May 2009

Porter’s 5 Forces Analysis

for

Medical Tourism Industry

in the U.S.

Factors Affecting Rivalry Among Existing Competitors

Characterization

(Current)Future Trend

Degree of seller concentration?

There are currently around 20 companies engaging in

medical tourism. Only maybe five companies are really

being active and could be considered serious players.

In the immediate future, one may expect some additional

players entering the industry during the next 1-3 years.

However, after that the weak players will exist, while the

stronger ones will go through consolidation by way of

mergers and acquisitions.

Rate of industry growth?

In 2007 750,000 Americans traveled abroad for treatments.

In 2010 as many as 6M Americans will have traveled for

medical treatments.

Economist estimates that number of American medical

tourism may reach 10M per year in 2012.

Significant cost differences among Firms?

Lack of economies of scale, economies of scope or capacity

utilization contribute no major effects to cost differences.

Use of similar medical facilities keep input prices similar for

every player. Only a handful of companies had enough

patients to move up on the learning curve.

Some players will eventually identify and sign smaller

medical facilities to reduce the cost of input. Economies of

scale will not play a major role, because the variable cost of

serving clients will still be high due to the nature of this

business. Economies of scope will increase in importance

and learning experiences will reduce costs of some

companies.

Excess capacity?

Medical Tourism companies are small firms (3-5 people

operations). Operations are rather lean and not much

overcapacity exists.

Since no major capital investments are required to operate in

this industry, there will always be little excess capacity.

Cost structure of firms: sensitivity of costs to

capacity utilization?

Sensitivity of costs to capacity utilization is low. Minimum

Efficient Scale (MES) is relatively small. At current average

industry margin of $1500, a firm needs to generate 200-300

clients per year to be self-sufficient.

Sensitivity of costs to capacity utilization will probably

remain low.

Degree of product differentiation among sellers?

Brand loyalty to existing sellers? Cross-price

elasticities of demand and competitors in

industry?

Degree of product differentiation is very small. All major

players offer a list of similar procedures from the same

medical facilities. No company has established a well-

recognized brand. Pricing of one company have no effects

on prices of other companies.

As the industry grows and attracts well-trained marketing

professionals, one should expect to see higher

differentiation. We suspect that within 3-5 years major

brands will emerge. Cross-price elasticities will be much

higher.

Factors Affecting Rivalry Among Existing Competitors

Buyer's costs of switching from one competitor

to another?

The cost of switching is relatively low today, since many

companies use the same treatment facilities.The costs of switching will remain relatively low.

Are prices and terms of sales transactions

observable?

Prices and terms of sales are observable and/or can be

estimated, especially for less costly procedures such as

dental implants.

Prices and terms of sales will be observable and/or can be

estimated. As more complicated procedures with higher

price differences are added to offerings, pricing information

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.

Large and/or infrequent sales orders?Services purchased by American patients will be infrequent

and may be large (e.g. hip replacement).

Services purchased by American patients will be infrequent

and may be large (e.g. hip replacement).

Use of "facilitating practices" (price leadership,

advance announcement of price changes?None of this taking place is this infant industry.

I presume some of these practices will occur in this industry

as well.

History of "cooperative" pricing?

There is no history of cooperative pricing. Competitors do

not exert, in a legal fashion, a great deal of energy on

determining prices of its competitors.

It is difficult to answer this question at this time.

Strength of exit barriers?

Exit barriers are low. Partnerships with medical facilities

can be disolved without major financial burdens.

Infrustructures can be easily dealth with.

As some player deside to vertically integrate, exit costs may

go up. However, the majority of players, since there are no

major capital investors their businesses, exit barriers will

remain relatively low.

Characterization

(Current)Future Trend

Factors Affecting the Threat of Entry

Characterization

(Current)Future Trend

Significant economies of scale? No significant economies of scale exist. No significant economies of scale exist.

Importance of reputation or established brand

loyalties in purchase decision?

Even though the importance of reputation is enormous, it is

not a major factor today, because none of the brands are

well recognized brands.

Reputation and brand loyalty will be of paramount

importance. A single mishandled case, and bad handling of

those incidients will ruin companies.

Entrants' access to distribution channels?

This is not a simple task. Evaluating and developing

relationships with reputable medical facilities takes time and

a great deal of knowledge. That's why most companies are

dealing with only a handful of centers in the world. Top

medical tourism centers are easily accessible. However,

the other facilities are not.

Identifying and accessing major medical facilities will

continue to be relatively easy. Developing relationships with

other centers will never be easy.

Entrants' access to raw materials?

This is not a major issue for medical tourism industry.

Webpage design, travel agency arrangements will always be

available to new entrants. However, working with insurance

companies may not be as simple.

This is not a major issue for medical tourism industry.

Webpage design, travel agency arrangements will always be

available to new entrants.

Entrants' access to technology/know-how?

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

medical facitilies that possess a major know-how will prevent

access to technology/know-how. The number of players in

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.

Exclusive contracts will prevent certain entrants from

accessing know-hows posessed by certain world-reknowned

medical centers.

Factors Affecting the Threat of Entry

Characterization

(Current)Future Trend

Entrants' access to favorable locations?It appears that at this time all "favorable" locations do not

sign exclusive contracts with medical tourism facilitators.

Eventually, we may see a trend for major brands signing

exclusivity contracts with major favorable locations. In

addition, even smaller reputable medical facilities will

eventually be signed. Thus, access will continue to diminish

with time.

Experience-based advantages of incumbents? This is a factor but not a major one.This factor will be more important but will never be a major

one.

Network externalities: demand-side advantages

to incumbents from large installed base?

This is a major factor. Larger client based translates into

better reputation. Furthermore, word of mouth advertising

will play a major role in the introduction and growth stages of

PLC.

This will continue to be a major factor. Larger client based

translates into better reputation and brand name.

Government protection of incumbents? No such protections exist at this time.

As the industry grows and as number of poor treatment

incidents will rise, the government may start regulating

and/or governing this industry.

Perceptions of entrants about expected

retaliation of incumbents/reputations of

incumbents for "toughness"?

On the contrary, most competitors are quite cooperative,

because they realize that joint efforts will benefit everybody

in this growing industry.

It is hard to answer this question at this time, since we don't

know who will run companies.

Substitute Products and Support from Complements

Characterization

(Current)Future Trend

Availability of close substitutes?

Available domestic medical care is the closest substitute.

At this time the higher cost of this care will not make

domestic care a major threat. Arranging your treatments

and trips on your own is another possible substitute. The

importance of selecting a reputable clinic, evaluating it will

force most patients to rely on intermediaries.

Domestic care will continue to be the closest substitute.

Even if the US moves towards more national healthcare

system, the wait for treatments will make domestic medical

care still not a major factor. Self arrangements will continue

to be a threat. However, I presume most patients will want

the peace of mind of dealing with a US intermediary. And

many medical facilities will be in exclusive partnerships.

Price-value characteristics of substitutes?

The price value will be low, especially given the risk of

medical incidents stemming from lack of medical facility

evaluation.

The price value will be low. A well-run established medical

tourism facilitator will always provide better value.

Price elasticity of industry demand? Elastic Elastic with the exception of rare, unique procedures.

Availability of close complements?Travel industry is a great complement and will continue to

exert a favorable influence on medical tourism.

Travel industry is a great complement and will continue to

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.

Factors Affecting or Reflecting Pressure from Substitute Products and Support from Complements

Factors Affecting or Reflecting Power of Input Suppliers

Characterization

(Current)Future Trend

Is supplier industry more concentrated than

industry it sells to?

The supplier industry is relatively concentrated than Medical

Tourism industry is, even though there is currently around

120 (2007 numbers) medical facilities worldwide which treat

the majority of medical tourism patients.

In the future as more smaller medical facilities enter the

market, the supplier industry is going to be less and less

concentrated.

Do firms in industry purchase relatively small

volumes relative to other customers of

suppliers? Is typical firm's purchase volume

small relatively to sales of typical supplier?

Typical firm's purchase volume is smaller relatively to sales

of typical supplier.

Some medical facilities may switch to entirely servicing

foreign clients. There will be very few of those. Hospital will

continue serve domestic and international clientele.

Few substitutes for suppliers' input?

There few substitutes for suppliers' input. All top notch

facilities have to hire well-trained, possibly foreign educated

doctors. In addition, equipment and processes come from a

relatively small number of manufacturers and teaching

facilities.

We don't foresee any changes in the foreseeable future.

Very few companies enter a relatively competitive medical

device market every year. Training of doctors has always

been a relatively controlled process.

Do firms in industry make relationship-specific

investments to support transactions with

specific suppliers?

Investments that firms in the industry make are travel

expenses, legal fees, and time. Travel expenses can range

from 2-3 thousand dollars per trip per person. Legal fees

associated with drafting contracts can be between 2 and 5

thousand dollars per contract. And the last investment is

time. Firms have to spend 20 to 30 hours of time on

selection and evaluation process.

It is possible that eventually the industry will see medical

treatments brokers, who will broker treatments based on

availability and requests. Otherwise, the specific

investments will remain relatively the same. Some

companies will develop software applications to integrate

with medical offices that deal with. In that case, integration

costs should be taken into account.

Do suppliers pose credible threat of forward

integration into the product market?

Lack of marketing skills and travel agency competencies in

countries outside their own may prevent many suppliers from

vertically integration. Travel agencies in the US do not

typically possess medical expertise. However, stiff

competition in the travel industry may prompt some

companies to consider entering this more profitable market.

Once major brands emerge, it will be harder for travel

industry companies to enter this market. Some medical

facilities may try to partner with or acquire other centers to

offer a wider range of geographic locations and enough

clients to vertically integrate.

Are suppliers able to price-discriminate among

prospective customers according to

ability/willingness to pay for input?

This practice is not currently observed. It is hard to predict these dynamics at this time.

Factors Affecting or Reflecting Power of Buyers

Characterization

(Current)Future Trend

Is buyers' industry more concentrated than

industry it purchases from?Patients' environment is not concentrated at all. We do not foresee any major changes in this area.

Do buyers purchase in large volumes? Does a

buyers' purchase volume represent large

fraction of typical seller's sales revenue?

Revenue coming from one single patient does not represent

a large fraction of company's sales revenue.

Even as the revenue per client will grow due to including

more expensive complex procedures into offering, a single

client will never present a large fraction of firm's revenue.

Can buyers find substitutes for industry's

products?

Yes, patients can certainly find alternatives to treatments

outside the US. However, these alternative will always be 30-

60 more expensive.

Even though the gap in prices may be reduced during the

next decade or two, medical tourism treatments will always

be less expensive alternatives to treatments in the developed

world.

Do firms in industry make relationship-specific

investments to support transactions with

specific buyers?

Since demand side of this industry is not concentrated,

relationship specific investments will not be common at all.WE don't anticipate any changes in this realm.

Is price elasticity of demand of buyer's product

high or low?

The price elasticity for patients' procedures will vary. Price

elasticity of demand for such treatments as hip or knee

replacement may be quite inelastic. The price elasticity of

demand for elective plastic surgery procedures is elastic.

Price elasticity of demand will continue to vary based on

medical procedures.

Do buyers pose credible threat of backward

integration?Buyers pose absolutely no threat of backward integration.

Buyers will not pose absolutely any threat of backward

integration.

Does product represent significant fraction of

cost in buyer's business?

Yes, medical procedures will represent even at a lower level

of $2-$3 thousand dollars a significant fraction of patient's

budget.

As procedures offered become more complex, the cost of

medical procedure will represent higher and higher fraction of

patient's family budget.

Are prices in the market negotiated between

buyers and sellers on each individual

transaction or do sellers post a "take-it-or-leave-

it" price that applies to all transactions?

Due to uniqueness of each medical case, prices are

typically negotiated on each individual transaction. Certain

plastic surgery procedures can qualify for "take-it-or-leave-it"

pricing strategy.

There won't be any significant changes in this area due to

uniqueness of each medical case.