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2005/2006 No. 10

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William A. Orme

Nikhilesh Dholakia and Nir Kshetri

Medical Transcription in India

Global Outsourcing of Electronically Traded White Collar Services:

Global Outsourcing of Electronically Traded White Collar Services: Medical Transcription in India

Nikhilesh Dholakia College of Business Administration

University of Rhode Island

Nir Kshetri Department of Business Administration

University of North Carolina at Greensboro

Date of this version: December 22, 2005 Please address correspondence to: Nir Kshetri Bryan School of Business and Economics The University of North Carolina at Greensboro Bryan Building, Room: 368 P. O. Box 26165 Greensboro, NC 27402-6165. Tel: 1- 336-334-4530 Fax: 1- 336-334-4141 Email: nbkshetr@uncg.edu

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Global Outsourcing of Electronically Traded White Collar Services: Medical Transcription in India

Abstract This paper integrates theories from international trade in services and e-commerce based on business process outsourcing (BPO) to explain the growth of the Indian medical transcription industry. In the burgeoning U.S. healthcare sector, enactment of the Health Insurance Portability and Accountability Act (HIPPA) escalated the demand for automation of medical records for insurance purposes. Medical transcription is one of the major functions in healthcare automation. Medical transcription being a peripheral activity for U.S. clinics and hospitals, they prefer to outsource this activity. With appropriate factor endowments for medical transcription as well as the right IT infrastructure, India has taken the lead in globally outsourced medical transcription. Using the Heckscher-Ohlin-Samuelson (HOS) theory of international trade, as well as BPO and e-commerce frameworks, our analysis indicates that India is positioned well vis-à-vis its Asian competitors as well as U.S.-based medical transcription services to grow its share of medical transcription outsourcing. Keywords: IT enabled services, medical transcription, India, BPO, Outsourcing, Heckscher-Ohlin-Samuelson theory, international trade of services

Introduction Globally outsourced IT enabled services (ITES) are growing rapidly in India. The revenue

generated by ITES jumped from US$224 million in 1998 (Chand 2000) to US$1.5 billion in

2002 (Hindu Business Line 2002). An estimate of the National Association of Software and

Service Companies (NASSCOM) suggested that India's software and services exports crossed

US$ 7 billion in the fiscal year 2004-2005, representing 44% of the world market for such

services (Cady 2005). ITES exports are expected to increase to US$24 billion by 2008 (Sinha

2002). Similarly, the employment created by ITES in India jumped from 23,000 jobs in 1998

to 70,000 jobs in 2000. In the fiscal year 2004-05 alone ITES added an estimated 150,000

jobs in India (Businessline 2005).

The focus of this is on the outsourcing of medical transcription—a subset of ITES.

Estimated to be around US$20 billion per year by mid-2000s, the medical transcription

market represents a sizable business by itself – and is a precursor to the much larger medical

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records management service business.1 Medical transcription2 has been among the top three

sectors in terms of revenue generated by the Indian ITES industry. What is more, India seems

to have superior competitive advantage in this area compared to the other ITES sectors

(Chand 2000). For instance, whereas India accounted for 5% of the overall global ITES

market3 in 2002 (Hindu Business Line 2002), the share of medical transcription services

outsourced to India was 30% (Small and Medium Enterprise Development Authority 2002).

This is expected to cross 66% by 2005 (Kumar 2001).

Of the 254 Indian medical transcription firms, 80% are in the unorganized,4 small-

scale sector (Express Healthcare Management 2001). Indian medical transcription industry

contributes to the country’s informal affirmative action goals by employing a

disproportionately higher proportion of women compared to other sectors of the IT industry

(World Bank Group 2002).

This paper presents a framework to examine the potential of Indian medical

transcription industry and facilitators and barriers faced by this industry. It does so by

integrating literatures from international trade in services, business process outsourcing, and

business-to-business e-commerce. The paper is organized as follows. In the next section, we

explain briefly the nature of demand and supply of global medical transcription services.

Next, we provide the macro and micro level explanations of the international flow of medical

transcription services. Finally, we offer some conclusions focusing on India, and the

developing Asian region.

Global Medical Transcription Industry: Demand and Supply In 2003, the global healthcare industry exceeded US$2 trillion,5 making it one of the largest

global economic activities. Of special interest to this paper is the U.S. healthcare industry.

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After experiencing several years of high growth rates, the U.S. healthcare spending6 climbed

to US$1.4 trillion in 2001 and is expected to reach US$2.2 trillion by 2007. Medical costs

have been a major national policy issue (Seninger 2003). Compared to other advanced

countries, the U.S. has more rigid requirements to maintain medical records in a proper

manner (Indiainfoline.com 2003). The concept of requiring accurate medical transcription is

rapidly taking off in the U.S., and other countries with high-level health expenditures may

realize the importance of medical transcription soon (Indiainfoline.com 2003).

A legal factor affecting outsourcing of medical transcription is the Health Insurance

Portability and Accountability Act (HIPAA) of 1996. A long and complex law, HIPAA

covers a number of important areas in the regulation of healthcare, from the portability of

health benefits and claims fraud and abuse penalties, to electronic health benefits claims

processing and beyond. HIPAA has created stringent regulations for the privacy of

information about individuals, and the security of information systems used by healthcare

professionals and organizations.

The U.S. has, thus, become a major source of demand for medical transcription related

services. Estimates suggest that the medical transcription business in the U.S. is worth

between US$10-25 billion annually7 and is expected to grow at 21-35 % per year during

2002-2012 (Computerworld Philippines 2002, Conn 2005)8. These rapid growth rates are

expected to boost the demand for medical transcriptionists (MTs). The U.S. Bureau of Labor

Statistics predicts a 51% increase in the need for MTs by 2008. In the U.S., 47% of the

medical transcription work is outsourced while the rest is done in-house. A large proportion of

the services is outsourced to domestic firms. An estimate by the American Association of

Medical Transcription (AAMT) suggested that 4-5% of total U.S. transcription is done

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offshore (Conn 2005). Estimates from other sources suggest that 8-10% of U.S. medical

transcription took place abroad in 2004 (Swartz 2004, Piotrowski 2005).

Medical transcriptionists held about 102,000 jobs in 2000 in the U.S. About 40%

worked in hospitals and another 40% in physicians’ offices and clinics; with the remaining in

laboratories, colleges and universities, and temporary help agencies (Bureau of Labor

Statistics 2003). The availability of U.S. transcribers is falling by 10% per year in recent years

whereas the demand for medical transcription services is rising at 20%, mainly because of the

increasing healthcare needs of an ageing population (Yahoo.com 2000). An estimate by the

U.S. Department of Labor suggests that the U.S. healthcare industry will need 90,000

additional medical records professionals by 2012 (Lillis 2004). The fall in the supply of U.S.

transcribers and the growth of the medical transcription market clearly enhances the

attractiveness of using transcribers in developing countries such as India.

Although India is the largest supplier of medical transcription services to the U.S., a

number of developing countries are also competing in this high-growth market. The

Philippines, in particular, has become another popular destination for outsourcing medical

transcription needs of U.S. hospitals (Table 1). Thanks to major initiatives taken by the

Philippines government in recent years, its relative competitiveness is increasing. In 2003, for

instance, the Philippines launched a high-level effort to challenge India in the business

process outsourcing (BPO) field, especially in the arena of medical transcription (Bray 2003).

Roberto Romulo, IT executive and senior advisor to the Philippines government, believes that

the Philippines holds several advantages in BPO fields such as medical transcription,

accounting, tax preparation, and customer service call centers. In medical transcription fields,

there could be some advantages for Philippines over India:

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• Many Filipino doctors and nurses have studied or worked in the United States and are thus familiar with the U.S. healthcare system.

• Americans find it easier to understand Filipino English speakers than speakers from India or even Ireland.

• CPAs, doctors, and lawyers – not just software engineers and programmers – are needed for BPO work such as medical transcription. The educational system of Philippines, while lagging India’s in the training of engineers and computer programmers, produces many well-trained experts in accounting, medicine, and law.

• IT infrastructure, originally put in place by the U.S. military, is better in the Philippines than in India (Overby 2003).

Table 1 here

Medical Transcription as a Flow of Services: Macro and Micro Level Explanations

Global Trade in Services The global outsourcing of medical transcription can be analyzed from the perspective of

international trade in services. Due to advances in technology, privatization, and

liberalization, global trade in services is increasing rapidly. Although accurate assessment of

international services flow has been a challenge (Samiee 1999), estimates suggest that annual

global trade in services crossed US$2 trillion (Nielson 2001). Services account for about 30%

of all world trade in developing countries as well (Nielson 2001). A large proportion of

international trade in services is taking place in the form of BPO9.

Macro-Level Explanation: Heckscher-Ohlin-Samuelson (HOS) Theory Most of the recent literature has applied Heckscher-Ohlin-Samuelson (HOS) theory of

comparative advantage to explain international trade in services. The theory argues that

countries’ comparative advantages are functions of their comparative factor endowments. The

implication of this theory is that countries comparatively endowed with labor tend to export

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products that are labor intensive whereas countries that are endowed with capital tend to

export capital-intensive goods. Despite its stringent assumptions – such as constant returns to

scale, perfect competition, no factor intensity reversals, incomplete specialization, no

economies of scale, balanced trade, and similar technologies and preferences (Salvatore 1998)

– the HOS theory has been reasonably successful in explaining international trade.

Deardorff (1984, 1985) and Bhagwati (1987) argue that HOS theory can be applied to

explain international services trade. Overall, the record of the classical HOS explanation of

international trade in services has been mixed. Hindley and Smith’s (1984) and Sapir and

Lutz’s (1981) tests, for instance, gave significant results in the case of transport or travel but

became less relevant for producer services10. Similarly, HOS theory is found to be more

applicable to analysis of trade in services between developed and developing countries (e.g.

UNCTAD 1988) rather than service transactions among advanced economies.

A number of fundamental trade theorems have been predicated on the HOS theory.

The Stolper-Samuelson theorem, for instance, postulates that reductions in tariffs will reduce

prices of imported commodities and therefore earnings of factors that are used intensively in

their production will fall. In the contemporary context this Stolper-Samuelson theorem

predicts that reduction of protection on the import of low-skill intensive goods will cause the

price of those goods to fall and wages of low-skill labor – used intensively in the production

of these imports – will also fall11 (Karunaratne 1999). Simultaneously, the wages of the high-

skill workers that are engaged intensively in the production of the other commodities for

exports will rise. Therefore the reduction in protection would lead to an increase in wage

disparity between low-skill and high-skill workers. Second, the factor price equalization

theorem based on HOS theory postulates that free trade in goods would manifest in a

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convergence of factor prices between the two trading countries; thus, for example, wages of

low-skill workers in the U.S. would fall and converge to that of their counterparts in

developing countries while the wages of high-skill workers would rise.

Table 2 here

Several arguments can be provided for the applicability of HOS theory in the trade of

medical transcription services between India and the United States (Table 2). First, India, is

already a global power in the software sector, and it seems to have high level of factor

endowments needed for medical transcription services. This industry only needs graduates

who have the ability to listen to, read, and write English with reasonable comprehension

abilities. Because of the legacy of the British Raj, virtually all Indian graduates are well

versed in English (in the 1991 census, for instance, there were as many as 90 million English-

speaking Indians). Moreover a number of companies in India are providing extensive training

in medical transcription, including specialized medical vocabulary and language.

Table 3 here

Second, as indicated by past studies (e.g., UNCTAD 1988), HOS theory is applicable

to the services traded between developed and developing countries, such as the trade of

medical transcription services between India and the U.S. Third, medical transcription seems

to fare better than other services in terms of some of the assumptions of HOS theory. For

instance, one of the assumptions of the HOS analysis is the use of same technology in

exporter and importer countries. The fact that Indian medical transcription firms are

employing state-of-the-art technologies and many of them have been established by U.S.

based firms indicate that the technologies used in transcription in India and the U.S. are

essentially on par.

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The increasing sophistication of speech recognition and spelling and grammar

checking software, however, offers stronger future capital-for-labor factor substitution

prospects in medical transcription services. Different phases of medical transcription services,

however, differ in terms of the elasticity of substitution of labor with respect to capital—raw

transcription having the highest elasticity and editing the lowest (Table 3). Declining labor

intensiveness – due to voice recognition technology, for instance – of medical transcription

services is, thus, likely to reduce the comparative advantage of developing countries as

determined by the factor endowment structure. Countries such as India and the Philippines

may have to shift to greater automation and greater levels of skill training to retain and

reinforce their comparative advantages. Projections by analysts of the offshore BPO market

indicate a slippage in India’s comparative advantage and thus its share of IT enabled services,

fueled by increasing competition from other low-wage countries as well as increasing

automation and rising wages in India (Ribeiro 2004).

Micro Level Explanation: Business Process Outsourcing In this section, we provide explanation of why firms outsource their medical transcription

activities and how they select their outsourcing partners. In general, BPO is touted to be

“globalization’s next wave – and one of the biggest trends reshaping the global economy”

(Business Week February 3, 2003). To maintain their competitive edges and to become more

efficient, an increasing number of firms are employing BPO. The global BPO market was

estimated at US$ 60 billion worldwide in 1998 (Irvine 1998). This jumped to US$ 119 billion

in 2000 and, according to a study by Gartner Group, is estimated to reach US$234 billion in

2005 (The Economist 2001b). Similarly, global IT outsourcing market amounted US$ 151

billion in 2000 with and is growing at a compound annual growth rate (CAGR) of 20.1%

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(Currie 2000). Offshore BPO accounts for only a small proportion of the total global BPO.

Gartner Group estimated that India’s share of US$2.3 billion, at 80% of the the global

offshore BPO market in 2003, would decline to 45% by 2007 (Express Computer 2003,

Ribeiro 2004). By 2007, however, the global offshore BPO market itself, however, would

burgeon to US$27 billion, thereby leaving India an estimated US$12.2 billion of this market

(Ribeiro 2004).

The theory behind BPO is that a firm can leverage its resources for increased

competitiveness by concentrating on a set of “core competencies” that can provide unique

value to customers; and strategically outsourcing peripheral, time-consuming, non-core

activities (Quinn 1992; Quinn et al. 1995). Multinational companies are increasingly

outsourcing peripheral functions such as payrolls, benefits management, real estate

management, tax compliance, claims administration, applications processes, and human

resources (Hansen 2000).

Various factors, external and internal to a company, influence the perceived need and

the extent of outsourcing. With a qualitative content analysis of 49 academic articles, Goo,

Kishore and Rao (2000) have identified 14 drivers of information technology and system

(ITS) outsourcing. Of those, Table 4 discusses the drivers that are applicable to medical

transcription outsourcing.

Change Management Considerations

The Clinton Administration and congressional healthcare reform proponents introduced the

Health Insurance Portability and Accountability Act of 1996 (HIPAA) to reform healthcare.

The goals and objectives of the HIPAA “are to streamline industry inefficiencies, reduce

paperwork, make it easier to detect and prosecute fraud and abuse and enable workers of all

10

professions to change jobs, even if they (or family members) had pre-existing medical

conditions” (Hipppaplus.com 2003). HIPAA and its strong integration with the insurance

sector (also see endnote 2) has propelled the U.S. healthcare industry to increase the level of

automation. Handwritten medical notes are no longer acceptable and most U.S. hospitals have

identified medical transcription as one of the important activities for the automation

processes.

Core Competencies

Pressure to remain competitive has forced firms to reduce costs and emphasize on

productivity by becoming lean and efficient and to focus on core businesses (Moore 1998).

Fierce world competition has also forced firms to internationalize their outsourcing operations

and has increased the necessity for strategic partnerships (Aquilon 1997). Core competencies

of hospitals in advanced countries are centered on direct patient care, research, and training of

medical professionals12. Thus, it makes more sense for them to outsource peripheral functions

such as medical transcription, parking management, grounds maintenance, and facilities

management to outside suppliers.

Table 4 here

Human Resource and Cost Control Considerations

U.S. hospitals’ outsourcing of medical transcriptions to developing countries has stemmed

from their quest for cost cutting. In a survey of several hundred executives conducted by A.T.

Kearney, for instance, 93% of the respondents indicated cost reduction as one of their major

motivations for offshore outsourcing (Marlin 2003). Another study conducted by McKinsey

indicates that a 400-person outsourcing center in India translates into a US$20-40 million

annual saving for a U.S. corporation. For instance, the average salary of service delivery

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agents in India is US$2,000-3,000 per year compared to US$ 23,000-35,000 in the United

States (Ebusinessforum.com 2002, May 3). In the medical transcription industry, medical

transcriptionists (MTs) in the U.S. earn US$ 24,000-38,000 per year at the entry level and as

high as US$ 60,000-80,000 with some experience (Future MT 2003). MTs in developing

countries such as India can do the same job for roughly one-tenth of the salary (Quammen

1996).

Creation of Alliances and Strategic Networks

A number of U.S. based companies have set up service centers in India (indiainfoline.com

2003). For instance, Healthscribe India, which started its operations at Bangalore in 1992, is a

fully owned subsidiary of US-based Healthscribe, Inc. Similarly, Ohio-based Heartland

Information Service (HIS), in association with Indian partners has expanded its services to

five centers across South Asia, employing 3,000 people by 2002. Moreover, over 32,000

Indian doctors practice in the U.S.,13 creating a network of contracts for India-based medical-

transcription services (Dhume 1999). India’s closest competitor, the Philippines, on the other

hand, still lags far behind because of its lack of marketing initiatives abroad. The Filipino

medical professionals’ network in the U.S. and the West is large, however, and in the future

stronger competition can be expected from the Philippines.

Service Quality Considerations

Medical transcription has more stringent requirement regarding service quality compared to

other outsourced businesses such as call centers. Such requirements often include a

turnaround time of 8 hours (2 hours for emergency “stat” procedures) and imposition of stiff

penalties if the accuracy and time factor clauses are not met (Dev 2001). Although there have

been some concerns about outsourcing medical transcription services to developing countries

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– for instance, American Association for Medical Transcription (AAMT) raised the issues of

documentation quality and patients’ rights to privacy and confidentiality that arise from

offshore transcription14 (Wall Street Journal Apr 6, 2000) – firms in developing countries are

taking several measures to maintain the quality of services (Iwinski 2004). First, whereas U.S.

MTs typically have high-school level education, most of the Indian MTs have college

degrees, often with training in medical sciences. Second, Indian MTs are provided on-the-job

training “to decipher American medical jargon” (Quammen 1996). Third, medical

transcription firms in India take such jobs more seriously. For instance, Selectronic, which has

a 75-employee staff in Delhi, has a two-level infrastructure in place to execute projects:

transcription is done at the first level, and the second level ensures quality checks15 (Express

Healthcare Management 2001). Moreover, some Indian MTs are also physicians (Health Care

Strategic Management, 2004). Fourth, thanks to technological advancements, the response

time has been very short for Indian transcription firms. For instance, Spryance – an India and

U.S. based outsourcing – company uses web-based technologies which medical

transcriptionists (MTs) can use to efficiently interface with customers and the company by

working out of their homes with 24-hour availability (World Bank Group 2002). According to

David Woodrow, president of Roswell, the healthcare documentation division of SPI

Technologies, which sends about half of its medical transcription work to India and the

Philippines (and half to the U.S.) offshore outsourcing of medical transcription “was not

prompted by price but by the sheer lack of qualified, willing workers in the U.S. to meet

demand” (Conn 2005).

At the same time, new management techniques, software, and communications

systems have enabled better coordination (Quinn 2000) and made it possible to monitor

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quality. Outsourcers, such as Spectramind, MsourcE and First Ring, to name a few, are

enabling American clients to remotely monitor the outsourcers' operations in India (Read

2003).

Discussion and Conclusions One of the important contributions of this paper is to provide macro and micro level

explanations of the international flow of medical transcription services. India seems to have

significantly higher levels of factor endowments for medical transcription compared to even

software and hence – as predicted by the HOS theory – exports of such services are likely to

experience yet higher growth rates in future (Kulkarni 2004). In line with HOS theory and its

corollaries, the existing comparative advantages of India for medical transcription are not

static and unshakable. There is already evidence that new sources of similar or better

comparative advantage would emerge in other developing nations (Ribeiro 2004), and also

technology innovations would keep occurring to allow the developed nations to recapture

some of the comparative advantages.

Figure 1 presents macro- and micro-level factors influencing developing countries’

share of the global medical transcription services as well as its supersets—the size of global

medical transcription industry and outsourced portion of the industry. The enactment of

HIPAA, rapid growth of U.S. healthcare industry and its strong integration with the insurance

industry are triggering the demand for medical transcription in the U.S. Medical transcription

being a peripheral function, U.S. hospitals prefer to outsource it — domestically as well as

internationally.

Figure 1 here

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As explained by HOS theory, the exports of medical transcription services from

developing Asian countries are likely to increase (Brinson 2003). Decreasing degree of labor

intensiveness likely to result from the automation of some stages of medical transcription

services, however, poses a threat to these countries. National and corporate policies of

countries such as India would have to adapt and upgrade their levels of technology and

training to thwart the threat of sophisticated voice recognition systems.

Although all Asian countries have time zone advantages, they differ in terms of the

availability of IT infrastructure, familiarity with the U.S. healthcare system, and networks of

contacts. Our analysis indicates that growth in globally-outsourced medical transcription (and

other BPO activities) would continue, with rising absolute levels of market tapped by India.

The overall growth in Asia-sourced BPO, however, would also open up opportunities for

additional players in South and Southeast Asia, and would eventually put pressure on India’s

share of the greatly expanded global offshore BPO market (Ribeiro 2004).

Notwithstanding India’s factor endowmets discussed in this paper, the country’s

medical outsourcing industry is likely to face some roadblocks. First, although English is an

official language in India, only a small proportion of graduates meet the standard required to

interact with foreigners (Fairell et al. 2005). An estimate suggests that Indian BPO industry

will face a shortfall of about 260,000 qualified personnel by 2009 (The Economist 2005).

India is also experiencing significant increases in employee turnover (Scheiber 2004). In the

absence of appropriate measures, the medical outsourcing industry is likely to face a shortage

of qualified manpower.

Second, there have been a number of well-publicized security breaches and concerns

about service quality associated with offshore outsourcing (Kaka and Sinha 2005). Moreover,

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a majority of such violations have occured in India. Perceived or real security, privacy, or

identity breaches can diminish the value created by offshore outsourcing of medical

transcription services (PR Newswire Europe Including UK Disclose 2005). For these reasons,

some U.S. medical transcription firms are unwilling to outsource work to India

notwithstanding a potential savings of up to 50 percent (The Economist 2001a).

Third, there have been regulative, ethical and normative pressures againt outsourcing

of medical transcription and other services in outsourcing origin countryies such as the U.S.

As of the mid-2004, there were 186 bills pending in the U.S. Congress and 40 state

legislatures that aimed to limit offshore outsourcing (Engardio et al. 2004). Offshore

outsourcing is also being attacked on the ground that it is unethical for executives to award

themselves large bonuses and outsourcing jobs to overseas contractors that don't pay health

benefits to their employees (O'Toole 2005). While some change management considerations

discussed earlier increased firms’ propensity to outsource peripheral activities such as medical

trascription to developing countries, forces discussed here are likely to decelerate and even

decrease the offshore outsourcing of medical services.

Fourth, measures taken in competing destinations may enable them to attack India’s

share in the global outsourcing of medical trascription. Consider, for instance, China. Since

2001, the Chinese Ministry of Education has required students to start learning English in

third grade (Farrell and Grant 2005). Similarly, college students must pass English

proficiency exams to graduate. The size of English-speaking graduates in the workforce

doubled during 2000-2004 to cross 24 million in 2004 (Filippo et al. 2005). Given that

English language has been India’s relative advantage compared to China, measures taken by

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the latter to improve English proficiency of its workforce may result in an attack to India’s

share.

Fifth, some fundamental shifts brought by globalization and market integration may

also put other competing destinations in advantage. For instance, some analysts think that

since Central American countries are introducing business-friendly policies and employing

heavy marketing, they can capture a growing share of the offshore outsourcing market

originated from the U.S. with the progress of Central American Free Trade Agreement

(CAFTA) (e.g., Harman 2005).

An important area of future research concerns comparing how India’s factor

endowments in medical transcription outsourcing differ from outsourcing of other services

such as customer service call centers, tax preparation, finance and accounting, human

resources, and design and engineering, etc. Further research is also needed to examine how

India differs from its regional competitors in terms of factors endowments associated with

these services.

HOS theory is a major framework applied in this paper. Preliminary evidence

discussed in this paper indicates that medical transcription fares better than other services in

terms of some of the assumptions of HOS theory. Future research is also needed to deeply

examine how medical transcription fares compared to other services being outsourced in the

of satisfying the assumptions HOS theory.

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Table 1: A Comparison of Medical Transcription Industry in India and the Philippines Country Revenue (year) Number of Medical

Transcription Companies (year) No. of Transcriptionists (year)

India US$ 70 million (1999) h

US$ 80 million (2003)b

US$110 million (2004)a

Estimate: US$2.6 billion (2008) h

254 (2002)i

300 (2004) k3,800 (1998) e

6,100 (1999) f

10,000 (2004) k

Estimate:160,000 (2008) e

The Philippines US$ 7 million (2005)d

16 (2003) g

20 (2004) c, d

22 (October 2004) j

1,200 (2005)d

a Hussain (2005), b chennaionline.com (2003), cTan (2004), dhttp://outsource2philippines.com/health.asp, e

NASSCOM estimates, See “Future of medical transcription” at http://www.technicaforts.com/tp.shtml (accessed: December 11, 2005). The numbers indicate medical transcription and insurance claim processing jobs; fIndia Today (2001); g Computerworld Philippines (2002); h Chand (2000); I Calimag (2002); j Valdez (2004); k Estimate by Hindu Business Line, http://www.thehindubusinessline.com/2004/08/07/stories/2004080702540300.htm;

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Table 2: Applicability of HOS Theory to International Trade in Medical Transcription Services Aspects of Theory

Elaboration Implications for Indian Medical Transcription Industry

Statement • A country’s comparative advantage is a function of its comparative factor endowments.

India seems to have higher factor endowments for medical transcription than for software and hence higher competitive advantage.

Assumptions • Constant returns to scale • Perfect competition • No factor intensity reversals • Incomplete specialization • No economies of scale • Balanced trade • Similar technologies and preferences

None of the international trade patterns satisfy all assumptions. Medical transcription fares better in terms of some of the assumptions. For instance, because of common transcription software, the similarity of technologies between Indian and U.S. firms tend to be higher in medical transcription than (say) in transportation and travel.

Relevant Past Studies

• Sapir and Lutz’s (1981): Significant results in the case of transport or travel but less relevant for producer services

• UNCTAD (1988): HOS theory more applicable in the trades in services between developed and developing countries.

Medical transcription is more similar to transport and travel than to producer services. HOS theory can be expected to be more applicable for services traded between India and U.S.

Related Theorems

• Stolper-Samuelson theorem: Wages of low-skill labor used intensively in the production of low-skill intensive goods tend to fall in developed countries.

Indirect evidence: the availability of U.S. transcribers is falling by 10% per year, pointing to the relative and increasing unattractiveness of this profession in the U.S.

Prediction • A country will export the goods and services in which its comparative advantage is greatest.

India’s export of medical transcription services is likely to increase further.

Source: Sapir and Lutz (1981), UNCTAD (1988), and authors’ research.

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Table 3: Phases of the Medical Transcription Process and Their Factor Substitution Prospects Medical Transcription Phase

Explanation Factor Profile Factor Substitution Prospects

Raw Transcription Medical records transcribed from audio to text format

Currently labor and skill intensive, offering advantages to selected developing nations

Automation likely, as speech recognition improves (IBM 2002)

Proofreading Checking for and rectifying spelling mistakes and grammatical errors

Currently labor and skill intensive, offering advantages to selected developing nations

Partial automation likely, as spelling and grammar checking software improves

Editing Checking the text for inaccurate medical terminologies or other inconsistencies

Currently labor and skill intensive, offering advantages to selected developing nations

Likely to remain labor and skill intensive, offering advantages to nations with skilled editing workforce

Source: Based on Sudhindra (2003), IBM (2002), and authors’ research

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Table 4: Drivers of Outsourcing: The Case of Medical Transcription Services

Driver Explanation Remarks

Change Management considerations: • Responding to changing

environment

• Enactment of HIPAA and integration with the insurance forced U.S. healthcare industry to increase automation. As a result, the concept of medical transcription is taking off.

Regulatory and political changes in the U.S. created opportunities for global players from developing regions.

Core Competence considerations: • Focus business on core

competencies

• Core competencies of hospitals are centered on direct patient care, research, and training medical professionals. Medical transcription is considered to be a peripheral function.

With relatively low investments, an appropriately-endowed developing nation can turn what is a peripheral competence in the U.S. into a core competence for that developing nation.

Human Resource considerations: • Aggressive use of low cost

labor pool Costs Control considerations: • IS cost reduction

• More cost effective to outsource medical transcription services to developing countries.

U.S. hospitals that are outsourcing to domestic firms are likely to switch to India-based firms in future.

Creation of Alliances: • Strategic networks

• U.S. based companies are setting up bases in India

• Over 32,000 Indian doctors practicing in the U.S. have created networks of contacts for Indian medical-transcription services

Like in many other global business fields, ethnic linkages smooth out the complex negotiations and transactions across national boundaries.

Service quality considerations: • Improve technology and technical service • Aggressive management of service and response time • Better responsiveness to customer needs

• AAMT raised the issues of documentation quality and patients' rights to privacy and confidentiality that arise from offshore transcription

• High level of quality control in India

• Response time of 8 hours.

Countries located in time zones where work can be done when the U.S. offices are closed stand to benefit from such outsourcing.

Source: Based on Goo, Kishore and Rao (2000), and authors’ research.

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Figure 1: Determinants of Developing Countries’ Share of the Global Medical Transcription Industry

Overall size of medical transcription industry

Outsourced portion of medical transcription industry

Medical transcription outsourced to developing countries

• Rapidly growing U.S. healthcare sector • Integration of healthcare and insurance industries • HIPAA

• Medical transcription’s peripheral position in the core competency considerations of hospitals

• Relative unattractiveness of medical transcription jobs in the U.S.

• Degree of labor intensiveness of medical transcription jobs • Relative factor endowment (availability and cost of labor)

in developing countries • Time zone advantage • Availability of IT infrastructure in developing countries • Familiarity with the U.S. healthcare system and American

accent • Networks of contacts

22

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Endnotes: 1 The US$20 billion estimate is by TIME-IS – Technology Innovation Management and Entrepreneurship Information Service. TIME-IS is a joint venture of Department of Science and Technology, Government of India, and Federation of Indian Chambers of Commerce and Industry (FICCI). See http://www.techno-preneur.net/new-timeis/Project-Profiles/nstedb-project/Medical-Project.htm. 2 Medical transcription is the process in which medical records – such as patient history, lab reports, pathology reports, discharge summaries, physical reports, clinic notes, operative reports, consultation notes and the like, dictated by doctors and other medical professional – are transcribed from audio to text format (Sudhindra 2003). Voice dictations of American doctors are transmitted as voice files to companies (in India) and then transcribed

27

into digital form by (Indian) medical transcriptionists. Such records are needed for insurance claims and other purposes. 3 The global ITES market was estimated at US$ 300 billion in 2002 (Hindu Business Line 2002). 4 In India, the small and mid-sized firms that are not publicly traded are referred to as the “unorganized sector” of the economy. 5 See http://www.expresshealthcaremgmt.com/20010215/. 6 Health spending per capita in the U.S. was $4,631 in 2000, 44 percent higher than Switzerland's (the country with the next-highest expenditure per capita), 83 percent higher than neighboring Canada; and 134 percent higher than the OECD median (Anderson et al. 2003). 7 The estimates of the size of the U.S. medical transcription industry varies widely. One source estimates it at US$15 billion with an annual growth 15% - 20% in 2003 (Future MT 2003). Another source estimates it at US $ 20 billion (http://www.zeelearn.com/course/medical/html/objectives_1.htm) 8 The European market for medical outsourcing is estimated at $10 billion in 2004 (Hussain 2005). 9 Business process outsourcing is defined as “the long-term contracting of non-core business processes to an outside services provider” (Doucet 2000). 10 Financial services and services provided to other production sectors (Landesmann and Petit 1995). Markusen (1987) gave a number of reasons for the failure of HOS theory to explain the international trade in producer services. He argues that producer services are mostly connected with the non-competitive nature of the markets and their linkages with the overall organization of trans-border economic activities. Nusbaumer (1987) points out that HOS hypothesis assumes free availability of the same technology across the range of countries, which runs against the very purpose of services transactions (i.e., to facilitate the transfer of technology). 11 The number of working American transcriptionists has been falling by about 10% annually in recent years. The profession is not attractive enough to draw many new entrants, especially since incomes are not commensurate with the long training involved (six months to a year) (See http://www.cbayscribe.com/cbaysystems/releases_mar2000.htm). 12 See, From the Archives: The Toronto Hospital: A Case Study, http://www.firmbuilder.com/articles/4/85/521/. 13 About one-fourth of the 661,000 doctors in the US in 1996 were born abroad (See http://migration.ucdavis.edu/mn/archive_mn/feb_1996-07mn.html). 14 For example, by the end of 2001, there were only 6 CMTs (Certified Medical Transcriptionists) in India authorized by the American Association of Medical Transcriptionists (Dev 2001). However, a MT is required to go to the U.S. to obtain the recognition. 15 The accuracy exceeds AAMT's industry-standard minimum level of 98.5%.

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