With the above in mind, it is ever clearer that the medical device market is influenced by macroeconomics and, as a result, politics. When fiscal deficits are high and budgets are under pressure, savings have to be implemented. These savings encompass the healthcare sector, which hitherto had avoided any significant cuts.
Cost cutting focuses on administration, centralised bureaucracies, infrastructure, pharmaceuticals, medical devices and, to a lesser extent, recruitment, training and wages. When spending is undertaken, especially to purchase products, there is growing scrutiny of the benefits incurred. One of the major trends is the shift from hospital-based care to more patient-centric diagnosis, treatment and monitoring.
These changes will be evolutionary rather than revolutionary. The provision of medical services is a matter relevant to every member of society. Moreover, in today's digital age the lines of communication are multiplied. Increased stakeholder communication—primarily between commercial enterprises, payers and patients—will define 21st century healthcare systems.
France: healthcare spending controls but also big-ticket expenditures
Rationalisation of medical services is a key theme in France, where patients traditionally have had many options in determining their care. New measures recently were introduced to control spending on medical devices, similar to those implemented on pharmaceuticals. A key directive is to reduce inpatient capacity, particularly in short-stay units, and shift resources to outpatient units, clinics and the home.
Nevertheless, as in other complex systems, trends are rarely unidirectional. A second five-year plan to reduce the burden of cancer has been launched in France. The state-mandated scheme seeks to boost the number of magnetic resonance imaging (MRI) scanners and increase the number of specialists, including radiotherapy technicians. This will not only boost big-ticket capital expenditure, but also recurrent support spending.
There is scope for further health service integration in France. The government aims to develop greater co-operation between hospital and ambulatory care. To date, both systems have operated largely independently, with the National Fund for Health Insurance Employees (CNAMTS) primarily responsible for overseeing ambulatory services through its regional branches. Plans to reduce the number of inefficient acute care facilities, in order to generate savings in France, have been met with fierce opposition from local authorities.
Fundamental reasons explain why France’s healthcare system does not operate ideally. Ambulatory care is mainly provided by general practitioners (GPs) and specialists from surgeries and in the homes of patients. Patients are free to choose their own doctor, whom they pay directly with partial reimbursement from social security funds. Because doctors are paid on a fee-for-service basis, the volume of consultations, diagnostic procedures and prescriptions is high. This is compounded by instances of patients seeking multiple opinions.
Signaling what can be expected in other European countries undergoing economic recoveries, France has explicitly targeted medical devices for cost containment. The 2013 budget seeks price cuts totaling €115 million, with savings of €75 million in the ambulatory care sector and €40 million from hospitals. Expenditure on medical devices is also at risk from plans to constrict the list of healthcare products eligible for reimbursement. The government furthermore wants to tighten up on advertising of medical devices, similar to sanctions that already apply to pharmaceuticals.
Italy: decentralised medical care, payment delays and spending caps
Entrenched economic problems are forcing the Italian government to make tough decisions on the future of its healthcare system, which is modeled on the UK National Health Service. In line with the regional trend, Italian authorities are looking to decentralise the provision of medical services, boost private sector involvement and give patients greater choice in their care.
As seen in Spain, there are long payment delays by hospitals to medical device manufacturers. Increases in patient copayments and lengthy waiting times are becoming more common. To improve the standard of care, reforms are being implemented, a key goal of which is to reduce the number of hospital beds. This will free up funds for rectifying current shortcomings in the healthcare system.
The draft version of the 2013-2015 Health Pact targets savings from medical devices and other subsectors. Under the tentative framework, expenditure on medical devices will be capped at 5.2% of Servizio Sanitario Nazionale (SSN) spending. It also seeks to introduce copayments for medical devices, similar to those applied to pharmaceuticals.
Switzerland: cost containment makes inroads in outlier economy
Because of its stable high-tech economy, Switzerland generally has avoided the worst of the eurozone crisis. Nevertheless, cost containment is beginning to permeate the highly decentralised healthcare sector. According to industry association FASMED, the medical device sector employs more than 40,000 people in Switzerland. There are more than 500 directly involved commercial enterprises, which generated estimated sales of more than CHF6 billion annually, with a considerable proportion reinvested in R&D. Key expertise lies in the areas of orthopaedic/prosthetic appliances and dental equipment.
Governments always seek to protect domestic industry, which provides direct and indirect employment, as well as tax revenue. Despite being home to many medical device firms, the Swiss authorities are not willing to overpay for expensive healthcare products or those lacking efficacy. In order for new products to be reimbursed, companies must demonstrate to health insurance firms that they offer a significant clinical benefit.
Ireland: despite double dip, medtech industry holds steady
The eurozone crisis has hit Ireland hard, with a double dip in real GDP growth in 2012. An €85 billion bailout from the troika of the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) stipulates a reduction in government spending. Despite attempts to ring-fence these reductions, healthcare is not exempt. Patient charges were raised in 2009 and efficiency savings are sought throughout the system. The changes are having the desired effect, which is encouraging authorities to continue looking for savings.
The Health Insurance (Amendment) Bill 2012 introduces new regulations that will almost certainly lead to higher premiums for patients. Following the February 2011 general election, it is planned that the Health Service Executive (HSE) will be replaced by a universal health insurance scheme by 2016, and further devolution of hospital management to their boards will take place.
Ireland is very keen to protect its medical device production sector, which accounts for nearly 10% of exports and adds considerable value to the wider economy. Government incentives attract new entrants and encourage those already established to expand operations. Despite the macroeconomic challenges Ireland faces, few manufacturers have abandoned the country for lower-cost manufacturing sites in emerging markets.
United Kingdom: manufacturers must prove value of their devices
A collective emotional attachment to the National Health Service (NHS) prevents any meaningful cost cutting to medical services in the United Kingdom, despite sluggish economic performance over the last five years. Management of the system is being changed; it is hoped that, as a result, GPs will take a greater role in budgeting and, therefore, spending. Patients in the United Kingdom are being offered the opportunity to choose their GP and select the facility, public or private, where they will receive treatment. The government is looking to introduce a medical device bar-coding system and a price comparison website. This will increase transparency and, it is hoped, reduce prices paid by the numerous NHS hospital trusts.
The National Institute for Health and Clinical Excellence (NICE), and the cost-effectiveness studies it conducts, arguably carries the future of the UK's healthcare, medical device and pharmaceutical sectors. Manufacturers increasingly will have to prove the value of their products, rather than dictating prices, and therefore profits, to payers. Another approach that is changing the medical services paradigm is the Payments by Results scheme. Under this, hospitals are paid a standardised fee for the work they do. The aim is stimulate greater productivity and reward procedures that are performed outside of hospitals.
Some aspects of the NHS are underfunded and in need of investment. Ironically, this situation is a result of society’s desire to protect the NHS from change. In early 2012, the government announced plans for a so-called world-class procurement system that would involve a cash fund for bulk purchases of high-end equipment such as MRI scanners and ultrasound machines. Most hospital purchasing of consumables is done in small multiple orders, which raises administration costs and reduces the opportunities for payers to demand sizeable discounts. It also leads to some significant price differentials. There is plenty of room for improvement in the NHS. Procurement hubs have funding, but would appear inefficient, with many cases of overlapping and duplicate contracts.
Germany: a remarkably resilient healthcare sector
Thanks to the strength of its economy, Germany was affected the least among EU member states by the eurozone crisis, with domestic consumption, investment and exports showing remarkable resilience. Nevertheless, Germany’s real GDP contracted by 0.6% in the first three months of 2013 in comparison with the same period in the previous year.
Despite its economic outperformance in comparison with its European neighbours, government funding for hospitals has remained capped in recent years. Purchasing managers of public facilities often choose to maintain existing equipment, rather than acquire new appliances. This contributes to one of the key trends in Western Europe’s medical device sector: prolongation of the replacement cycle.
Anticipating the draining effects of an ageing population, Germany has implemented a series of major healthcare reforms over the past 20 years. A new Healthcare Provision act took effect in early 2012. The legislation seeks to achieve a more efficient use of resources by offering patients treatment as close to home as possible. This reduces the burden on hospitals and improves convenience for patients. The boundaries between inpatient and outpatient services are to be relaxed, and financial incentives will be offered to encourage doctors to work in rural areas. There will be more telemedicine and mobile services. Post-hospital care will be improved to lower the number of re-admissions. Older persons, in particular, will be given the possibility to recover in familiar surroundings after an accident or illness.
The German healthcare system demonstrates sustained resilience, at a time when others in Western Europe are creaking under the pressure. According to the Federal Ministry of Health, the statutory health insurance system has a relatively good financial status. Implemented changes also are having the desired effects. Data released by the Federal Statistics Agency indicated a declining rate in the growth in hospital activity, at least as far as procedures on inpatients are concerned.
The Joint Federal Committee (Gemeinsame Bundesausschuss; G-BA) recently clarified new procedures for assessing new diagnostic and treatment methods that incorporate innovative medical technologies. While there is not yet sufficient proof of benefit, the G-BA can appoint an appropriate institute to conduct a clinical trial of the new product, with the aim of getting it reimbursed using pooled funds. This initiative primarily supports the innovative efforts of smaller companies, which are crucial to the underlying strength of any economy.
Spain: no improvement in the short term
The near-term outlook for Spain's economy is dire. Domestic demand will be weak, fixed capital formation sluggish and the country's perilous fiscal position will weigh on growth over the next few quarters. Under the terms of the €100 billion bailout given to Spain, an increasingly painful austerity drive is being implemented.
The growth rate of private health insurance has slowed, increasing the burden on the state-run system. Many regions of Spain have accrued sizeable debts to medical device manufacturers. Although payment delays have reduced recently, there is still considerable concern about timely payments among industry representatives.
To improve the efficiency of medical services provision in Spain, the Health Cohesion & Quality Law, published in 2003, aims to guarantee a unified national health system despite devolution of autonomy in the regions. There are a few fundamental shortcomings in the medical device sector. Equipment replacement cycles tend to be lengthy. Some facilities have the full spectrum of high-grade equipment and products, while others cope with outdated machines and shortages of basic goods.
Drivers of growth
Despite the recent downturn in medical device expenditure, the ageing populations of western Europe will ensure the commercial viability of the healthcare sector. According to Alex Gorsky, Chairman of the Board and CEO of Johnson & Johnson (J&J), “People over the age of 65 years use approximately seven times more healthcare than younger people.”
Sales and margins will also be preserved by the growth of chronic diseases, innovative products, widening access to medical services and better understanding of diseases.
There is scope for policymakers across western Europe to apply further pressure on the revenue generated by medical device manufacturers. Firms that do not embrace the new operating conditions will struggle to thrive. It is unlikely, however, that governments will allow extreme controls on spending. Western Europe is home to many medical device manufacturers, ranging from low-end producers to high-tech players. In addition to the multinationals, there are hundreds of small and medium-sized enterprises (SMEs). These smaller companies are crucial to the region's economic recovery.
New oversight procedures are also pressuring medical device companies, especially SMEs. In September 2012, the European Union proposed measures to increase access to innovative products and widen supervision of the manufacturing process. Industry representatives broadly welcome these changes, although there is concern that SMEs will be financially disadvantaged; a centralised approval system typically leads to lengthier registration times.
There will also be the emergence of healthcare companies. For example, Philips aims to become a total service provider to hospitals. Meanwhile, J&J is forming broad partnerships that provide unique offerings to patients, insurers and providers. More than any other involved party, the multinationals that produce medical devices will have to lead the campaign to prove the benefit of their products. This will enable companies to command reasonable prices, which can be reinvested to ensure a sustainable future for the medical device industry.
Jamie Davies is Head of Pharmaceuticals, Medical Devices & Healthcare at Business Monitor International.