Olivia Cavlan – an alumna of McKinsey’s London office – Lewis Grey, consultant, Chris Llewellyn, senior partner, Christian Zerbi, partner, and Adam Krych, specialist in McKinsey’s Poland Knowledge Centre, share their thoughts on the European marketplace at this crucial time
Value-based procurement is a reality today. To capture the opportunity in today’s European medtech-public-procurement market fully, winners need to adapt to new realities quickly.
Across Europe, there is unprecedented financial pressure on healthcare payers and providers, which, in turn, makes the European medtech landscape increasingly challenging. As public procurement becomes more sophisticated, price transparency is growing, and demand for integrated solutions is driving changes in product offers, requiring new sales channels and tactics.
Value-based procurement is a reality today, and it is proving to be a key driver to unlocking outcome-based value for health systems and patients. It is facilitated by the new EU directive on public procurement (2014/24), with decisions assessed through two lenses: total cost of ownership (TCO) and price-quality ratio. However, our research across six core categories of medical products suggests that they are moving toward value-based procurement at different speeds; equally, countries will also evolve at different speeds of adoption.
Medtech winners will need to develop a demand-shaping mindset; engage early on, at the right level, and quickly; and offer a value proposition ‘beyond the device.’ They must move quickly to tailor their go-to-market model by geography and segment, enhance service offers to include solutions based on relevant outcome key performance indicators (KPIs), and develop capabilities that enable them to link outcome measures with tender award criteria.
Our estimates suggest that for a medium-size medtech company, proactively investing in line with this trend over the next three years will lead to a 2.5 to 5.0 per cent growth in the top line.
Across Europe, medical-device prices for all major categories – cardiovascular, in vitro diagnostic, medical imaging, general surgery, orthopaedics and wound care – decreased on average by 1.5 per cent a year from 2012 to 2016 (figure 1).
Despite efforts to improve margins through globalised business services, reduced cost of goods sold, commercial transformation, and so on, there continues to be significant pressure on shareholder returns. Figure 2 illustrates the consistently lower total return to shareholders compared with other industries.
Today, three major trends are challenging traditional medtech commercial models:
While these trends may seem challenging, a recent Europe-wide legislative change – the new directive on public procurement – is making it easier for medtech players to deliver successfully the goals defined in these demands. Indeed, the shifting procurement landscape presents real opportunities for medtech players to think through optimised value-based offers and business models that better match health systems’ evolving needs.
Value-based procurement is a reality today, facilitated by the new EU directive on public procurement, which was approved by the European Union in 2014, with an option to procure based on criteria that favour the most economically advantageous tender. This introduces two new lenses through which decisions are assessed:
– TCO criteria, which allow public procurers to go beyond the acquisition cost and consider all expenses during the device’s life cycle (for instance, acquisition costs, maintenance costs, and consumables)
– Price-quality ratio criteria, which encourage procurers to consider qualitative and economic benefits for the full set of stakeholders along a care pathway (for example, care providers, care staff, the wider care system, and environment)
Both methods are fundamental in the move away from price as the only criterion for procurement toward value-based procurement (figure 3).
Currently, all analysed regions (the EU-5, the Netherlands, and Sweden) have incorporated this directive into their own national legislation. While countries are at different stages of implementation, there are a growing number of examples of successful value-based-procurement efforts. For example, in Sweden, Karolinska University Hospital has recently launched multiple strategic partnerships and made value-based procurement a core vision of its newly built hospital. The same is true in Catalonia, where several value-based tenders have been awarded with further expansion into other medtech categories. And there are other leading examples from the Netherlands, Sweden, and the UK.
As part of this transition to value-based procurement, we have seen economic incentives in select countries shifting from payment-by-episode to payment-for-population outcomes. This represents a fundamental shift for public procurers: in the new scenario, they have incentives to improve for the whole system (and not just the hospital) and to acquire products and services that optimise outcomes and cost along an entire patient pathway – from primary care to hospital-based care to community care. One key example is in the United Kingdom, where nine regions have recently been selected to form part of a fast-paced accountable care system – ACS Accelerator – and will effectively control the budget on a cross-regional (as opposed to hospital) level.
Procurement decision makers today have a number of needs that leading medtech players are starting to fulfil. These range from the need for medtech players to deepen their knowledge of the implications of the EU procurement directive to the need for evidence from use cases in which the price-quality ratio model was applied and delivered more value for the care system (figure 4).
Our research across six core categories of medical products (cardiology, orthopaedics, wound care, imaging, general surgery and in vitro diagnostics) suggests that categories are moving toward value-based procurement at different speeds. On one hand, cardiology, medical imaging and orthopaedics are expected to be the most advanced over the next three years, with a 15 to 20 per cent average increase in the number of tenders prioritising price or quality across most advanced countries. On the other hand, wound care and IVD are expected to see a 5 to 10 per cent decrease in the number of price-quality tenders over the next three years – these are high-volume, commodity products for which price is still the most important criterion (figure 5).
Meanwhile, countries and regions are also at different stages today and will evolve at different speeds to form three main archetypes:
Our estimates suggest that for a medium-size medtech company, proactively investing in line with the value-based-procurement trend over the next three years would lead to 2.5 to 5.0 per cent growth in the top line (figure 6 shows the detailed impact by lever).
Medtech players must move quickly in three distinct areas:
Our research suggests three enablers to separate medtech winners from losers in this changing landscape:
The global medical products industry is facing many challenges, and nowhere more so than in Europe. Companies that are willing to make bold choices with regard to their strategies and business models will emerge as future leaders; those that continue to make marginal changes will not. The time to act is now.
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