BERLIN — German companies may be world-famous for developing innovative medical products, but they have been slow to adapt to the radically changed landscape in their home market following sweeping healthcare reforms that went into effect four years ago.

Prices for medical devices have fallen rapidly, tightening cash flow and squeezing the margins necessary to support continued innovation.

The purchasing cooperatives for that are pushing down prices have only grown stronger and account for more than 70% of hospital sales today, it was reported at last week's German Congress for Orthopedics and Trauma Surgery.

A closer observation in a study commissioned by BVMed (Berlin), the association representing device makers, shows that the 20 largest purchasing consortia accounted for 50% of all sales.

Germany is the world's third-largest market for medical devices with €21 billion ($26 billion) in sales of non-capital devices.

Purchasing managers commenting in the report agreed the manufacturers of medical devices "make it relatively easy for hospitals" to drive down prices.

"It is a ruinous competition, and no one is winning," Joachim Schmitt, director of BVMed, told Medical Device Daily.

"The growth in volumes purchased is in the double digits," he said, "but Germany today has the lowest prices for implants, for example, anywhere in Europe. When you calculate the volumes and the prices, we are seeing a 4% to 6% growth in the sector."

Unlike France, Germany does not set a fixed price for implants but instead adapted a diagnosis-related group (G-DRG) model that pays hospitals a fixed fee for a given procedure.

The strength of the German model inspired Switzerland to build a similar system and other countries, such as the Netherlands, are considering modeling their reimbursement on the G-DRG structure as well.

China has also expressed a serious interest, according to the director of Germany's health technology assessment authority, the Institute for Hospital Reimbursement (InEK), which fixes the G-DRG Catalogue.

The cost of an implant within the G-DRG reimbursement plan for a hip replacement, for example, averages one-third of the total reimbursement and can vary from €500 ($625) for a common procedure to €1,500 ($1,875) for revision surgeries, according to BVMed Communications Director Manfred Beeres.

The obvious incentive for hospitals is to reduce the cost of the implant and device makers have rushed into the competition, slashing prices and their margins.

For a company in Germany reporting an average margin before taxes of 8.7%, a 5% net price decrease leads to a direct decrease in the margin to 3.9%, according to the BVMed report.

To compensate, the company would need either a disproportionate volume increase of 8% to compensate for the price decrease, or else a decrease in variable unit costs by 17%, or else a decrease in fixed costs by 9%.

At the same time that it is driving costs down, the G-DRG system also has proven to be too rigid, taking more than four years to introduce new procedures and treatment, a critical obstacle for companies that earn a third of revenue, and their best margins, from products developed in the past three years.

The G-DRG Catalogue for 2009 has recently approved, adding 55 new groups for reimbursement to bring the total number of procedures covered to 1,192.

Among these are special provisions where hospitals can recover 100% of supplemental costs for innovative procedures, but only 12 such new procedures were added, bringing the total to 127, or 10.6% of approved G-DRGs.

Responding to complaints from industry that the G-DRG structure is blocking new medical treatments that are more cost-effective, the German Hospital Federation commissioned an expert report which confirmed the regulations concerning the NUB method (Neue Untersuchungs und Behandlungsmethode) for introducing new treatment and examination technologies, "lose much of their original sense and the introduction of innovations has been delayed, contrary to the lawmaker's intent."

Germany does not allow patients to pay out of pocket for upgrading treatment received within a G-DRG, for example, asking for a higher-quality implant than the one chosen by the hospital.

To pay for a different manufacturer's implant, the patient would lose 100% of the reimbursement for the procedure.

Founded on the principle of solidarity, the German system does not allow different care for rich and poor, insisting on one single, high-quality care for all.

A wealthy German can opt out of the system by taking a private health insurance policy, and one in 10 Germans have chosen to do so, though in October BVMed reported the net number of new people for full private insurance fell slightly for the second year in a row to a total of 8.55 million policyholders.

A new and encouraging development for doctors, and by extension for medical device manufacturers, is the willingness of Germans to pay out of pocket for services not covered by the G-DRGs.

A study funded by Germany's largest health insurance company, AOK, said physicians collected more than €1 billion ($1.25 billion) in supplemental revenues for diagnostics and therapies that included ultrasound examinations, measurement of intra-ocular pressure, and removal of tattoos.

At the German Orthopedic and Trauma Surgery conference, manufacturers of extracorporeal shock wave machines for doctor's offices, for example, reported steady interest and brisk sales.

Hartmut Gloth of distributor GHS Medical (Singen, Germany) was promoting the AR2 tabletop therapy device from Dornier MedTech (Wessling, Germany) and said sales were "very good" through 2007 and into 2008, though business has slowed in the fourth quarter.

Storz Medical (T gerwilen, Switzerland) was showing the DuoLith SD1, which has been available for orthopedic practices in Europe for two years.

Peter Kröner said he believed "everyone is holding their breath right now," with the financial crunch. "The fourth quarter is normally very good, but it is not feeling good right now," he said.

Doctors are gaining confidence in the trend toward additional revenue from extra-G-DRG services with a report from the Federal Association of Panel Doctors showing "the change of a physician to a health businessman has not yet had any effects on his credibility" with 93% of patients saying they continue to trust in the doctor's specialized competence.

In two-thirds of cases, the doctor recommends the additional procedure, primarily to above-average wage-earners who can afford the additional cost while only 20% of patients in low income brackets are offered such treatments.

BVMed is now campaigning to reform the provisions in the German healthcare reform that has harshly impacted medical device manufacturers with a focus on first loosening up the stiffness of the "Innovation Clause" to allow faster access for new products to reimbursement and then for assuring the system of supplementary payments continues.

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