Europe’s Path in Public Healthcare Procurement Without China's '4+7' Volume-Based Model

Editor's Note:

On November 15, 2018, with the approval of the National Healthcare Security Administration, the Shanghai Sunshine Pharmaceutical Procurement Network officially released the “Document on Centralized Drug Procurement in 4+7 Cities.”

The document designates four municipalities directly under the Central Government—Beijing, Tianjin, Shanghai, and Chongqing—and seven provincial capital cities—Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an—as pilot cities (collectively referred to as the “4+7” cities). It specifies 31 drug varieties (with designated specifications) that already have domestic manufacturers and have passed the Consistency Evaluation of Generic Drugs as pilot drugs (primarily for chronic diseases and common conditions), implementing volume-based procurement based on agreed purchase volumes.

As China vigorously pilots volume-based drug procurement policies to achieve overall cost containment, public procurement in Europe is likewise facing severe challenges: mounting financial pressure, an increasingly complex public procurement environment, and rising price transparency.

Challenges and Opportunities Coexist. By adopting value-based procurement, Europe’s medical technology industry has ushered in new development opportunities.

Recently, McKinsey, a global management consulting firm, analyzed the challenges facing the European medical technology sector. It highlighted the opportunities presented by value-based procurement—defined as procurement guided by the criterion of delivering strong societal value—and provided guidance on how mid-sized medtech companies can seize these opportunities.

Although national contexts differ, the adage “stones from other hills may serve to polish the jade” holds true; this report offers valuable insights for the future development of centralized drug procurement in China.

The following is a report compiled and translated by VCBeat (WeChat ID: vcbeat) reporters, primarily containing the following information:

I. The Medical Technology Sector in Europe Is Facing Significant Challenges

II. Value-Based Public Procurement Opens New Opportunities for the Industry

III. How Should Mid-Sized Medical Technology Companies Seize Opportunities?

Value-based procurement has become a reality in Europe today. To fully seize opportunities in the European public procurement market for medical technologies, participants must rapidly adapt to this new reality.

Across Europe, healthcare payers and providers are facing unprecedented financial pressure, which in turn poses increasingly severe challenges to the European medtech sector. As the public procurement landscape becomes more complex and price transparency continues to rise, the industry’s growing demand for comprehensive solutions is driving changes in product offerings, necessitating the emergence of new sales channels and strategies.

Evidence has shown that value-based public procurement is a key driver in unlocking outcome-based value for healthcare systems and patients. The new EU Public Procurement Directive (2014/24) facilitates this effort by enabling assessment and decision-making based on two criteria: Total Cost of Ownership (TCO) and the price-quality ratio.

From 2012 to 2016, the prices of medical devices in six core categories—cardiovascular, in vitro diagnostics (IVD), medical imaging, general surgery, orthopedics, and wound care—declined by an average of 1.5% annually across Europe. Despite efforts by medical device providers to improve profit margins through offering global commercial services, reducing sales costs, and undertaking business transformations, significant pressure remains on return on equity. (The total shareholder return in the medical device industry has consistently remained lower compared to other industries.)

Today, three major trends are challenging the business models of traditional medical technologies:

The pace and complexity of public procurement integration are increasing.Over the past decade, public hospitals have undergone successive rounds of consolidation, and the presence of new, highly complex procurement teams has become the norm.

For example, France established Territorial Hospital Groups (GHTs) in July 2016, reducing the number of hospitals participating in price negotiation and tendering from over 890 to 135. Meanwhile, the public procurement workforce strengthened its purchasing capabilities by investing in tools and analytical capabilities and recruiting new talent specializing in tender management.

Similar trends are also evident within the National Health Service (NHS) in the United Kingdom and Spain (specifically in the Balearic Islands and Madrid). Furthermore, as national bodies such as the UK’s National Institute for Health and Care Excellence (NICE) place increasing emphasis on medical technologies and pharmaceuticals, the challenges facing procurement teams have become increasingly complex. In response, these teams are progressively adopting strategies such as market consultation and competitive dialogue to conduct price negotiations and shape tender submissions, thereby better meeting the needs of all stakeholders.

Increased price transparency is putting pressure on traditional models.Following similar initiatives across the pharmaceutical industry, MedTech Europe released the MedTech Europe Code of Ethical Business Practice in January 2017, establishing guidelines for cost transparency. Meanwhile, with the growing prevalence of online tools and social media, purchasers are becoming increasingly price-sensitive, and low-cost companies are challenging traditional pricing models.

The demand for integrated solutions has driven changes in product pricing.As payers and healthcare providers increasingly adopt clinical care pathways, they are adhering more strictly to guidelines and protocols, thereby improving device utilization rates and the frequency of treatments in outpatient and home care settings. Medical technology companies are increasingly expected to support this transition through outcome-based and value-based contracts.

For example, in 2012, the Stockholm County Council (SCC) launched an innovative tender for wound care products. The SCC required bidders to calculate the total treatment cost for each of three hypothetical patient cases and to evaluate the outcomes of such treatments. Another initiative, which linked reimbursement to outcomes for hip and knee replacement surgeries, resulted in an 18% reduction in complications, a 23% decrease in reoperation rates, a 19% decline in revision surgeries, and a 20% reduction in medical costs per patient.

The UK’s National Health Service (NHS) primarily focuses on cost-effectiveness research to determine optimal clinical practice guidelines and treatment options, such as the NICE clinical guidelines and health technology assessments. Recently, industry attention to standardized care pathways, such as the “Right First Time” initiative, has further driven improvements in best practices, including enhanced procurement methods.

Therefore, medtech companies need to provide “beyond-the-product” solutions that integrate education, services, consulting, and financing with the products themselves to deliver greater value to payers.

Although these trends appear challenging, recent Europe-wide legislative changes—the new public procurement directive—have made it easier for medical technology companies to successfully achieve the objectives defined in these requirements.

In fact, the evolving procurement landscape presents genuine opportunities for medtech companies to rethink their value-based offerings and business models, thereby better addressing the changing needs of healthcare systems.

Value-based procurement has become a reality. In 2014, the European Union approved the new EU Directive on Public Procurement, allowing purchasers to procure based on the criterion of the most economically advantageous tender.

This directive primarily evaluates decisions from two dimensions:

1. Total Cost of Ownership (TCO).Public procurement personnel are permitted to look beyond the initial purchase price and consider all costs over the equipment’s lifecycle (such as acquisition costs, maintenance costs, and consumables).

Second is the price-to-quality ratio.Encourage purchasers to consider the quality and economic benefits for all stakeholders (such as care providers, healthcare professionals, the broader care system, and the environment) along the care pathway.

These two approaches form the foundation for the shift from “price as the sole procurement criterion” to value-based procurement.

Currently, five EU countries, including the Netherlands and Sweden, have transposed the directive into their respective national laws. Although countries are at different stages of implementation, a growing number of examples demonstrate the success of value-based procurement approaches.

For example, in Sweden, Karolinska University Hospital has recently launched multiple strategic partnerships and made value-based procurement a core vision for its newly built hospital.

The same applies to Catalonia, which has already implemented several value-based procurement cases and further expanded them to other categories of medical technologies. In addition, the Netherlands, Sweden, and the United Kingdom have also had numerous successful cases, which will not be elaborated on here.

As part of the transition toward value-based public procurement, economic incentives in some countries have shifted from fee-for-service to payment based on population health outcomes (i.e., patient outcomes following care). This represents a fundamental shift for public procurers: in this new context, they need to improve the entire healthcare system (not just hospitals) along the patient care pathway—from primary care to hospital-based care and then to community care—and acquire products and services that optimize outcomes and costs across these pathways.

For example, the United Kingdom recently selected nine regions as part of the Accountable Care System (ACS) Accelerator, a fast-track accountability care initiative, and will effectively control budgets across regions rather than at the hospital level.

Currently, procurement decision-makers have numerous needs. For instance, stakeholders in the medical technology sector need to deepen their understanding of the implications of the EU procurement directives, correctly apply price-quality ratio models, and gain experience by demonstrating cases that deliver greater value to healthcare systems. Leading medical technology companies have already begun to address these needs.

McKinsey’s research on six core medical product categories indicates that these products are transitioning toward value-based procurement at varying speeds.

On the one hand, cardiology, medical imaging, and orthopedics are expected to become the most advanced fields within the next three years, with the number of tenders prioritizing either price or quality increasing by an average of 15% to 20% in most developed countries. On the other hand, the number of price-and-quality tenders for wound care and in vitro diagnostics is projected to decline by 5% to 10% over the same period. These are high-volume products, for which price remains the most critical tender criterion.

Meanwhile, countries and regions are at different stages of development and will progress at varying speeds, leading to the emergence of three models in the future:

Leading countries (Sweden and the United Kingdom) currently employ a range of innovative procurement approaches in the therapeutic sector and possess extensive experience in structuring and evaluating innovative bids, as well as linking them to partial funding mechanisms.

Fast followers (France, Germany, the Netherlands, and Spain) currently have some cases of innovative procurement methods. In the next three to five years, they will continue on this path.

Slow Adopters (Italy) place less emphasis on innovative procurement approaches. Although they have made some attempts in this area, it remains unclear whether they will accelerate expansion in the coming years.

McKinsey research indicates that for a mid-sized medical technology company, actively investing in alignment with the trend toward value-based public procurement will drive revenue growth of 2.5% to 5.0% over the next three years.

Medical technology companies must act swiftly in the following three distinct areas:

Customize the go-to-market strategy for each prototype and market segment.Participants should redefine their national and regional coverage and create detailed market segments to better target public tenders in complex cross-regional environments. This will help improve commercial resource allocation and sales capabilities targeting non-clinical senior stakeholders.

Expand the scope of services to include KPI solutions that are of concern to clients.These key performance indicators encompass education, training, IT, and digitalization. For instance, regarding services related to implantable cardioverter-defibrillators (ICDs) procured in Catalonia, medical technicians must go beyond core requirements by providing remote monitoring and IT infrastructure that supports integrated solutions. This approach should cover short-term service projects, medium- to long-term innovation partnerships, and associated promotional initiatives.

Cultivate participants' ability to link outcome measurement with tender award criteria.Specifically, participants need to possess three capabilities: first, a deep understanding of care pathways to tailor services according to the needs of providers/payers; second, the ability to measure health and service outcomes to enable innovative financing; and third, the capacity to establish more sophisticated billing arrangements, including risk-sharing and outcome-based financing.

To achieve this goal, participants need to invest in building the capabilities of their frontline team members to enable effective engagement with procurement teams. In particular, team members need to become accustomed to using data to develop and discuss more quantified value propositions.

McKinsey research indicates that in an ever-changing environment, three factors distinguish the winners from the losers in the health technology sector:

The Mindset of Shaping Demand.For example, Catalonia updated its public procurement practices well before the deadline for full transposition of EU directives into national law. Since 2013, the region has signed more than 15 risk-sharing agreements with pharmaceutical companies and issued tenders worth €10 million for value-based procurement, all of which have now become successful models. The €20 million value-based procurement program launched in the third quarter of 2017 drew on the successful experience from these cases.Only pharmaceutical and medical technology companies willing to innovate can successfully turn this opportunity into reality.

Engage promptly at the earliest appropriate opportunity.For example, the new Karolinska University Hospital has entered into a 14-year partnership agreement with Koninklijke Philips to provide end-to-end equipment and service solutions, while both parties will jointly invest in the research and development of next-generation imaging technologies. However, such collaboration requires Philips to be fully prepared and willing to offer extensive R&D cooperation options to win the highly competitive bidding process.

Deliver a value proposition that goes beyond the device.For example, IMS Medical won the tender from the Erasmus Centre for Entrepreneurship in the Netherlands by offering bed-cleaning products that go beyond core services and are tailored for specific applications. By gaining deep insights into customers’ strategic needs, actively engaging in competitive dialogue, and collaborating with industry and academic experts, IMS Medical was able to develop highly innovative products. In addition to effectively cleaning beds, IMS Medical’s products reduced carbon emissions by 65% and lowered total cost of ownership (TCO) by 35%.

The global medical products industry faces numerous challenges, with the European market confronting the most severe headwinds. Companies willing to make bold strategic and business model choices will emerge as future industry leaders; those reluctant to do more than make incremental changes, or even resistant to change altogether, must take action now.

(Compiled by Cheng Xiaoqin)