Health care sector and markets

The health care sector will continue to be one of the world’s largest industries. The demand for life-saving and life-sustaining products and services will especially remain intact as they are medically needed.

However, experts estimate that a prolonged economic downswing could result in more pricing pressure and slowdown in revenue growth as governments seek to ease their healthcare spending – especially in the United States.

Nonetheless, industry observers believe that, despite all challenges, the sector will also see a comparatively solid financial performance in the foreseeable future. Moreover, favorable demographic trends, such as aging populations, medical advances, and the large number of diseases that are still difficult to cure or are incurable should be growth drivers. In addition, the need to increase the availability of primary health care and the growing demand for high-quality medical treatment in the emerging countries will also continue to generate solid growth rates.

However, in the mid to long term, funds channeled into economic programs to contend with the financial and economic crisis in other sectors may not be available for the health industry.

THE DIALYSIS MARKET

We expect the number of dialysis patients worldwide to rise by about 6 % p. a. in the coming years, although significant regional differences will remain. For the United States, Japan, and the countries of Central and Western Europe, where prevalence is already relatively high, we forecast slightly
below-average patient growth. In many developing countries, however, where needs are still not met sufficiently, we expect above-average growth in patient numbers of up to 10 %, and in some countries even higher rates. This growth is driven by steadily evolving health care systems that are providing broader patient care. As more than 80 % of the world’s population lives in these countries, this opens up strong potential for the entire spectrum of dialysis care and dialysis products.

We expect that the total dialysis market could reach more than US$ 70 billion in 2011 (unchanged currency relations assumed), almost doubling its volume over a period of just ten years.

We intend to maintain our market leadership at a very high level in the major product groups, such as dialyzers and hemodialysis machines, and to improve it where possible.

In the United States, our biggest market, a new flat-rate reimbursement system for dialysis patients covered by the public health care program (Medicare) is due to be introduced in January 2011. The legislation was passed in July 2008 under the “Medicare Improvements for Patients and Providers Act of 2008”. All products and services currently reimbursed according to the so-called composite rate as well as services that have so far been reimbursed separately, such as the administration of certain drugs and the performance of diagnostic laboratory tests, will be reimbursed in future as a single, flat-rate payment. This so-called bundled rate will take individual patient parameters, such as age and weight, into account. Adjustments are also provided for patients who require exceptional medical care, with correspondingly high costs.

Besides being inflation-linked, another special feature of the new reimbursement scheme is its orientation to certain quality parameters. For instance, if dialysis clinics do not meet set quality standards, their reimbursement rates will be reduced. The quality parameters include factors such as patient satisfaction, the control of blood hemoglobin levels (anemia management), and bone mineral metabolism.

The composite rate was already increased in 2009 and is being raised by a further 1 % in 2010.

THE MARKET FOR INFUSION THERAPIES AND CLINICAL NUTRITION , GENERIC IV DRUGS , AND MEDICAL DEVICES

The market for infusion therapies and clinical nutrition in Central and Western Europe will probably grow at a low single-digit rate in the coming years. There continues to be high growth potential in Asia-Pacific – especially China – and in Latin America and Eastern Europe. We expect the market in these regions to continue growing at high single to doubledigit rates.

With intravenously administered generic drugs the growth dynamic will continue to be driven by original preparations going off-patent. A factor working in the opposite direction is the price erosion for products that are already in the market. We expect the market for IV generics in Central and Western Europe to grow at a mid single-digit rate. In the United States, a key factor will be the direction of the planned health care reform. Given the high cost of the reforms, it can be generally assumed that the US government will encourage the use of low-cost generics, among other things through incentive mechanisms and initiatives to promote cost consciousness. In addition, generics manufacturers should benefit from faster market access. On the other hand, however, it looks as if the pharmaceutical industry will have to grant higher rebates to public payors in future. It has also been proposed that hospital reimbursement rates should be reduced. That could increase pressure on the pharmaceutical industry.

All things considered, we therefore currently expect the US market for IV generics to grow at a mid single-digit rate in 2010, driven by a number of important original preparations going off-patent.

We also expect rising demand for medical devices in the coming years.

THE GERMAN HOSPITAL MARKET

Although the reimbursement schemes are largely regulated by law, German hospitals will not completely escape the effects of the financial and economic crisis in 2010, after an overall positive year in 2009. Experts see an increasing risk of insolvency for German hospitals in 2010. Due to the further worsening financial situation in the public sector, privatization activities are expected to increase in 2010.

Health insurers’ revenues are expected to decrease. Furthermore, negative impact will stem from the health care fund introduced in 2009 and for which a budget deficit of € 4 billion is anticipated. Moreover, the financial situation of local governments has worsened, reducing their ability to cover their hospitals’ operating losses and to finance investments. This will further limit the financial scope for supporting loss-making hospitals and investment in public health care facilities.

Another challenge for hospitals is financing investments. Given their high investment needs but declining government support, hospitals are under growing pressure to rigorously tap the potential for rationalization.

Crucial factors for a hospital’s success will not only be cost-efficient processes, a well-structured treatment spectrum, and well-trained staff, but also excellent medical standards. HELIOS is convinced that systematic quality management and high-quality medical results should not just serve as marketing instruments, but should be an element of hospital management, and thus part of the reimbursement. In the long run, initiatives are expected that provide for the introduction of quality-based reimbursement (pay for performance) and allow hospitals the option of concluding selective contracts with health insurers. With its strict focus on quality and transparency, HELIOS would be excellently prepared for this future development.

It is generally expected that the privatization process will accelerate further, especially among public hospitals. Private hospital chains and alliances are likely to be able to respond to the pressure to improve efficiency better than public hospitals. They often have more experience in operating commercially and creating efficient structures. Also, they have the potential to secure cost advantages in procurement. Finally, private operators have more experience with the process know-how for acquiring and integrating new facilities and quickly adjusting their cost structures.

There are no signs as yet that the new coalition government will bring decisive changes for clinics in the German acute care and post-acute care market as the political discussion has been confined so far to long-term financing issues. As in the past, a focus on cost-cutting in a future health care reform cannot be ruled out. On the one hand, health insurers’ revenues are expected to decline subsequent to the economic crisis. And on the other hand, the health care system is faced with rising costs.

In Germany the new reimbursement system on the basis of the standardized base rates in the individual federal states will enter into force from the beginning of 2010. It remains to be seen how additional services over and above the budgets agreed for 2009 will be negotiated with the health insurers. The different base rates from state to state are to be successively harmonized over a period of five years, starting in 2010, toward a standardized, nationwide base rate corridor.

However, in light of the experience with the DRG system, the above-average increase in the number of admissions, and the convergence steps already completed, HELIOS does not expect any major changes in the reimbursement policy.

Under the Hospital Funding Reform Act (KHRG), the criteria for the introduction of flat-rate investment allowances should be agreed by 2012. Instead of the previous application-based financing of hospital investments, state governments can decide to fund investments in an entrepreneurial way on the basis of performance-oriented investment allowances. However, important details have still to be resolved, especially the structure of the flat-rate investment allowances.

No consequences from changes in the law are expected in the post-acute segment. However, pricing and other controls by health insurers will continue to increase. As a result of growth in acute care cases and continuous improvements in HELIOS’ internal referral management, we expect to be able to leverage potentials from the combination of acute care and post-acute care, thereby increasing our number of postacute care admissions.

THE MARKET FOR ENGINEERING AND SERVICES FOR HOSPITALS AND OTHER HEALTH CARE FACILITIES

In industrial countries, owing to demographic trends, growing demand for high-quality, efficient medical care – and thus for engineering and services for hospitals and other health care facilities – is expected to continue. The focus is on services, ranging from the maintenance and repair of medical and hospital equipment, facility management, and technical operation, through to total operational management and infrastructure process optimization – especially within the framework of public- private partnership (PPP) models. Additional growth opportunities are presented by the privatization of health care. This trend can be observed especially in Eastern Europe.

In the emerging countries, there is growing demand above all for infrastructure development, but also for efficient, needs-oriented medical care. The provision of primary health care is now very largely in place. In many markets, the focus now is therefore on building up secondary care, developing tertiary health care structures in the form of “centers of excellence”, and creating training and research structures. All in all, we expect the market for engineering and services for hospitals and other health care facilities to continue growing in 2010.

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