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Changes in hospital purchasing - the challenge for the medical device industry Both the public sector and the medical device
industry are taking a close look at the processes involved in public procurement. This has been driven by the realisation that hospital purchasing is
one area where savings can still be made. As a consequence of this, purchasing practices are undergoing a process of rationalisation and reform across
Europe. A fuller understanding of the factors influencing hospital purchasing will enable those involved in the medical device industry to make the
most of upcoming changes in procurement. This is an area where companies who stay ahead of trends will be able to avoid the worst effects of the drive
to make savings and can benefit from developments in electronic procurement, rather than being stung by a more price driven market and by a shift in
negotiating power towards purchasers. The predominant influences affecting procurement include changes in hospital funding, which have a significant
knock on effect on purchasing, the European and national regulatory environment, group and consortium purchasing and electronic procurement.EU
and national procurement regulations: protecting ?1200 billion European community public procurement regulations have sought to standardise
public procurement practices across the region. Across the EU, public procurement accounts for more than ?1200 billion each year (approximately 14% of
the total GDP of the EU). The scale of public procurement has therefore made it essential to ensure transparency and to protect public funding from
corruption and favouritism. The downside of the extensive legislation that has been introduced to achieve this is that purchasers and suppliers
become entangled in bureaucracy. National regulations governing procurement vary across Europe, further complicating the process.Changes in
hospital funding: the drive to make savings Hospital procurement rationalisation aims to make savings. The impact of this on the medical
device industry has been to foster a more price driven market with a strong incentive for suppliers to provide added value in terms of service, better
deals etc. One of the most significant changes in recent years affecting purchasing has been driven by changes in the way that hospitals are funded. Many
countries within Europe are now exploring the potential of case-mix based systems of hospital funding, in which hospital funding provision is based on
the profile of cases that a hospital encounters and treats. The most commonly used form of case-mix funding in Europe is Diagnosis Related Group based
funding (DRG), which covers in-patient stays, and the treatment given to a patient whilst staying in hospital. DRG schemes are operating in Italy and
are currently being piloted in Germany and France, whilst a case-mix based funding scheme that covers patient care from out medical consultation to
hospitalisation and out patient follow up has recently been introduced in the Netherlands. Case-mix based schemes are largely regarded as
causing potential problems for medical device industry suppliers selling products to hospitals, since their introduction can lead to more cautious
spending by hospital purchasers and a substantial (up to of 30% hospital based services) shift in services to the ambulant and primary care sectors. However,
the improved monitoring of expenditure made possible by case-mix based schemes can also focus purchasers' minds on the potential of technology
that yields longer term cost savings.Group purchasing: the power shift towards purchasers The development of purchasing groups
in a number of European countries reflects a wish to endow hospital purchasers with increased negotiating power and to achieve economies of scale,
which save procurement costs and ensure uniformity of health care provision. Example include the recent development of health enterprises in Norway,
which centralise purchasing for groups of hospitals within geographical areas, and the introduction of NHS Supply Confederations, which will include
all hospital and primary care Trusts in a certain area, in the UK. It is planned that the Supply Confederations will manage procurement for over 80%
of NHS Trusts by March 2004. The development of large purchasing groups may simplify negotiations between medical device suppliers and purchasers,
since companies do not have to deal with each hospital individually. However, large purchasing groups are able to exert considerable leverage on
suppliers and can demand lower prices and high service provision.Electronic procurement: new challenges Electronic procurement
has attracted growing attention from hospital purchasers, European governments and suppliers. Electronic procurement offers advantages for suppliers
and purchasers, as summarised in the table below. E procurement services developed by medical device manufacturers, such as Global Health Exchange (GHX)
which was founded by Johnson and Johnson, Baxter, GE Medical, Abbott and Medtronic, have become more established in Europe and, in GHX' x case, have
formed links with purchaser focussed e procurement services such as Belmin/CAPS, which supplies a large number of NHS Trusts with an e procurement
service. However, medical device suppliers are also wary about the possibility of the widespread uptake of e procurement and have justifiable
concerns that the development of this technology may benefit purchasers at the expense of suppliers. In addition, the development of e procurement
systems in Europe is patchy and diverse. Different hospitals and regions have adopted different e procurement systems. There is a lack of uniformity
on terms of information security provision, with the EU failing to establish clear guidelines for electronic signatures. Companies may be
justifiably concerned that the development of e procurement systems, especially when coupled with the use of purchasing groups and consortiums, will
result in greater price pressure being placed on suppliers, with e marketplaces providing minimal benefits for suppliers in terms of savings whilst
involving additional work in terms of the development of online catalogues and technical interfaces. E procurement services developed by medical
device manufacturers, such as Global Health Exchange (GHX) which was founded by Johnson and Johnson, Baxter, GE Medical, Abbott and Medtronic, have
become more established in Europe and, in GHX' x case, have formed links with purchaser focussed e procurement services such as Belmin/CAPS, which
supplies a large number of NHS Trusts with an e procurement service. However, medical device suppliers are also wary about the possibility of the
widespread uptake of e procurement and have justifiable concerns that the development of this technology may benefit purchasers at the expense of
suppliers. In addition, the development of e procurement systems in Europe is patchy and diverse. Different hospitals and regions have adopted
different e procurement systems. There is a lack of uniformity on terms of information security provision, with the EU failing to establish clear
guidelines for electronic signatures. Companies may be justifiably concerned that the development of e procurement systems, especially when coupled
with the use of purchasing groups and consortiums, will result in greater price pressure being placed on suppliers, with e marketplaces providing
minimal benefits for suppliers in terms of savings whilst involving additional work in terms of the development of online catalogues and technical
interfaces. The spread of e commerce in the public sector appears to be inexorable however. Companies must adapt to ensure that they benefit as much
as possible from this change. Early company involvement in e procurement and working with hospital clients to develop e procurement systems will help
to ensure that the e procurement solutions that are developed address the needs of suppliers as much as those of purchasers. It is also important that
personal relationships with purchasers and other decision makers in hospitals are maintained despite the encroachment of the electronic age. The
development of e marketplaces in the hospital sector should never be a replacement for talking to and listening to the people who will use products.The
new balance Achieving the balance between satisfying the needs of purchasers with their requirements for lower costs, new procurement
systems and processes, with industry needs to squeeze profits from an ever more competitive commercial environment and the need for resources for
R&D reinvestment will challenge the best management teams in the industry. Deciding how far to pander to the needs of purchasers may well be the
most important decision companies will make in the future. | 
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