Medical tourism industry analysis using Porter\'s Five Forces Analysis.

1. May 2009
Porter’s 5 Forces Analysis
for
Medical Tourism Industry
in the U.S.

2. Factors Affecting Rivalry Among Existing Competitors
Characterization
Future Trend
(Current)
In the immediate future, one may expect some additional
There are currently around 20 companies engaging in players entering the industry during the next 1-3 years.
Degree of seller concentration? medical tourism. Only maybe five companies are really However, after that the weak players will exist, while the
being active and could be considered serious players. stronger ones will go through consolidation by way of
mergers and acquisitions.
In 2007 750,000 Americans traveled abroad for treatments.
Economist estimates that number of American medical
Rate of industry growth? In 2010 as many as 6M Americans will have traveled for
tourism may reach 10M per year in 2012.
medical treatments.
Some players will eventually identify and sign smaller
Lack of economies of scale, economies of scope or capacity medical facilities to reduce the cost of input. Economies of
utilization contribute no major effects to cost differences. scale will not play a major role, because the variable cost of
Significant cost differences among Firms? Use of similar medical facilities keep input prices similar for serving clients will still be high due to the nature of this
every player. Only a handful of companies had enough business. Economies of scope will increase in importance
patients to move up on the learning curve. and learning experiences will reduce costs of some
companies.
Medical Tourism companies are small firms (3-5 people
Since no major capital investments are required to operate in
Excess capacity? operations). Operations are rather lean and not much
this industry, there will always be little excess capacity.
overcapacity exists.
Sensitivity of costs to capacity utilization is low. Minimum
Cost structure of firms: sensitivity of costs to Efficient Scale (MES) is relatively small. At current average Sensitivity of costs to capacity utilization will probably
capacity utilization? industry margin of $1500, a firm needs to generate 200-300 remain low.
clients per year to be self-sufficient.
Degree of product differentiation is very small. All major As the industry grows and attracts well-trained marketing
Degree of product differentiation among sellers?
players offer a list of similar procedures from the same professionals, one should expect to see higher
Brand loyalty to existing sellers? Cross-price
medical facilities. No company has established a well- differentiation. We suspect that within 3-5 years major
elasticities of demand and competitors in
recognized brand. Pricing of one company have no effects brands will emerge. Cross-price elasticities will be much
industry?
on prices of other companies. higher.

3. Factors Affecting Rivalry Among Existing Competitors
Characterization
Future Trend
(Current)
Buyer's costs of switching from one competitor The cost of switching is relatively low today, since many
The costs of switching will remain relatively low.
to another? companies use the same treatment facilities.
Prices and terms of sales will be observable and/or can be
Prices and terms of sales are observable and/or can be
Are prices and terms of sales transactions estimated. As more complicated procedures with higher
estimated, especially for less costly procedures such as
observable? price differences are added to offerings, pricing information
dental implants.
may not be as apparent.
Can firms adjust prices quickly? Yes, firms are able to adjust prices quickly. Firms will be able to adjust prices quickly.
Services purchased by American patients will be infrequent Services purchased by American patients will be infrequent
Large and/or infrequent sales orders?
and may be large (e.g. hip replacement). and may be large (e.g. hip replacement).
Use of "facilitating practices" (price leadership, I presume some of these practices will occur in this industry
None of this taking place is this infant industry.
advance announcement of price changes? as well.
There is no history of cooperative pricing. Competitors do
History of "cooperative" pricing? not exert, in a legal fashion, a great deal of energy on It is difficult to answer this question at this time.
determining prices of its competitors.
As some player deside to vertically integrate, exit costs may
Exit barriers are low. Partnerships with medical facilities
go up. However, the majority of players, since there are no
Strength of exit barriers? can be disolved without major financial burdens.
major capital investors their businesses, exit barriers will
Infrustructures can be easily dealth with.
remain relatively low.

4. Factors Affecting the Threat of Entry
Characterization
Future Trend
(Current)
Significant economies of scale? No significant economies of scale exist. No significant economies of scale exist.
Even though the importance of reputation is enormous, it is Reputation and brand loyalty will be of paramount
Importance of reputation or established brand
not a major factor today, because none of the brands are importance. A single mishandled case, and bad handling of
loyalties in purchase decision?
well recognized brands. those incidients will ruin companies.
This is not a simple task. Evaluating and developing
relationships with reputable medical facilities takes time and
Identifying and accessing major medical facilities will
a great deal of knowledge. That's why most companies are
Entrants' access to distribution channels? continue to be relatively easy. Developing relationships with
dealing with only a handful of centers in the world. Top
other centers will never be easy.
medical tourism centers are easily accessible. However,
the other facilities are not.
This is not a major issue for medical tourism industry.
This is not a major issue for medical tourism industry.
Webpage design, travel agency arrangements will always be
Entrants' access to raw materials? Webpage design, travel agency arrangements will always be
available to new entrants. However, working with insurance
available to new entrants.
companies may not be as simple.
Know proprietary technology for Medical Tourism has been
developed so far. This industry will always be high touch
point and only certain functions of the process can be
automated. Furthermore, process flows can be studies and
replicated, albeit not easily. Only exclusive contracts with Exclusive contracts will prevent certain entrants from
Entrants' access to technology/know-how? medical facitilies that possess a major know-how will prevent accessing know-hows posessed by certain world-reknowned
access to technology/know-how. The number of players in medical centers.
the value chain and number of processes that must be in
place create a significant learning curve. Entrants must be
comfortable nevigating through complex environment of
health care, insurance, and medical procedures.

5. Factors Affecting the Threat of Entry
Characterization
Future Trend
(Current)
Eventually, we may see a trend for major brands signing
exclusivity contracts with major favorable locations. In
It appears that at this time all "favorable" locations do not
Entrants' access to favorable locations? addition, even smaller reputable medical facilities will
sign exclusive contracts with medical tourism facilitators.
eventually be signed. Thus, access will continue to diminish
with time.
This factor will be more important but will never be a major
Experience-based advantages of incumbents? This is a factor but not a major one.
one.
This is a major factor. Larger client based translates into
Network externalities: demand-side advantages better reputation. Furthermore, word of mouth advertising This will continue to be a major factor. Larger client based
to incumbents from large installed base? will play a major role in the introduction and growth stages of translates into better reputation and brand name.
PLC.
As the industry grows and as number of poor treatment
Government protection of incumbents? No such protections exist at this time. incidents will rise, the government may start regulating
and/or governing this industry.
Perceptions of entrants about expected On the contrary, most competitors are quite cooperative,
It is hard to answer this question at this time, since we don't
retaliation of incumbents/reputations of because they realize that joint efforts will benefit everybody
know who will run companies.
incumbents for "toughness"? in this growing industry.

6. Substitute Products and Support from Complements
Factors Affecting or Reflecting Pressure from Substitute Products and Support from Complements
Characterization
Future Trend
(Current)
Domestic care will continue to be the closest substitute.
Available domestic medical care is the closest substitute.
Even if the US moves towards more national healthcare
At this time the higher cost of this care will not make
system, the wait for treatments will make domestic medical
domestic care a major threat. Arranging your treatments
Availability of close substitutes? care still not a major factor. Self arrangements will continue
and trips on your own is another possible substitute. The
to be a threat. However, I presume most patients will want
importance of selecting a reputable clinic, evaluating it will
the peace of mind of dealing with a US intermediary. And
force most patients to rely on intermediaries.
many medical facilities will be in exclusive partnerships.
The price value will be low, especially given the risk of
The price value will be low. A well-run established medical
Price-value characteristics of substitutes? medical incidents stemming from lack of medical facility
tourism facilitator will always provide better value.
evaluation.
Price elasticity of industry demand? Elastic Elastic with the exception of rare, unique procedures.
Travel industry is a great complement and will continue to Travel industry is a great complement and will continue to
Availability of close complements?
exert a favorable influence on medical tourism. exert a favorable influence on medical tourism.
Price-value characteristics of complements? Price-value will depend on the destination. Price value will depend on the destination.

7. Factors Affecting or Reflecting Power of Input Suppliers
Characterization
Future Trend
(Current)
The supplier industry is relatively concentrated than Medical
In the future as more smaller medical facilities enter the
Is supplier industry more concentrated than Tourism industry is, even though there is currently around
market, the supplier industry is going to be less and less
industry it sells to? 120 (2007 numbers) medical facilities worldwide which treat
concentrated.
the majority of medical tourism patients.
Do firms in industry purchase relatively small
Some medical facilities may switch to entirely servicing
volumes relative to other customers of Typical firm's purchase volume is smaller relatively to sales
foreign clients. There will be very few of those. Hospital will
suppliers? Is typical firm's purchase volume of typical supplier.
continue serve domestic and international clientele.
small relatively to sales of typical supplier?
There few substitutes for suppliers' input. All top notch
We don't foresee any changes in the foreseeable future.
facilities have to hire well-trained, possibly foreign educated
Very few companies enter a relatively competitive medical
Few substitutes for suppliers' input? doctors. In addition, equipment and processes come from a
device market every year. Training of doctors has always
relatively small number of manufacturers and teaching
been a relatively controlled process.
facilities.
Investments that firms in the industry make are travel It is possible that eventually the industry will see medical
expenses, legal fees, and time. Travel expenses can range treatments brokers, who will broker treatments based on
Do firms in industry make relationship-specific from 2-3 thousand dollars per trip per person. Legal fees availability and requests. Otherwise, the specific
investments to support transactions with associated with drafting contracts can be between 2 and 5 investments will remain relatively the same. Some
specific suppliers? thousand dollars per contract. And the last investment is companies will develop software applications to integrate
time. Firms have to spend 20 to 30 hours of time on with medical offices that deal with. In that case, integration
selection and evaluation process. costs should be taken into account.
Lack of marketing skills and travel agency competencies in
Once major brands emerge, it will be harder for travel
countries outside their own may prevent many suppliers from
industry companies to enter this market. Some medical
Do suppliers pose credible threat of forward vertically integration. Travel agencies in the US do not
facilities may try to partner with or acquire other centers to
integration into the product market? typically possess medical expertise. However, stiff
offer a wider range of geographic locations and enough
competition in the travel industry may prompt some
clients to vertically integrate.
companies to consider entering this more profitable market.
Are suppliers able to price-discriminate among
prospective customers according to This practice is not currently observed. It is hard to predict these dynamics at this time.
ability/willingness to pay for input?

8. Factors Affecting or Reflecting Power of Buyers
Characterization
Future Trend
(Current)
Is buyers' industry more concentrated than
Patients' environment is not concentrated at all. We do not foresee any major changes in this area.
industry it purchases from?
Do buyers purchase in large volumes? Does a Even as the revenue per client will grow due to including
Revenue coming from one single patient does not represent
buyers' purchase volume represent large more expensive complex procedures into offering, a single
a large fraction of company's sales revenue.
fraction of typical seller's sales revenue? client will never present a large fraction of firm's revenue.
Even though the gap in prices may be reduced during the
Yes, patients can certainly find alternatives to treatments
Can buyers find substitutes for industry's next decade or two, medical tourism treatments will always
outside the US. However, these alternative will always be 30-
products? be less expensive alternatives to treatments in the developed
60 more expensive.
world.
Do firms in industry make relationship-specific
Since demand side of this industry is not concentrated,
investments to support transactions with WE don't anticipate any changes in this realm.
relationship specific investments will not be common at all.
specific buyers?
The price elasticity for patients' procedures will vary. Price
Is price elasticity of demand of buyer's product elasticity of demand for such treatments as hip or knee Price elasticity of demand will continue to vary based on
high or low? replacement may be quite inelastic. The price elasticity of medical procedures.
demand for elective plastic surgery procedures is elastic.
Do buyers pose credible threat of backward Buyers will not pose absolutely any threat of backward
Buyers pose absolutely no threat of backward integration.
integration? integration.
Yes, medical procedures will represent even at a lower level As procedures offered become more complex, the cost of
Does product represent significant fraction of
of $2-$3 thousand dollars a significant fraction of patient's medical procedure will represent higher and higher fraction of
cost in buyer's business?
budget. patient's family budget.
Are prices in the market negotiated between Due to uniqueness of each medical case, prices are
buyers and sellers on each individual typically negotiated on each individual transaction. Certain There won't be any significant changes in this area due to
transaction or do sellers post a "take-it-or-leave- plastic surgery procedures can qualify for "take-it-or-leave-it" uniqueness of each medical case.
it" price that applies to all transactions? pricing strategy.