Over the last forty years, the health care industry has experienced rapid escalation in health care costs and medical spending. Today, in most of the western European countries, health care is one of the fastest growing government spending segments.

One of the main underlying factors driving healthcare expenditure across countries in Europe is the ageing population. Particular healthcare needs have increased alongside the increasing ageing population. These age related diseases encapsulate mainly musculoskeletal and cardiovascular.

In response to the increasing healthcare needs, most countries have sought to increase public sector spending. Evaluations of the current healthcare structures are frequently carried out to ensure quality of healthcare provision. Decentralisation of planning and devolvement of power to local authority levels is one set being taken to tackle inefficiencies in health care systems. Rationalisation of financial resources often takes the form of cost containment strategies, which can take two main forms; these include the regulation of prices and capping of budgets in healthcare spending.

From the early 1990’s, diagnostic related groups (DRGs), an activity based method of payment was introduced. The system allows fixed reimbursement tariffs for specific treatment areas.

There are increasing concerns that the implementation of such systems is restricting the growth for the medical device industry. Implementation of the DRG systems is envisaged to impact technology diffusion, as financial resources are being rationalised to reduce slack. The DRG reimbursement systems are expected to adversely influence uptake levels, growth rates, technology diffusion and future reimbursement levels.

The DRG based payment system is in place and expected to be fully implemented in Germany by the end of 2006. The German market is one the biggest markets for medical devices, but recently BVMed had expressed concerns about the impact of the implementation of DRGs on the uptake of medical technology.

In the UK a case mix prospective payment system has been implemented which works on the same principal as the diagnostic related groups. In 2004, the UK government introduced a new method of payment called Payment by Results (PbR) to help the NHS use its resources more efficiently and effectively. The PbR regulations aims to improve and support patient choice, encourage plurality of provision, reward efficiency, reduce waiting lists and ensure fair and consistent basis of funding is delivered. In 2005, the government introduced 48 specific health related groups (HRGs) to be commissioned. The indicative cumulative totals for each HRG are calculated on monthly totals based on weighted spells.

This trend however is slowly being implemented across the European countries. The shift is already evident in Sweden, where the healthcare system was once characterised by public service monopoly. The introduction of the DRG system in Stockholm has offered several advantages for the healthcare system in Sweden. It has increased productivity and helped reduce waiting lists.

It is envisaged that soon most of the European countries will adopt new reimbursements systems which will adhere to the DRG system. The introduction of this healthcare system will drive consistency and transparency within healthcare systems.

The DRG system offers a number of advantages for healthcare providers but also creates a number of challenges for medical device manufacturers. The DRG system is feared to increase the regional hospital purchasing trend, which strengthens their bargaining power and gives providers the advantage of leveraging cost advantages by placing large purchasing orders.

Due to the stringent healthcare constraints in place we can see a significant decline in bed numbers and patient stay in European hospitals. The change has been facilitated by a significant growth in the day care, home care and ambulatory care sectors, which avoid costs associated to inpatient care. The provision of healthcare available outside hospital environments offers significant cost advantages for hospitals. The cost reduction achieved through providing out of hospital treatment, allows maximum utilisation under the DRG reimbursement systems.

The introduction of the Euro is likely to lead to gradual integration of European markets and hospital products. The single currency has stimulated intra-continental purchasing and distribution. However, price transparency pricing issues have ensued, making the competition for medical device manufacturers even fiercer.

It is only in recent years that economic evaluation of products and procedures has become a necessity for Medical Device and Diagnostic (MD&D) companies. NICE in the UK was the first institution requesting data to demonstrate the economic and clinical value of a new product, procedure or surgical technique. For almost four years now certain MD&D companies have been working on the development of health economic resources and on the internal and external process, to be prepared for the future.

The economic evaluations often lead to the development of long approval procedures for the procurement of medical devices. The need for health technology assessments (HTA) and evidence based medicine (EBM) incorporated in domestic health policies is one pivotal factor which medical device manufacturers and in particular marketing personnel should bear in mind at every step of product development.

In conclusion, DRGs are seen to provide incentives to hospitals to treat patients in the most cost containing way. However, DRGs are characterised by short product life cycles and are seen to suppress innovation due to the decreasing budget allocations. Implementing DRGs is helping healthcare providers to distribute resources more equitably across healthcare units. The future increase in healthcare expenditure is envisaged to increase the pool of money for each of the healthcare units. But the question remains whether the increased budget allocation will be in line with patient demand.

For further information please contact:

Radhika Menon Theodore
Corporate Communications
+91 44 42044668
rmtheodore@frost.com

www.medicaldevices.frost.com