Bulk Shopping

Challenges of volume-based procurement in the medical device industry

Until recently, ‘to see a doctor is both difficult and expensive’ (看病难, 看病贵) was a familiar catchphrase to describe the Chinese healthcare system.

Steps are being taken by the Chinese Government to improve community hospitals and rural healthcare facilities, with volume-based procurement (VBP) being one of the tactics used to cut costs. However, bulk buying the cheapest product is not always the most economical option in the long-run, particularly when it comes to medical devices. Volker Müller, senior government affairs desk manager at the European Chamber, tells us more.

Finance the healthcare system of a developed country with the monetary resources of a third-world country.

This is, condensed into one sentence, the challenge Chinese healthcare authorities are facing. In 2020, China spent euro (EUR) 665 per capita for healthcare. In comparison, in Germany—the biggest European healthcare market—per capita spending (2019) was EUR 4,944, 7.5 times as much. Standing at a rate of 30.5 per cent, government subsidies of the healthcare sector in China are high (in comparison: Germany is 12.8 per cent). A further increase in social security contributions of the workforce would harm the competitiveness of the Chinese industry. In the five years from 2015 to 2020, overall healthcare expenses in China grew by an unsustainable average of 13.3 per cent per year,[1] almost 2.5 times as fast as the average gross domestic product (GDP) growth of 5.7 per cent.[2] Hence, the only option for China’s health authorities is to limit the growth of expenses.

Facing this bleak monetary perspective, health authorities, especially the National Healthcare Security Administration (NHSA) need to control expenses while at the same time maintain or even expand (especially in rural areas) the level of care.

China uses different approaches in parallel to achieve this goal, including:

Diagnosis-related Group (DRG); paying a lump sum to a hospital for a specific disease, encouraging hospitals to use resources economically.[3]

Tiered care; a collaboration of community clinics and hospitals of different levels shall relieve expensive top-end hospitals of patients who can be treated close to their homes with less expensive treatment methods.

One of the newest tools of the NHSA to control expenses, by reducing purchasing prices of medicines, disposable and consumable medical devices, is volume-based procurement (VBP). The basic idea is to bundle the demands of many hospitals in order to buy products in high quantities and ask the manufacturer for price reductions.

The idea of VBP or bulk-buying is not new. In the 19th century, European citizens organised themselves in consumer cooperatives to negotiate better prices for food and other daily necessities. In the field of healthcare, the United Kingdom is a pioneer of state-controlled procurement, encouraging local National Health Service organisations to work together in a regional purchasing arrangement that enables them to bulk buy and benefit from the economies of scale.[4] Though the term VBP was not used, the idea of bulk buying healthcare products became most prominent in late 2020, when the European Commission used its bargaining power to negotiate prices and terms of delivery with manufacturers of COVID-19 vaccines for all its 27 member states.

In China, VBP of medicines started in late 2018 in 11 trial cities. On 7th December 2018, the tender results of 25 different medicines were announced, leading to their prices subsequently dropping by as much as 96 per cent, with an average decrease of 52 per cent.[5] This was mainly achieved by replacing originator medicines (medicines manufactured by the inventor) by generics (medicines ‘copied’ after the patent has expired). Encouraged by the substantial savings of the pilot, the NHSA started VBP-tendering on a national level in 2019.

The first two VBP tenders for high-value medical devices were organised by the provincial Healthcare Security Administrations of Anhui and Jiangsu provinces in July 2019. The use of VBP for medical devices is much more complex than that of medicines: one type of medicine is defined by one or a few active ingredients, therefore originator medicines and generics have in principle the same pharmacologic effect. Complex medical devices have hundreds or thousands of parameters; the devices of different manufacturers are never completely identical, giving the doctor many choices from which to select the most suitable option for a patient’s condition. However, the diversity of medical devices makes it difficult to define the scope of a tender and limits procurement volume.

Despite this difficulty, in 2020, prospective cost savings led to a ‘rush’ in VBP tenders. With a few exceptions, procurement of medical devices is organised at provincial level or below. Each procurement entity decided the scope of products to be purchased by VBP tenders and created its own set of regulations and requirements. Many regular procurement activities were re-organised as VBP tenders, often on third- and fourth-tier municipality levels that have just one or two class III (top-end) hospitals, and thereby not creating substantial procurement volume to justify major price cuts. The hasty call for VBP tenders resulted in poorly conceived tendering procedures: for example, sometimes the tender regulations were only announced orally at tender meetings; the criteria for winning a tender remained unclear; or hospitals’ device demand forecasts were not always available when they called for tenders.

In 2020, the Government Affairs subgroup of the Chamber’s Consumable and Disposable Medical Device Advisory Committee spent most of its time contacting and visiting local procurement centres to advocate for an improvement of the VBP tender procedures.  Thanks to the combined efforts of the NHSA, the local Health Security Administrations and the industry, most of these administrative shortcomings were solved by the first half of 2021.

In late 2020, the NHSA conducted the first nationwide VBP tender for medical devices ˗̵ coronary stents. The result was announced on 9th November 2020: the contracted price dropped by an average of 93 per cent, from Chinese yuan (CNY) 13,000 to CNY 700. [6] Ten different stents were selected in the tender; three imported, seven domestic. Several international companies retracted their bid because of the cut-throat price competition. Compared with many other medical devices, the costs of the physical manufacturing of coronary stents are very low, but manufacturers have to invest heavily in research and development, including international multi-centre clinical studies. The price in this national VBP tender covers manufacturing costs, but leaves no resources for manufacturers to invest in further product improvement.

Results of the second VBP tender at national level, this time for artificial joint implants, were announced in September 2021. 44 out of 48 manufacturers passed this pre-qualification. The average price cut compared with 2020 was 82 per cent, certainly at the pain threshold, but not as extreme as in the first national VBP. One improvement noted in the second VBP tender: devices and service prices were quoted separately, increasing cost structure transparency.

However, a general challenge remains for VPB tenders at both national and local levels: as the main objective of VBP is price reduction, tenders are generally decided on price criteria, without sufficient consideration of clinical requirements and quality of devices and related services. In contrast, the European medical device industry promotes the concept of ‘value-based healthcare’ and ‘value-based procurement’. As with consumer products, buying the cheapest medical device is often a waste of money. For example, if a cheap and lower quality artificial joint has to be replaced after ten years, this will cause additional suffering for the patient, the additional surgery consumes additional hospital resources and health insurance payments will increase overall.

The NHSA and most local procurement agencies understand the necessity of introducing ‘value-based procurement’; the question is not ‘whether’, but ‘how’. There is no simple formula to compare the lifetime and quality of medical devices, as clinical studies are required for each individual medical device. Taking lifetime of implants as an example, it may be necessary to observe patients for decades until reliable data are available. The Chamber’s Healthcare Equipment Working Group is planning to bring European and Chinese experts together to share experiences and best practices in value-based procurement, to make best use of China’s limited healthcare resources.

[1] Statistics of China’s Healthcare Development (in Chinese), annual reports 2016 – 2020, National Health Commission, viewed 12th September 2021.

[2] Economy and Society Development Report 2020 of the People’s Republic of China (in Chinese), National Bureau of Statistics, 28th February 2021, viewed 12th September 2021, <http://www.stats.gov.cn/tjsj/zxfb/202102/t20210227_1814154.html>

[3] Müller, Volker, New Payment Systems: The process of Chinese hospitals adopting a commercial mindset, Eurobiz November/December 2017, 1st December 2017,viewed 12th September 2021, < https://www.eurobiz.com.cn/new-payment-systems/>

[4] Partnering with the NHS to sell goods and services. Government of the United Kingdom, 28th September 2018, viewed 12th September 2021, <https://www.gov.uk/guidance/partnering-with-the-nhs-to-sell-goods-and-services>

[5] European Business in China Position Paper 2019/2020, European Union Chamber of Commerce in China, 2019, pp. 263 – 271, < https://www.europeanchamber.com.cn/en/publications-archive/714/Pharmaceutical_Working_Group_Position_Paper_2019_2020>

[6] Tender Result of the State Level VBP of Coronary Stents Announced, the Average Price for a Stend goes down from an Average of 13,000 Yuan to an average of 700 Yuan (in Chinese), people.cn, 5th November 2020, viewed 12th September 2021, <http://health.people.com.cn/n1/2020/1105/c14739-31920276.html >