VALUE-BASED PROCUREMENT IN EUROPE: NOT JUST ABOUT PRICE

by MELANIE SENIOR for MedTech Strategist

In May 2019, four manufacturers of external fixations bid for a two-year tender offered by the Vestre Viken Hospital Trust in Norway. The bidders included Stryker Corp., Smith & Nephew PLC, and Texas-based Orthofix Medical Inc. The winners, though, were two Istanbul, Turkey- based manufacturers, Response Ortho (acquired in 2018 by Indiana-based orthopediatrics firm WishboneMedical Inc.) and TST Medical Devices. Their combined offering was 74% cheaper than the competitors’, and the products “as good or better,” says Lukas Mansson, lead orthopedic surgical specialist at the hospital.

This is an extreme example. The tender was an experiment, designed to expand choice and lower costs in a market that is not subject to the same hurdles-to-entry as, say, hip stems or knees which require decade-long safety data. It was intended to encourage “non-established, smaller suppliers,” says Mansson, by  including, for instance, a minimum free shipping threshold (so that smaller companies are not crippled by  delivery  costs  for tiny volumes) and by not requiring a local support organization.

But the tender—run as a reverse auction, with qualifying bidders progressively reducing their price–illustrates how European purchasers of medical equipment are getting more organized and proactive in obtaining best-value. It also shows how some corners of the medtech market are opening up to low-cost supply and distribution models.

Procurement in Europe has become more professional, as hospital groups have joined forces to achieve better pricing and value-for-money on high-volume equipment, and health technology assessors have expanded their focus beyond drugs to include devices, too. Several countries, including Norway and Sweden, use regional or national tender systems in some segments to select one or two providers over two years or more, creating competitive, winner-takes-all situations.

Granted, few European countries have achieved Norway-style centralized purchasing. That country remains exceptional, for several reasons, not least a small (5.5 million), relatively compliant population and a culture that supports the welfare state.

But other, far larger markets including the UK and France are attempting to travel in the same direction. France in 2016 created regional hospital groups that reduced the number of purchasers from almost 900 hospitals to 135. The UK’s National Health Service is also attempting to aggregate demand and centralize procurement activities, as part of a broader supply chain overhaul. The goal: £2.4 billion of savings over five years.

Europe’s main markets have much further to go. In the UK, not all hospitals are clubbing together at the regional level, let alone nationally. And although awareness among surgeons about pricing is growing, many “don’t know the prices” of implants and equipment, says one senior orthopedic surgeon. Indeed, he adds, “there would be uproar if [the Prime Minister] sought to centralize [medical equipment] procurement”. (National Health Service-funded hospital trusts are currently free to engage in however many–or few–contracts they choose; all have tight budgetary constraints, though.)

But even this multi-speed set-up has created a challenging environment for medtech manufacturers. Many have had to squeeze prices and offer free add-on services to maintain their positioning in key markets. The data reflect this: prices for all major medtech categories in the top five European markets, Switzerland,  and  the  Netherlands  decreased  by 1.5% per year between 2012 and 2016, according to GlobalData Medical and Thomson Reuters.

The US presents similarly tough dynamics as  local  health systems and integrated delivery networks start to pressurize suppliers directly, setting up their own group purchasing organizations and thereby eroding the value of larger regional or national GPOs. (See “Time for Medtech to re-think GPOs?” MedTech Strategist, October 13, 2017.)

 

Balancing Quality and Price

 
 In theory, European procurement is not entirely about price—even though health systems remain under huge financial pressure. It is about achieving value—the greatest benefit for the lowest cost. It is also about encouraging a healthy marketplace and continued innovation.
 
The European Union directive on public procurement, approved in 2014, encourages buyers to focus on the ‘most economically advantageous’ tender (MEAT), but not just according to up-front cost. Calculations should include life- cycle costing, and may also take into account wider qualitative and economic benefits, such as to the wider care system and to the environment. The directive was also designed to make it easier for small and mid-sized companies to break into national tenders, for instance by lowering minimum turnover requirements.
 
That broader, beyond-the-price focus can be hard to make out. Health systems and procurement organizations tend to trumpet cost-savings as an easy, widely-understood metric. And there is still fat in some parts of the system, despite many years of price-squeezing. Gross margins on medical devices range from 60% to over 90% in Europe, according to one medtech company CFO. And although distribution costs can eat 40% of those margins, some segments are dominated by one or two incumbents with significant clout. There can be huge national and regional variation in prices for the same product due to distribution and purchasing dynamics and preferences. A knee replacement in the UK costs about £700; in Italy it is five times that, due to the margins paid to regional and local distributors. For an uncemented hip stem, the UK pays “anything from £950 to £3500,” says the orthopedic surgeon. In Norway, DePuy Synthes, part of Johnson & Johnson, recently won a regional, winner-takes-all tender with its Corail stem, priced at £500.
 
But the Corail stem wasn’t the cheapest in that tender. The cheapest, at £350, was Zimmer Biomet’s Taperloc stem. DePuy won “because it’s a very good, widely trusted product,” says Mansson. Yet, he adds, the company knew that they would have lost the market if they’d priced much higher. “It is about balancing quality and price.”
 
In other segments, tenders have been designed to break up a monopoly. DePuy Synthes was until recently also a monopoly supplier of screws and plates in Norway. Now, however, the regions have three suppliers per sub-category. “We wanted to keep Synthes as a supplier, but also open [the market] up to others,” says Mansson. By using other suppliers too, the hospitals help keep a lid on prices, and create some of the comparative data that was lacking around competing products. (In more complex areas like hip and knee, minimum long-term safety data from national registries is mandatory for participation in any tender, but also makes it difficult to claim a product advantage unless the data supports it.)
 
Will surgeons use the alternative products? Some may argue, as Mansson does, that one orthopedic screw is like another. But for the most part, even for apparently simple tools like these, “surgeons like to stick with what they know,” says Mansson. For more complex products, associated services such as training and support also influence decision- making. (Even with orthopedic screws, the instruments used to hold, position and insert them also play a major role in driving physician preference, according to the UK surgeon.)
 

SURGEONS AND FINANCIERS: AN EVOLVING RELATIONSHIP

 

In parallel to the balance between quality and  price  is that between surgeons’ wishes and those of the hospital’s finance department. They are not equivalent–but they are equally difficult balances to strike.  Orthopedic  surgeons in particular are often trained on specific products by the manufacturers themselves. They get to know the particular instruments and tools involved, and the nuances of the technology. Orthopedics is a training- and service-heavy discipline. Few surgeons therefore, are willing to switch to a different product, least of all on request from the hospital bean-counters, just because doing so will save a few dollars.

 

Things have improved since organized procurement first took hold in Europe’s health systems more than a decade ago. The friction is still there, but today, “it’s a negotiation,” says the UK surgeon, rather than “the finance guys coming in and saying, ‘you need to choose two hips.’” NHS Shared Business Services in the UK has established three-year Framework Agreements offering regional trusts volume- based discounts across certain product categories, including orthopedics. This avoids the need for each Trust to engage in formal procurement processes, though engagement is not mandatory.

 

Consultation with clinical experts has also been key to the success of Norway’s central hospital purchasing organization (HPO), known locally as SykehusinnkjopThe organization designs and runs tenders and manages supply contracts on behalf of the country’s hospitals, working with representatives from each of the Norway’s four regions. “We want to help hospitals and surgeons, not control them,” insists Kjetil Istad, CEO. “A working relationship with the clinical professionals is the cornerstone of everything we do.” Doctors and surgeons are more likely to accept and adhere to the results of a tender process if they, or some of their respected peers, have been involved in it.

 

 

 

Changing behavior and mindsets is a gradual process. “You can’t do it with one tender,” says Istad. In Norway, early tenders in a given field tend to include a wide variety of suppliers, with choice–and price–falling with subsequent contracts as agreement and confidence grows around a narrower range of suppliers. Hips and knee tenders are relatively far along, reflecting the established product range, experience, and long safety data across multiple products. Surgical instrument packs have also harmonized across hospitals, Istad says. The largest savings emerge when regional contracts are first bundled into national ones, generating larger volumes and lower transaction and contract-management costs for the payor. 

 

When pacemakers were first procured nationally, the estimated annual savings were NOK70 million (£6.5 million); savings the second year were just NOK11 million. Today, in Norway’s Western region—which has high contract coverage—average savings are “only” about 10%, according to Istad. But even there, there is opportunity: a new, first-time contract in 2019 around endoscopy accessories and consumables saved one hospital almost 70%. And even small, local contracts can command deep price discounts–as the external fixation example shows.

 

In the US, with its multitude of private payors and more mature group purchasing climate, integrated delivery networks can often drive deeper discounts at their local or regional level than may be achieved nationally. Medicare plays no direct role in price-setting for most medical devices; it instead sets reimbursement for broader procedures or services.

 

Norway’s tenders are evolving in their reach and their sophistication–reflecting the broader maturation of procurement as a discipline. And Istad emphasizes that they are not just about cost-savings, though that is obviously one component. “They are also about delivery, reliability of supply, and ensuring that innovations make their way into our hospitals,” he insists. Doctors in a given specialty, from across the country, meet and “we let them argue about what is best,”–not only when there’s a tender up for grabs, but all year round, to stay on top of market trends and new technologies. “We discuss what is coming, how we can benefit, and how we might design the next tender to take into account a given development.”

 

Mistakes have been made. In 2008, when DePuy reduced the price of its Corail uncemented hip stem by almost 50% in Norway, “it took the market by surprise,” reports Mansson. Suddenly, there was virtually no price difference between the uncemented stem and its cemented equivalent–causing an inappropriate shift in usage towards uncemented products, which are usually more expensive. (Debate continues to rage over the relative merits of the cemented versus uncemented hips; in very general terms, uncemented hips require healthy bones and are not ideal for patients with osteoporosis.) Similarly, a price-driven shift in one UK hospital Trust from a Johnson & Johnson cemented hip to a Stryker equivalent, also about 10 years ago, led to a significant increase in complications two years later, according to one ex-J&J national sales director.

These challenges have not derailed the drive for value. Instead, “we have gotten better at dealing with the transitions” toward more cost-effective alternatives, says the UK surgeon. There is a growing realization that “the system would fall apart if every doctor had a special arrangement,” says Istad. Yet both in Norway and the UK, if a given product is specifically requested, it is rare for the local provider not to procure it, even if it sits outside of a broader contract. 

 In spinal fusion surgery for scoliosis, for example, there are almost as many mechanisms and instruments as there are surgeons in the UK. “If you’re trained on one, you’ll continue with that one,” says the orthopedic specialist. Procurement contracts are rarely watertight in practice. Winning suppliers have little recourse if a hospital chooses to buy an alternative product; they are unlikely to sue their customer, even if the legal framework allowed it.

 

Innovation in Distribution and Supply

 

Europe’s maturing procurement landscape should in theory allow new entrants to elbow into selected medical devices segments where prices remain high due to lack of competition, but where barriers to entry are surmountable.

“I think there is scope [for disruption] around trauma (plates and screws), sports medicine (e.g. stitches for meniscal repair) and arthroscopy,” says Keith Clarke, former sales director at Smith & Nephew in the UK. Clarke is now UK general manager at Medivatus, a Scandinavian start-up based in Oslo, Norway that helps innovative manufacturers that have no local presence to engage with innovative, value-seeking hospital purchasers across the Nordic markets and the UK.

 

As tenders multiply and grow in sophistication, the overseas or less well-established product-makers that these tenders are designed to attract need help navigating the system. Take the UK NHS’ Framework agreements. These agreements, organized into 11 ‘Category Towers’ are run by specialist procurement experts hunting value. Each agreement, worth several tens of millions of dollars, can run for up to four years. So it’s critical to get in at the beginning. “Once on the approved-suppliers list, companies can build up their portfolio. What’s important is getting through the door on day one,” explains Gareth Martin, Medivatus’ founder and CEO.

 

Medivatus connected Ortho Response (now Wishbone Medical) and TST with Vestre Viken on their public external fixation tender, offering them a low-cost route into a new market, and new, high-quality suppliers for the whole region (which includes four hospitals). There are no sales reps involved, and no consignment stock is held: orders are filled directly with manufacturers and delivered to the hospital. “It’s a rep-lite, or even rep-less” model, says Martin. Hospitals pay a pre-agreed fee for any training they require.

 

Robots, not Reps?

 

Such a lean approach may work in selected segments of selected markets. (Medivatus also distributes products across trauma, spine, rehabilitation, and infection control.) The approach won’t work everywhere, though.

 

Even incumbents have struggled to sell “no-frills” product lines. Smith & Nephew tried with Syncera, a low-cost line of hips and knees launched in the US in mid-2014, and later  in some European markets. The idea was to build market share by reducing prices by up to 50% – thanks in large part to replacing the sales rep with an automated system, plus hospital staff training. Medtronic plc tried selling low-cost pacemakers and defibrillators through NayaMed, targeting cash-strapped European markets.

 

Neither was a success. In Syncera’s case, the segment leaders simply dropped their prices to match,  while continuing  to offer the ‘extras’, like reps and training. Both initiatives faced cultural barriers, both internally–where the company struggled to support the “generic” line alongside premium products–and externally. “No one within the NHS wanted to be the first to do this,” recalls one senior executive closely involved with Syncera in Europe. (Smith & Nephew declined to comment for this article about its efforts to create value- based solutions.) The end result was lower prices from the incumbents, with the same levels of service.

 

The role of the sales rep has already evolved significantly, in devices and in pharma, as purse strings tighten. Reps have fallen in number and no longer crowd  operating  theatres,  as they used to. They are more tightly monitored, yet reps remain valuable sources of insight and assistance in many areas, especially implants/prostheses, according to both surgeons themselves and other medtech industry executives. “They can help new surgeons or those beginning to use a particular product. They can tell you whether a placement    is correct,” says one medtech CFO. “It is often about the nuances that are not in the [instruction] manual.” Reps also sometimes do equipment checks prior and post-op. And they provide an outside perspective on what’s happening in other hospitals, and what is coming down the pipeline.

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