Health is a way of life in industrialized countries. As Europe’s biggest market for medical products and services, Germany has a very promising out-of-pocket health-care market not covered by health insurance providers. As the population ages, opportunities for foreign investors are huge in this rapidly expanding segment.
Germany was the first country to introduce a national health insurance system, back in 1883, under Chancellor Otto von Bismarck. It provided coverage for industrial workers and tradesmen and was based on the principle of solidarity, meaning that the healthy helped the sick; the insurance contributions, paid jointly by workers and their employers, were the same regardless of age, gender, or one’s state of health. The system survived the upheavals of the twentieth century, and today more than 85 percent of Germans, some seventy million people, are covered by 132 statutory health insurance companies. A further nine million are privately insured, and the remaining three million have special insurance provisions that cover organizations such as the army. That brings us to a total of 99.8 percent of people in Germany who have health insurance.
Now new challenges have arisen. Today, Germany has to face the aging demographics as well as increasing costs in health-care services. Germany is very health-conscious; people talk about their health the way the British discuss the weather. In fact, visitors are often startled to discover that the country has terms for diseases no one else has ever heard of. Take Frühjahrsmüdigkeit — spring fatigue — for example. Or Kreislaufstörung — circulatory disruption — which sounds lethal but just means feeling a bit below par. And then there’s the Biowetter report on television and in newspapers, a kind of weather forecast that lets you know in which parts of the country you are likely to suffer from a Kreislaufstörung today.
“Key to health”
German health expenditure totaled EUR 314.9 billion, or EUR 3,910 per capita, in 2013 according to the Federal Statistics Office, a 4 percent rise on 2012, making it the biggest health market in Europe. In the last two decades, successive German governments have reformed the insurance system to cut costs in response to a rise in contributions from employees and employers driven by surging health spending as the population ages. Those contribution hikes were deterring job creation and putting a brake on economic growth.
In the course of these reforms, insurance coverage has been pared down. Patients are being required to pay for an increasing share of treatments and drugs out of their own pocket. This development, together with a growing readiness to spend money on one’s personal health and well-being, has boosted the market for all kinds of health goods and services funded not by insurers, but by consumers themselves.
The so-called “out-of-pocket” market is estimated to be worth over EUR 40 billion annually and has been growing faster than the German GDP over the past decade.
This “out of pocket” market, known in Germany as the “second health market,” because it covers goods and services not paid by insurers, is vast. It comprises every-thing from over-the-counter cough medicine to probiotic yoghurt, from vitamin pills to wearable devices that monitor your pulse, and from wellness holidays to Nordic walking sticks.
The German out-of-pocket health-care market is estimated to be worth over EUR 40 billion annually, and has been growing at a rate of 4 percent per year for over a decade — well above GDP growth. Each adult in Germany spends an average of EUR 900 on their health per year, on top of their frequently sizable monthly insurance contributions, according to a study by the Roland Berger consultancy.
The core target group is the generation 50 plus, which accounts for more than 40 percent of the German population and over 50 percent of spending in the out-of-pocket market.
“There are many people in Germany who are prepared to spend a lot of their own money on their health,” says Melanie Wiegand, a consultant at Germany Trade & Invest. “Everything points to growth in this market because health is increasingly becoming a way of life in Germany, and people are getting older.”
Sales of over-the-counter (OTC) drugs, a large part of the out-of-pocket market, totaled EUR 8 billion in Germany in 2013, an increase of 6 percent. It’s the largest OTC market in Europe and is expected to keep on growing healthily – particularly considering that Germany has one of the lowest birthrate in the world, which means an ever-shrinking proportion of the population will be paying into the welfare system in the coming decades. The notion of the cradle-to-grave welfare state is a thing of the past. Self-reliance is the watchword for people as they age.
Furthermore, there is a growing realization among German policymakers that a buoyant private market can help safeguard the health insurance system over the long term by keeping people healthier and less in need of expensive medical care.
In a sign that the political environment for health products and services is likely to remain favorable, the Bundestag lower house of parliament debated a draft law to boost funding for disease prevention in March of this year. “The aim is to prevent diseases before they even occur,” says Minister of Health Hermann Gröhe. “That is why we must organize the environment in which we live, learn, and work in a way that promotes good health — in kindergartens, at school, at work, and in homes.”
At first sight the German health market may seem dauntingly complex ,with its decentralized system of health insurers, the statutory and private insurance market, and the continued dominance of pharmacies as distribution channels for over-the-counter drugs.
“It often takes me half a day to explain how the German health system works,” Professor Roland Trill, an expert on the fast-growing digital health market, says. “Other countries have a health sector that is strongly steered by a single ministry. In Germany, you have public, private, and other organizations in various sectors. This complex structure can make things difficult to understand.”
Germany Trade & Invest is keen to provide foreign investors with guidance. There is no doubt that the scale and growth prospects make this market highly attractive
Drugs and clinical thermometer.
Business Driver Self-Medication
The over-the-counter drug market in Germany has seen consistent growth in recent years, fueled by a 2004 health-care reform that encouraged consumers to self-medicate in order to relieve the health insurance system. In 2014, it grew 2.5 percent to EUR 8.5 billion, after 5.8 percent growth in 2013, according to figures from IMS Health. Mail-order distribution saw the strongest sales expansion, with 11.6 percent, but accounted for just 11 percent of sales.
Companies wishing to enter the German market should be aware that the most important distribution channel by far is the retail pharmacy, which in 2014 accounted for 77 percent of the OTC market. They should also know that German law forbids pharmacy chains, common in the United Kingdom and the United States, although many pharmacies in Germany are members of wholesale cooperatives to maximize their buying power.
Investors targeting this market should observe German idiosyncrasies: the regulations may at times seem as surprising as the freedoms. There is no general speed limit on the motorways, for example. But if you have a headache and want to buy a painkiller, you’ll have to go to a pharmacy to get it – for safety reasons it will not be available in the supermarkets. The key to accessing the German consumer lies in persuading pharmacies to stock and recommend your product, because Germans trust their local Apotheke.
“Pharmacists are generally well trained, pharmaceutical safety is a frequently discussed issue in German media, and the German public is generally reluctant to trust big pharma, so they appreciate the advice of their local pharmacist,” Gerhard Müller, Principal at IMS Health, explains. The key to maximizing sales is to choose the right pharmacist. It’s also important, of course, to select the right advertising strategy. Careful market research, as always, pays dividends.