Germany’s hospital system is reported to be of high quality but is also very expensive by international standards. Hospitals and healthcare payers such as health insurances are exposed to increasing economic constraints. One particular point of criticism is, for example, the current system of Diagnosis Related Group (DRG)-based fees.

Patient treatments are compensated based on the DRGs which effectively leads to a lump-sum payment system per diagnosis (with certain exemptions). This system has pros and cons. As a downside, it is reported to create incentives for over-treatments to generate DRG-based fees per patient.

At the same time, many hospitals in Germany are at risk of closure and insolvency due to financial challenges. The German federal states have thus asked the federal government for financial support to finance the restructuring of the hospital system and prevent hospitals from bankruptcy.

German federal and state governments have been discussing an intended hospital reform for months. Provided that no additional money flows into the healthcare system, the principle for this reform is “outpatient care before inpatient care”. The financial volume incentive shall therefore be minimised and a concentration on larger hospitals and medical institutions shall optimise or at least improve the current structures and quality of medical care in Germany. This shall also be accompanied by a reduction of the general number of hospitals in Germany.

On 10 July 2023, the key objectives of the envisaged hospital reform plans (Eckpunktepapier: Krankenhausreform) have been agreed on: (1) Ensuring security of supply (in particular public responsibility for ensuring the provision of healthcare, so-called “Daseinsvorsorge”), (2) securing and increasing the quality of treatment, and (3) reducing bureaucracy. Particularly, this is to be reflected in the following key measures:

• The current remuneration system with DRG-based fees shall be discontinued. This essentially means that hospitals will be guaranteed a continued existence, even if they offer comparatively few treatments. It is no longer quantity but quality that is to govern the provision of care. The idea behind the reform is that patients can rely on this concept to ensure that their treatment is really necessary and performed properly.

• In the future, hospitals shall receive a large share of the remuneration for the provision of staff, technology, emergency rooms and other services. Instead of the DRG-based fees there shall be budgets for the provision of services (Vorhaltepauschale).

• Financing by the health insurance funds shall be based on precisely defined groups that narrow down the spectrum of services (“service groups”) – for example, “cardiology” instead of broad terms such as “internal medicine”. The service groups shall ensure uniform quality standards, for example in terms of equipment, staff and treatment experience. Every treatment must be unambiguously assigned to a service group on the basis of the billing data record. At the same time, service groups shall be used as a criterion for granting an advance payment.

• Until the service groups and quality criteria have been defined, the shares of the remuneration for services shall initially be set at 60% of the DRG-based fees in the transitional phase, including the costs for hospital staff at the bedside. The remaining 40% will continue to be financed by DRG-based fees.

Given the broad scope of this reform, it will most likely also have an impact on the pharmaceutical and medical device industries, as well as other life sciences companies, including laboratory, diagnostics and digital health companies. Obviously, the products of all of these life sciences companies are used for hospital treatments. Some of the products are even used exclusively for inpatient treatment of patients in hospitals (e.g., implants, large diagnostic devices and many medicines).

Hence, if the hospital remuneration per patient treatment is reduced or the compensation system is modified, this will accordingly also affect the life sciences companies that sell the underlying medicines or medical devices to hospitals for these inpatient treatments. At this stage, it is not entirely clear how the remuneration and compensation systems will change and how these changes will impact certain treatments or products. Under the current DRG-based remuneration system, the costs of most products used for the treatment of a patient are compensated with the DRG-based fee. Insofar, it will be interesting to see how the future hospital remuneration system will handle this specific point and whether hospitals will experience more or less pressure with regard to the costs of products used in inpatient treatment. The publicly available key elements paper (Eckpunktepapier) is yet silent on this point.

Overall, life sciences companies should closely monitor these developments in Germany.

The key elements paper (Eckpunktepapier) on the hospital reform is the foundation for the draft law on which a joint working group of federal and state governments is currently working. The draft law is expected to be presented at the beginning of autumn 2023. The entire new law is expected to come into force on 1 January 2024.

The Life Sciences Team of Covington & Burling LLP in Frankfurt (Germany) will monitor the next steps and report about further developments.

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