Imaging vendors look for solutions to wring profits from European market

Pressures on cost-containment may overshadow glow from unification

Europe has been in the headlines lately because of encouraging moves toward monetary and political union. These may represent the first steps toward the creation of a single huge market that could surpass even the U.S. as the largest in the world. But industry observers looking to European unification as a solution to the continent's sluggish imaging market may be disappointed. Concerns over rising healthcare costs in Europe will overshadow monetary union as the primary influence on capital equipment purchasing. The result will be single-digit growth rates for the next several years.

Many vendors participating in the European imaging industry have developed new strategies for dealing with the tight market, according to Europe '99: Market Trends and Regulatory Issues in the Diagnostic Imaging Market, a new market report to be published in April by the editors of Diagnostic Imaging.

The European medical imaging market of the 1990s has been characterized by a period of sluggish sales in a tough environment. Not only have healthcare reforms impacted sales, but spending on capital equipment also took a blow in European countries in the move toward monetary union. Governments targeted healthcare expenditures in their efforts to meet the criteria for signing up for the single European currency, the euro. These efforts included reducing budget deficits to no more than 3% of gross domestic product.

As a result, revenues of the radiological and electromedical industry in the European market declined 8.1% in 1997, according to data compiled by the Coordination Committee of the Radiological and Electromedical Industries (COCIR), a European industry group. Sales in the seven countries included in the association's survey totaled $2.2 billion, compared with $2.39 billion in 1996. Apart from a slight upturn in sales in 1995 (+1.5%), the trend has been downward since 1992.

Of the total electromedical market surveyed by COCIR, diagnostic imaging equipment accounted for 78% of sales. Sales in the imaging industry declined 7.6% in 1997. The only bright spot in an otherwise lackluster picture is the expanding ultrasound market. While imaging equipment sales excluding ultrasound slumped 14.5% in 1997, ultrasound reversed a decline in 1996 to register a 14.8% increase, for a record $450 million in sales. Based on industry figures, Diagnostic Imaging estimates the western European imaging market to have been worth $2.3 billion in 1997, the most recent year for which reliable data are available.

There have been few signs in Europe of the recovery that occurred in the last two years in the U.S., where purchasing took a brisk upward turn in 1997 and has continued since then. While industry executives do not expect a major upturn in the European market for imaging equipment, the indications for 1998 suggest 3% growth overall, with national variations dictated by government policies to control costs and by the reimbursement structure in each country.

A regulatory revolution. The 1990s have seen a regulatory revolution in Europe with the implementation of the Medical Devices Directive, which became mandatory in the 18 member states of the European Economic Area (EEA) on June 14, 1998. While the directive in theory creates a level regulatory playing field for medical equipment manufacturers, the additional demands by national regulators for safety assurances mean that Europe still has some way to go before it is truly a single market.

In addition, there is little likelihood of a unified healthcare system developing in Europe. Medical imaging companies doing business in Europe face differing national healthcare delivery and funding systems. Although there are common goals of increasing cost-efficiency and productivity, not only in radiology departments but hospital-wide, the European Union is still far from a single market with respect to healthcare systems.

Different reimbursement rules apply in the 15 member countries of the European Union; divergent national regulations govern imaging equipment purchases and installations; and each country is tackling the restructuring of the hospital sector in its own way. Germany and Italy are among countries introducing U.S.-style DRG (diagnosis-related groups) reimbursement systems. France, Germany, and Spain have capped hospital budgets to control costs.

Industry executives are reserved in their predictions regarding the future direction of the European market. While increased use of less expensive modalities such as ultrasound will be encouraged and new technological capabilities of MRI and CT will expand the number of imaging procedures, any growth in unit sales of equipment will largely be offset by price erosion. The overall market is forecast to maintain the modest growth rate of 3% recorded in 1998 over the next few years.

While healthcare will remain a target for cost-containment in Europe, healthcare delivery systems are shifting their focus from cost reduction to more efficient use of resources so that disease management, cost-effectiveness, and technology assessment are becoming common tools in health management. Elements of the U.S. concept of managed care are being adopted by some European countries, particularly those that are funded by social insurance and where providers and purchasers operate independently, such as France and Germany.

The introduction of a single currency is generally viewed positively by imaging companies. The benefits of doing business in the euro are expected to outweigh the potential negative effects from price transparency, which will make it more difficult for companies to set different pricing strategies for commodity products in Europe. There is likely to be pressure to reduce prices of certain low-end products, such as simple x-ray equipment, to the lowest common denominator. Some of the countries with the lowest prices, such as Italy and Spain, could even see small price increases.

In general it is believed that most high-end equipment, such as MRI and CT scanners, will be relatively immune to the impact of the euro. These systems are configured to the needs of an individual site, and pricing structures involve not just the equipment but service maintenance and local "added-value" components. Pricing will, therefore, continue to be regionalized, with companies employing sales forces in each country.

On the corporate side, the spate of mergers and acquisitions that occurred in 1998 has set the medical imaging market on course for greater consolidation, fueled by the sluggish market and customers' demand for new solutions to information management. Casualties are most likely to be medium-sized companies, which will either be absorbed by the major players or go out of business. Small entrepreneurial companies that have niche markets will survive, even if they are ultimately absorbed by another vendor. Changes among the leading players cannot be ruled out, and it remains to be seen how the industry will shape up in the next five years.