Hospital spending on health in Germany is rising – purchasing companies help cut material costs

• In 2010, hospital spending in Germany totaled
  EUR 73 billion
• 40% of that spending is on material costs
• Material costs in German hospitals are expected to exceed EUR 50 billion by 2016
• Purchasing companies can help hospitals cut their material costs by up to 15%
• Clear trend among purchasing companies toward a greater level of commitment and professionalization
• Purchasing companies becoming increasingly important in Switzerland and Austria as well

Expenditure on health in Germany has risen considerably in recent years – up from around EUR 212 billion in 2000 to EUR 284 billion in 2010. Inpatient care in hospitals accounts for EUR 73 billion of these costs. In this environment, purchasing companies are becoming increasingly important, since they can reduce material costs in hospitals by up to 15%. This is not insignificant, since more than 40% of hospital spending goes to material costs. To increase their attractiveness in the future, purchasing companies will have to offer a broader range of services. These are the key findings of a study by Roland Berger Strategy Consultants entitled "Material costs and the importance of purchasing companies in the hospital environment".

"German hospitals have been facing rising costs for years, and this trend will continue in the future," says Oliver Rong, Partner at Roland Berger Strategy Consultants. "This is because demographic change and political regulations are constantly driving hospitals' material costs up." Roland Berger experts are predicting that material costs, at about EUR 39 billion in 2010, will rise to over EUR 50 billion in 2016. In the battle to cut costs, purchasing companies are playing a bigger role.

Cutting costs with purchasing companies

Since 2000, material costs in German hospitals have climbed by an average of 5.7% each year. The share of total hospital costs accounted for by materials also increased significantly – from 31% in 2000 to 42% currently. "In light of these increasing costs, hospitals have to find ways to cut their spending and make their purchasing activities as cost-effective as possible," explains Zun-Gon Kim, Partner at Roland Berger Strategy Consultants.

Purchasing companies offer hospitals precisely this opportunity: they bundle the product demand of several hospitals to realize lower costs. Compared to individual hospitals, purchasing companies have greater negotiating leverage with their suppliers. For this reason, the purchasing volumes that hospitals have been asking purchasing companies to handle have been rising steadily for years. Whereas only about 20% of material costs were handled by purchasing companies in 2000, now it's 42%. Roland Berger experts assume that this share will increase in 2012 to about 50%.

Purchasing companies are focusing on service

Purchasing associations can be classified into four types based on their degree of organization: loose purchasing associations, non-binding and binding purchasing companies as well as hospital groups. In the past, purchasing associations limited themselves to bundling purchases and reducing the prices of materials. But now the experts at Roland Berger expect them to cover a broader product range and offer additional services. "We're observing a clear trend on the market: purchasing companies want to create added value for their customers by offering comprehensive services," explains Rong.

The additional services offered by purchasing companies include streamlining the product range, advising hospitals on product changeovers and handling logistics. "By offering additional services, purchasing companies increase not only their attractiveness for industry and hospitals, but also their own profitability," says Kim.

Switzerland and Austria: promising markets

The Swiss and Austrian markets also offer massive potential for purchasing companies, since health expenditure is growing by 4.4% annually in Austria and by 3.5% in Switzerland. However, the situation in the two countries is quite different. Purchasing companies in Switzerland already have a strong presence with market penetration of approx. 38%. However, limited by strict regulations governing contract awarding in Austria, purchasing companies currently cover about 34% of the market there.

Due to rising costs and upcoming healthcare reforms, hospitals are facing increasing pressure to keep their costs in check. "For the medium term, we're assuming that Switzerland and Austria will develop similarly to the German market. Accordingly, purchasing companies in those countries will also play important parts in the years to come," predicts Rong.