. One can rst note that because of assumption HA and the fact that z(h, YN ), x(h), r(h) are all decreasing functions of h, the set of treated individuals treated in the North N Nc 1 2 z(h, YN ) pN and N Nc sup 1 2 = h [0, h ] p (19) pN < x(h)c(gS , mS ) + r(h) + is an interval 0, hN . The northern price pN is therefore given by pN = ACN (hN , mN ) = R hN
0

x(h)f (h)dh F (hN )

. c(1, mN )

27

and the trade equilibrium conditions in the North write as: AC(hN ; mN ) = x(hN )c(gS , mS ) + r(hN ) + LT (hN ; mN ) = MN A hN < hN (20)

The rst equation characterizes the northern individual hN indierent between consuming medical services in the North (and paying the average cost pN = AC(hN ; mN )) and getting treated in the South (and paying total competitive pricing medical costs x(hN )c(gS , mS ) plus the transaction costs r(hN ) + ). The second equation is the medical doctor market clearing condition in the North. Finally, the last equation says that this marginal patient hN is A actually below the threshold level of autarky hN , ensuring that we are in an "North demand shifting" equilibrium. Similarly, the equations for the South are described as follows: z(hS , YS ) = x(hS )c(gS , mS ) "Z # (21)

LT (hS ; gS , mS ) +

h2 (mS , )

x(h)f (h)dh

hN

c (gS , mS ) = MS m

(22)

(21) shows again the level of health hS of the marginal patient in the South while (22) is again the market clearing condition for medical doctors in the South. Note now that in the aggregate demand for medical doctors in the South, the additional demand emanating from norther patients writes as: "Z # h2 (mS , ) c (gS , mS ) x(h)f (h)dh m hN The international equilibrium is then obtained recursively. First, we dene the set of values of (mN , mS , ) such the autarkic agent in the North prefers to have medical services in the North rather than in the South. Formally this is dened as T = {(mN , mS , ) | AC(hA ; 1, mN ) < x(hA )c(gS , mS )+ N N r(hA ) + }. It is clear that this denes a south doctor wage level mS ( , mN ) f N 28

decreasing in and increasing in mN such that (mN , mS , ) T if and only if mS > mS ( , mN )19 . f In the appendix we show that under reasonable assumptions on the functions x(h), r (h) and Ax(h), for all mS < mS ( , mN ), there exists a unique f eN (mN , mS , ) < hA such that the individual with health health value h N eN (mN , mS , ) is indierent between treatment in the North and treatment h in the South, given that all individuals with health less than eN (mN , mS , ) h eN (mN , mS , ) has to satisfy are treated in the North. Formally h Moreover, inspection of (23) reveals that such threshold eN (mN , mS , ) is h decreasing in mN , and increasing in mS and . The Northern region equilibrium conditions (20) can then be written as: hN = eN (mN , mS , ) h (CC) and T (MM) L (hN ; 1, mN ) = MN (24) AC(eN ; 1, mN ) = x(eN )c(gS , mS ) + r(eN ) + h h h (23)

One can show that for all values of mS < mS ( , mA ), these two equations f N N (mS , ) < hA and mN (mS , ) < mA with characterize a unique solution h N N hN (mS , ) and mN (mS , ) increasing in (mS , ). Moreover by denition of T , for mS < mS ( , mA ), we necessarily have a "North demand shifting" regime f N N (mS , ) < hA ). (ie. h N Consider now the equilibrium for medical doctors in the South. Using (21) and (22). It writes as : "Z # h2 (mS , ) c (gS , mS ) = MS x(h)f (h)dh LT (hS ; gS , mS ) + m hN (mS , ) {z } |
(mS , )

with hS (mS ) determined by z(hS , YS ) = x(hS )c(gS , mS ). It is again straighte forward to see that the aggregate labor demand for southern doctors (mS , ) is decreasing in mS (see the appendix). For small enough trade frictions, (ie.
Note that mS ( , mA ) = me ( ) and h1 (me ( ), ) = hA and therefore : g N N AC(hA ; 1, mA ) = z(hA , YN ) = x(hA )c(gS , me ( )) + r(hA ) + N N N N N
19

29

 ), it can then be shown that there exists a unique equilibrium value e of wage me ( ) < mS ( , mA ) such that (mS , ) = MS . eS f N The complete characterization of the " North demand shifting" trade equilibrium is obtained by substituting the equilibrium wage value me ( ) eS into (21) and (24) to obtain In this "North demand shifting" regime, as he < hA , on average less N N healthy individuals get treated in the North. Compared to autarky, this implies an increase of the average cost of medical services ACN in the North A and an increase therefore of its price pe = ACN > ACN = pA . At the same N N time, the reduction of the demand for medical services in the North leads to a reduced demand for medical doctors in the North. Consequently the equilibrium wage me becomes lower than the autarkic wage mA . All these N N eects are stronger the degree of international integration, that is the lower the level of trade frictions Conversely, in the South, we nd the same eects as in the "Pure North demand expanding" trade regime. The increased demand for medical services in the South emanating from northern patients increases the wage rate of medical doctors me ( ) in that region further above the autarkic wage mA S S and leads to a crowding out of local southern patients. The equilibrium health threshold he is reduced. Again these eects are stronger, the lower S the degree of trade frictions . This preceding discussion can be summarized as follows For there is no international trade in medical services For [ , [, there is a "Pure North demand expanding" trade equilibrium with hN = hA , mN = mA . There is a new range of northern N N patients in an interval [h1 ; h2 ] who consume medical services in the South with h1 hA . The equilibrium medical doctor wage in the N south becomes me ( ) > mA and is decreasing with . S S For < , there is a "North demand shifting" equilibrium with the marginal northern patient in the North having an equilibrium health levelhN < hA ,. The equilibrium medical doctor wage is me ( ) < mA N N N 30 e e eS he = hS (me ( )); he = hN (me ( ), ) and me = mN (me ( ), ) S S N S N

 Finally, when there is international trade in medical services (ie. < ), compared to autarky there is crowding out on health treatment of southern patients (ie. the marginal southern patient has an equilibrium health level hS < hA ). S The three possible cases are represented on the following gures:

and increasing in . A fraction hN , hA of northern patients shift from N medical services in the North to medical services in the South. A new range of northern patients in an interval [hA ; h2 ] consume medical serN vices in the South. The equilibrium medical doctor wage in the South me ( ) in this regime is such that: me ( ) > mA and it is decreasing eS eS S with .

31

Figure 1 below summarizes the equilibrium on the market for medical services in three dierent situations. The x-axis represents patients health h, and the y-axis is money. The rst case is the case where the cost of treatment in the South C(h; wS , mS ) + r(h) + is always too high to allow for international trade in medical services. The second case illustrates a "Pure North demand expanding" trade equilibrium. In the North, the quantity of medical services and medical doctor wages are not aected by trade integration (hN = hA , N and mN = mA ). However there is a new range of northern patients in an N interval [h1 ; h2 ] who consume medical services in the South with h1 hA . N Finally, the third case describes the situation of a "North demand shifting" trade equilibrium. The marginal northern patient in the North has now an equilibrium health levelhN < hA ,. A fraction hN , hA of northern N N patients shift from medical services in the North to medical services in the South. This increases the price pN of medical services in North. At the same time, a new range of northern patients in an interval [hA ; h2 ] consume N medical services in the South.

Welfare Implications

-To be written

Conclusion

This paper investigates one aspect of international trade in medical services: patients who travel abroad to consume health care. We model a general equilibrium situation, to study interaction between the market for health care services and the market for health care professionals. We rst study autarkic situations in two stylised countries (a poor country with a competitive medical sector, and a rich country with regulated medical prices). We then investigate trade in medical services. A central assumption of our analysis is that travel costs dier across patients, according to their health conditions. This features induces a selection bias in patients movement, which has important consequences with international trade. For intermediate travel costs, only patients who would not 32

have been treated in their origin country travel for treatment. There is no eect in the rich country while in the poor country, the positive demand shock may increase equilibrium medical wages and health care prices, which aects doctors positively but southern patients negatively. Conversely, if travel costs are low, the health sector in the rich country is also aected. At the margin, patients in a better condition than those who stay at home to get treated:abroad, worsening the case-mix of patients treated in the origin country . This has conicting eects on medical care prices, but unambiguously puts a downward pressure on medical wages. In short, in the origin country the selection eect increases average costs, but increased competition may reduce them. The overall eect on patients who do not travel for health care is ambiguous, and depends on the relative magintude of the two eects. Beyond the eect on insurance premiums, the selection eect also puts pressure on risk pooling by insurance rms. This may result in an increase in the insurance market failure in countries who lack universal coverage, making it more dicult for high risk individuals to nd an insurance contract. The eect on health care workers is unambiguously negative, as the two eects combine to decrease demand and wages. In the destination country, the eects move in the opposite direction. Medical professions benet from the increase in demand. As international competition tends to equalise input factors prices across countries, they also benet from an increase in wages. As for local patients, foreign demand for health care leads to an increase in medical prices and wages; insofar as some medical workers (physicians, nurses,...) opt for the health care units open to international patients, this may result in a crowding out eect and actually decrease the overall quality of health care available to the local population. Again, this is a standard eect in international trade, which may be benecial to workers in industries open to international trade, but detrimental to the rest of the population who may face price increases. Of course, our analysis is just the beginning of a promising line of research about the issue of globalisation of medical services. A number of issues have not been taken into account and would merit further extensions. For instance one may want to introduce health care insurance or medical liability and see how international integration of medical services aects the functioning of the health care insurance market in the North and eventually internationally. Although our analysis remained essentially positive, our framework provides a toolbox to analyze welfare issues and political economy dimensions such as the overall gains, and who are the losers and winners of medical 33

service trade integration. Finally, clearly our analysis should be complemented by some empirical investigation on the eects of trade in medical services. Important questions naturally arise. Who are the patients treated in the poor country? Would they have been treated in their home country, or not? What are the eects of trade integration on the distribution of health conditions in the North and in the South? We hope that our framework will pave the way to adress these questions in the future .

References

American College of Surgeos (2009), Statement on medical and surgical tourism, Bulletin of the American College of Surgeons, 94 (4). Arrow, Kenneth (1963), Uncertainty and the welfare economics of medical care, American Economic Review, 53 (5): 941-73 Blouin, C, Nick Drager, and Richard Smith, eds (2002), International trade in health services and the GATS : current issues and debates, Washingon DC/Geneva : The World Bank / World Health Organization. Burne, J. (2008), A world of medical opportunity: special report on health tourism, http://www.treatmentabroad.net/medical-tourism/a-worldof-medical-opportunity/ Davis, Lucy, and Fredrik Erixon (2008), The health of nations: conceptualizing approaches to trade in health care, ECIPE Policy Brief, n. 04/2008. Einhorn, B. (2008), Top medical tourism destinations, Business Week.
http://images.businessweek.com/ss/08/03/0317_hospitals/index_01.htm?technology+slideshows Gardiol, Lucien, Pierre-Yves Geoard, and Chantal Grandchamp (2006) Selection and Incentive Eects: an Econometric Study of Swiss Health Insurance Claims Data", in Insurance: Theoretical Analysis and Policy Implications, ed. by P.-A. Chiappori and C. Gollier, MIT Press. Geoard, Pierre-Yves (2006), Incentive and selection eects in health insurance, chap. 10 in Elgar Companion to Health Economics, A. Jones, ed., Edward Elgar. Herman, Lior (2009), Assessing international trade in health services, ECIPE working paper n. 03/2009, www.ecipe.org

34

Manning, W.G., J. Newhouse, N. Duan, E. Keeler, A. Leibowitz, and S. Marquis (1987), Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment, American Economic Review 77(3): 251-277. Markusen, James R.(1989), "Trade in Producer Services and in Other Specialized Intermediate Inputs," American Economic Review 79 , pp. 85-95. Markusen, James R. & Strand, Bridget, (2007). "Trade in Business Services in General Equilibrium," CEPR Discussion Papers 6080, C.E.P.R. Discussion Papers Mattoo, Aaditya, and Randeep Rathindran (2006), How health insurance inhibits trade in health care, Health Aairs, 25 (2): 358-368. McClellan, Mark (1997), Hospital reimbursement incentives : an empirical analysis, Journal of Economics and Management Strategy, 6 (1): 91-128. Newhouse, Joseph (1993), Free for all? Lessons from the RAND Health Insurance Experiment, Harvard University Press. Newhouse, Joseph (1996), Reimbursing health plans and health providers: eciency in production versus selection, Journal of Economic Literature, 34(3): 1236-63 Newhouse, Joseph (2002), Pricing the priceless, MIT Press.

35

Appendix
Proof: of lemma 1: Consider the function (h) = z(h, Y )C(h; w, m) = z(h, Y )x(h)c(w, m). Suppose that there exists a value h ]0, hsup [ such that (h) = 0. Then h is determined by z(h, Y ) = c(w, m) x(h) Because of assumption H1, the function z(h, Y )/x(h) is decreasing in h. Therefore if such h exists, it is unique and we have (h) R 0 when h S h, implying that all patients with health h h demand health treatment while all those with health h > h do not. If there is no such h ]0, hsup [ with (h) = 0, then for all h ]0, hsup [ the function (h) has a constant sign. If (h) > 0 then all patients with h < hsup are ready to pay for medical treatment. Two case can occur. The rst one is (hsup ) = 0 and h = hsup . Or (hsup ) > 0 and for all h hsup patients are ready to pay for medical treatment. By convention one may again pose h = hsup . If (h) < 0, then no patient h > 0 is ready to pay for medical treatment. Then or (0) = 0 and h = 0.Or (0) < 0 and for all h > 0, patients are not ready to pay for medical treatment. Again by convention we can pose h = 0. From the denition of z(h, Y ), note that when h ]0, hsup [ , an alternative way to characterize h is also through the relationship u(Y C(h; w, m), H(h)) = QED u(Y, h). Proof of lemma 2: Identical to that of lemma 1, substituting Ax(h) for x(h) amd assumption HA for assumption H1. Proof of proposition 1: Given assumption HA and lemma 2, there exists a unique hN (m) sup [0, h ] satisfying the condition z(hN , YN ) = c(g, m) Ax(hN ) 36

for all m [0, m0 ] with m0 given by the condition c(g, m0 ) = z(0,YN ) (ie Ax(0) such that hN (m0 ) = 0). Moreover hN (m) is decreasing in m and because limm0 c(g, m) = 0 and z(hsup , YN ) = 0, one also get hN (0) = hsup . Similarly N T the second condition M = L (hN ; g, m) can be written as Z
hN

x(h)f (h)dh =

MN 0 (g, m) cm

Recalling that c0m (g, m) is decreasing in m and that limm0 c0m (g, m) = + and limm c0m (g, m) = 0, this relationship denes a unique value m(hN ) for e sup all hN [0, h ]. Moreover m(hN ) is increasing in hN with m(0) = 0 and e e m(hsup ) > 0. e Now dene the function (m) = m(hN (m)) m for all m [0, m0 ]. e From the previous discussion, this function (m) is decreasing in m (ie. 0 (m) = m0 (hN )h0N (m) < 0); Moreover it is such that (0) = m(hN (0)) = e e m(hsup ) > 0 and (m0 ) = m(hN (m0 )) m0 = m(0) m0 = m0 < 0. e e e Hence there exists a unique m ]0, m0 [ such that (m ) = 0. Consider then hN = hN (m ). Then by construction (m , hN ) is the unique point satisfying condition (8) and therefore the unique equilibrium of the health sector. QED Proof of proposition 2: Given assumption H1 and lemma 1, there exists a unique hS (m) [0, hsup ] satisfying the condition z(hS , YS ) = c(gS , m) x(hS ) for all m [0, m0 ] with m0 given by the condition c(gS , m0 ) = z(0,YS ) (ie x(0) such that hS (m0 ) = 0). Moreover hS (m) is decreasing in m and because limm0 c(g, m) = 0 and z(hsup , YS ) = 0, one also get hS (0) = hsup . Similarly S T the second condition M = L (hS ; g, m) can be written as Z
hS

x(h)f (h)dh =

MS 0 (g , m) cm S

Recalling that c0m (gS , m) is decreasing in m and that limm0 c0m (gS , m) = + and limm c0m (gS , m) = 0, this relationship denes a unique value 37

m(hS ) for all hS [0, hsup ]. Moreover m(hS ) is increasing in hS with m(0) = 0 e e e sup and m(h ) > 0. e Now dene the function (m) = m(hS (m)) m for all m [0, m0 ]. From e the previous discussion, this function (m) is decreasing in m (ie. 0 (m) = m0 (hS )h0S (m) < 0); Moreover it is such that (0) = m(hS (0)) = m(hsup ) > 0 e e e S (m0 )) m0 = m(0) m0 = m0 < 0. Hence there exists and (m0 ) = m(h e e a unique m ]0, m0 [ such that (m ) = 0. Consider then hS = hS (m ). Then by construction (m , hS ) is the unique point satisfying condition (8) and therefore the unique equilibrium of the health sector. QED Properties of the function (h, m) : i) Concavity of (h, m) in h. .We easily get the relationships: z x = c(gS , m) r0 (h) h h h 2z 2x 2 = c(gS , m) r(h) h2 h2 h2 2 x c(gS , m) = >0 hm h m So
2 h2

< 0 when r(h) is convex enough.QED.

.ii) The function (h, m) reaches a maximum at some value of health b h(m) Using the fact that r0 (0) = and limhhsup r0 (h) = 0, one can conclude that: >0 h h=0 Given that < 0 when r(h) is convex enough, . is decreasing in h. h2 h Two possibilities can occur. Or there is a unique b h(m) ]0, hsup [ such that = 0 and (h, m) reaches a maximum at this value of health b h(m).Or for h sup sup all h [0, h ], h > 0 and (h, m) reaches a maximum at h , in which cas we can pose that b h(m) = hsup . Hence with this convention, for all m, there is a unique b h(m) ]0, hsup ] such that.(h, m) reaches a maximum at this value. 38
2

Furthermore, it is easy to see that when it is an interior solution, b h(m) is 2 2 increasing in m.(as h2 < 0 and hm > 0). Finally note as well that limh0 (h, m) < 0 (as r(0) = +) and limhhsup (h, m) < 0 (as z(h, YN ) C(h; gS , m) is negative at h = hsup ). QED. iii) (m) = Maxh (h, m) is decreasing in m and negative when m is large enough: (m) = Maxh (h, m) = z(b h(m), YN ) x(b h(m))c(gS , m) r(b h(m)). and simple dierentiation gives : c(gS , m) b x(h(m)) < 0 and m 2 c(gS , m) b c(gS , m) b x(h(m)) x(h(m))b0 (m) > 0 h (m) = m2 m 0 (m) =

Also it is easy to see that for m large enough, b h(m) gest closer to hsup . Hence z(b h(m), YN ) 0 and (m) < 0: QED. Proof of proposition 3:: i) Pose = (mA ) > 0 under assumption E. Then clearly for , S nobody in the North is ready to pay for medical services in South given that the medical doctor wage in the South are the autarkic one mA ). Therefore S there is no international trade in medical services. ii) For 0 < , the function (m) is decreasing in m and such that (mA ) = > and (m) < 0 for m large enoug. Hence there exists a South S wage threshold mS ( ) > mA such that (mS ( )) = . When the doctor wage S mS in the South is larger than mS ( ), then,(mS ) < (mS ( )) = . This implies again that there is no possibility of international trade in medical services, given the level of trade barriers . Moreover the fact that (m) is decreasing in m implies obviously that the threshold mS ( ) is decreasing in . Also, at the prohibitive trade friction , one has mS ( ) = mA . Finally S when trade frictions go to 0, mS (0) = m > mA with (m) = 0. b b S iii) Consider now 0 < , and mS < mS ( ).then as (m) is decreasing h(m in m, (mS ) = (b S ), mS ) > (mS ( )) = . Also, because r(0) = + , we have limh0 (h, mS ) < 0 . Similarly because limhhsup r(h) = 0, z(hsup , YN ) = 0 and x(hsup ) > 0, we have limhhsup (h, mS ) < 0. Therefore 39

the fact that (h, mS ) is a concave function of h taking its maximum at point b S ) with (b S ), mS ) > 0, implies that for all mS mS ( ), there h(m h(m h(m exists an interval [h1 (mS , ); h2 (mS , )] with h1 (mS , ) b S ) h2 (mS , ) and such that for all h [h1 (mS , ); h2 (mS , )], we have (h, mS ) > .Hence all northern individuals with health h [h1 (mS , ); h2 (mS , )], are ready to pay medical services in the South, given their individual moving costs r(h) and the trade friction level . Notice that the bounds h1 (mS , ) and h2 (mS , ) are determined by the condition (h1 (mS , ), mS ) = (h2 (mS , ), mS ) = .Note also that h1 (mS , ) is increasing in and h2 (mS , ) is decreasing in , as (h, mS ) is increasing h(m (resp. decreasing) in h for h b S ) (resp. h b S )). Hence the size of h(m this interval is decreasing with the level of trade frictions (ie. h1 (mS , ) is increasing in and h2 (mS , ) is decreasing in ). h(m Finally, h1 (mS ( ), ) = h2 (mS ( ), ) = b S ( ). Thus at the medical doctor threshold mS ( ), the size of this interval is zero (ie. h1 (mS ( ), ) = h2 (mS ( ), )).QED. Proof of lemma 3: i) Simple dierentiation of (mS , )gives indeed: (mS , ) LT (hS ; gS , mS ) hS = mS mS hS Z h2 (mS , ) 2 T C L (hS ; gS , mS ) + + (h; gS , mS )f (h)dh mS m2 h1 (mS , ) h2 C (h2 (mS , ); gS , mS )f (h2 (mS , )) + m mS C h1 (h1 (mS , ); gS , mS )f (h1 (mS , )) m mS all the terms are negative and so (mS , ) < 0. mS ii) Now for all [0, ], (mA , ) > MS . Also as mS ( ) > mA , (mS ( ), ) = S S LT (hS ; gS mS ( )) < LT (hA ; gS , mA ) = MS . Hence there exists a unique , S S me ( ) mA , mS ( ) such that (me ( ), ) = MS . S S S

40

iii) Simple dierentiation gives as well that it follows immediately that

(me , )

(mS , )

< 0. Because of this,

dme S = (me , ) < 0 d

mS

and therefore me ( ) is a decreasing function of . QED. S Proof of proposition 4 One may rst notice that h1 (me ( ), ) is an increasing function of . S Indeed at the medical doctor labor market equilibrium in the South, one has "Z # h2 (me ( ), ) S c (gS , me ( )) = MS x(h)f (h)dh LT (hS ; gS , me ( )) + S S m h1 (me ( ), ) S Hence "Z
h2 (me ( ), ) S

h1 (me ( ), ) S

MS LT (hS ; gS , me ( )) S x(h)f (h)dh = c e (g , mS ( )) m S

c Given that me ( ) is a decreasing function of , LT (hS ; gS , mS ) and m (gS , mS ) S are decreasing functions of mS , the RHS of this equation is decreasing in . Therefore the LHS should also decrease with . Given that h1 (m, ) and h2 (m, ) move in opposite direction when changes, this can be the case only when h1 (me ( ), ) increases with . Note also that h1 (me ( ), ) = S S A h(mS h1 (mA , ) = b A ) > hN . S Two cases can then happen. First, suppose that h1 (m (0), 0) < hA . This N A implies that there is a unique > 0 such that h1 (me ( ), ) = hN . And for A all [ , ] , h1 (me ( ), ) > h1 (me ( ), ) = hN ,.condition (18) is satised and there exists a "Pure North demand expanding" health trade equilibrium. Suppose otherwise that h1 (m (0), 0) hA . Then in that case, for all N A e e [0, ] , h1 (m ( ), ) > h1 (m (0), 0) hN and again condition (18) is satised and there exists a "Pure North demand expanding" health trade equilibrium. One has again the result of proposition 4, noting by extension = 0. Finally, note that the condition h1 (m (0), 0) < hA is equivalent to z(hA , YN ) N N C(hA ; gS , me (0)) r(hA ) > 0, or pA = z(hA , YN ) > C(hA ; gS , me (0)) + N S N N N N S r(hA ). So when pA large enough ensures that > 0. QED. N N

41

i) Denote (h, mN , mS ) = Ax(h)c(1, mN ) x(h)c(gS , mS ) r(h). Then when r(h) is suciently convex, for all mN mA , and mS > mA , the N S function (h) is concave. Consider then the following assumption: Assumption HT : 0 Ax0 (h) x (h) r0 (h) ; > Max x(h) r(h) Ax(h) Then, it is rst easy to see that there is at most one value eN (mN , mS , ) h eN , mN , mS ) = . Indeed suppose that there exists one value eN h satisfying (h eN , mN , mS ) = or Ax(eN )c(1, mN )x(eN )c(gS , mS )r(eN ) = such that (h h h h . Then

Proof of the existence of a threshold eN (mN , mS , ) < hN for all h mS < mS ( , mN ). f

0h (eN , mN , mS ) = Ax0 (eN )c(1, mN ) x0 (eN )c(gS , mS ) r0 (eN ) h h h h # " x0 (eN ) r0 (eN ) h h c(1, mN ) x0 (eN )c(gS , mS ) r0 (eN ) > Ax(eN )Max h h h ; eN ) eN ) x(h r(h # " i h x0 (eN ) r0 (eN ) h h h = x(eN )c(gS , mS ) + r(eN ) + Max h ; x(eN ) h r(eN ) h x0 (eN )c(gS , mS ) r0 (eN ) h h # " h i x0 (eN ) r0 (eN ) h h > x(eN )c(gS , mS ) + r(eN ) Max h h ; x(eN ) h r(eN ) h x0 (eN )c(gS , mS ) r0 (eN ) h h or ! ! h h x0 (eN ) r0 (eN ) + r(eN ) h h h 0h (eN , mN , mS ) > x(eN )c(gS , mS ) x(eN ) h r(eN ) h x0 (eN )c(gS , mS ) r0 (eN ) h h > 0

h Hence for any eN such that (eN , mN , mS ) = , under assumption HT, one h 42

has 0h (eN , mN , mS ) > 0. This implies that there is at most one such value h eN . h Now for all mS < mS ( , mN ), (hA , mN , mS ) = Ax(h)c(1, mN )x(hA )c(gS , mS ) f N N A r(hN ) > . Moreover, (0, mN , mS )) < 0 as limh0 r(h) = +.Therefore by continuity, there exists a value eN such that (eN , mN , mS ) = andit is h h therefore unique under assumption HT. QED. Proof of the existence of hN (mS , ) < hA and mN (mS , ) < mA N N A for all mS < mS ( , mN ), f

h Indeed the marginal threshold function (CC) hN = eN (mN , mS , ) describes a downard sloping curve between hN and mN while the medical doc tor labor market clearing condition (MM) : LT (hN ; 1, mN ) =MN denes an upward sloping curve between hN and mN dened as hN = mN Now, for a xed value mS , dene then mN (mS , ); the value of mN such b that mS = mS ( , mN ). Then mS < mS ( , mN ) is equivalent to mN > f f mN (mS , ). Therefore mS < mS ( , mA ) implies that mN (mS , ) < mA . b f b N N eN (mN (mS , ), mS , ) = hA while eN (mA , mS , ) < hA . h Also note that h b N N N Hence, along the (CC) curve, hN = hA at mN = mN (mS , ) and hN = b N eN (mA , mS , ) < hA at mN = mA . h N N N On the other hand, at mN = mN (mS , ) < mA , one has LT (hA ; 1, mN (mS , )) > b b N N N < hA at MN , Hence along the (MM) curve, one should necessarily have h N N mN = mN (mS , ). Also, mN = mA , h = hA along the (MM) curve. b at N N Now, in the interval mN (mS , ), mA , consider the function (mN ) = b N (eN (mN , mS , )) mN . (mN ) is a decreasing function of mN with h b b (mN (mS , )) = hA mN (mS , ) = mA mN (mS , ) > 0 b N N h (mA ) = eN (mA , mS , ) mA < (hA ) mA = 0 N N N N N b Therefore there exists a unique mN = mN (mS , ) mN (mS , ), mA such N that (mN ) = 0 and consequently a unique hN = hN (mS , ) such that hN (mS , ) and mN (mS , ) is point at the intersection of the two conditions (MM) and (CC). Moreover by construction hN (mS , ) = eN (mN (mS , ), mS , ) < eN (mN (mS , ), mS , ) = hA h h b N 43 and

 Simple inspection also shows that mN (mS , ) and hN (mS , ) are increasing functions of mS , . QED. e Proof that (mS , ) is decreasing in mS e (mS , ) LT (hS ; gS , mS ) hS = mS mS hS "Z # h2 (mS , ) 2 LT (hS ; gS , mS ) c (gS , mS ) + + x(h)f (h)dh mS m2 hN (mS , ) + h2 c (gS , mS )x(h2 (mS , ))f (h2 (mS , )) m mS c hN (gS , mS )x(hN (mS , ))f (hN (mS , ))) m mS

e with all terms negative. Hence (mS , ) is a decreasing function of mS and (as well). QED. eS Proof that for , there exists an equilibrium wage me ( ) > A e me ( ), ) = MS . mS such that ( e S

denition is a solution of

Note rst that at = , C(hA ; 1, mA ) = z(hA , YN ) = x(hA )c(gS , me ( ))+ N N N N S A f r(hN ) + and therefore mS ( , mA ) = me ( ), h1 (me ( ), ) = hA and N S N A h h1 (me ( ), ) = hN = eN (mA , me ( ), ) = hN (me ( ), ) S N S S Now consider for < the South doctor wage me ( ) > mA which by S S (me ( ), ) = LT (hS ; gS , me ) + S S "Z
h2 (me , ) S

x(h)f (h)dh

h1 (me , ) S

c (gS , mS ) = MS m

At such a wage h1 (me ( ), ) < hA . Consider then the equilibrium threshS N old hN (me ( ), ) and Northern medical doctor wage mN (me ( ), ) correS S sponding to such a wage me ( ). Then by denition: S Ax(hN (me ( ), ))c(1, mN (me ( ), ))x(hN (me ( ), ))c(gS , me ( ), )r(hN (me ( ), )) = S S S S S 44

and by denition (h1 (me ( ), ), me ( )) = S S Now in the "demand shifting" equilibrium, the northern patient with thresh old health hN (me ( ), ) that is indierent between treatment in the North S and treatment in the South strictly prefers treatment to no treatment. Hence pe = Ax(hN (me ( ), ))c(1, mN (me ( ), )) < z(hN (me ( ), YN ) N S S S Also by denition of hN (me ( ), ) one has S Ax(hN (me ( ), ))c(1, mN (me ( ), )) = x(hN (me ( ), ))c(gS , me ( )) S S S S N (me ( ), )) + +r(h S Hence (hN (me ( ), ), me ( )) = z(hN (me ( ), YN ) S S S N (me ( ), ))c(gS , me ( )) x(h S S r(hN (me ( ), )) S N (me ( ), YN ) pe + = z(h S N > h(mS h(mS Moreover under assumption E, hN (me ( ), ) < hA < b A ) < b e ( )), S N e N (me ( ), ) are on the increasing part of therefore both h1 (mS ( ), ) and h S the function (h, me ( )). It follows that hN (me ( ) > h1 (me ( ), ). From S S S this one concludes that "Z # h2 (me ( ), ) S c (gS , me ( )) e S x(h)f (h)dh (me ( ), ) = LT (hS ; gS , me ( )) + S S m hN (me ( ), ) S "Z # hN (me ( ), ) S c (gS , me ( )) x(h)f (h)dh = MS S m h1 (me , ) S < MS e e Given that (0, ) > MS and (mS , ) is a decreasing function of mS , it e e follows that there exists a unique me ( ) ]0, me ( )[ such that (me ( ), ) = eS S S e A , ) > LT (hA ; gS , mA ) = MS = (me ( ), ), one has e eS MS . Moreover as (mS S S me ( ) > mA . QED. eS S 45

willingness to pay zh, Y

Pooling Price Average cost Competitive price

ACh, w, m Axhcw, m

Marginal cost Ch;w, m xhcw, m

h sup
Figure 1)

Health h

wage m

Medical labour market Eqm curve mh N

m
Health care market Eqm curve h N m

hN

h sup
Figure 2)

Threshold value

wage m

Medical labour market South Medical labour market North

mA N mA S
Health care market North Health care market South
hS
A

hN

h sup

C S h
AC N h

PS
PN

Price

Figure 3)

zh, Y

PA N
C S h th
AC N h

C S h

hN

h sup

Health h

Figure 4a): No trade in medical services

zh, Y

Demand expanding effect

PA N
AC N h

C S h

C S h th

h N h 1 m S ,

h 2 m S ,

h sup

Health h

Figure 4b): Pure Demand Expanding Equilibrium

zh, Y

Demand shifting effect Demand expanding effect

PA N
AC N h

C S h th C S h
h 2 m S ,

A h N m N , m S , h N

h sup

Health h

Figure 4c): Demand Shifting Equilibrium